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on International Finance |
| By: | Christopher M. Meissner; Nienke Oomes |
| Abstract: | Conditional on choosing a pegged exchange rate regime, what determines the currency to which countries peg or “anchor” their exchange rate? This paper aims to answer this question using a panel multinomial logit framework, covering more than 100 countries for the period 1980-1998. We find that trade network externalities are a key determinant of anchor currency choice, implying that there are multiple steady states for the distribution of anchor currencies in the international monetary system. Other factors found to be related to anchor currency choice include the symmetry of output co-movement, the currency denomination of debt, and legal or colonial origins. |
| Keywords: | exchange rate regime; anchor; network externalities; optimal currency area; international currency; de facto |
| JEL: | E42 F02 F33 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:cam:camdae:0643&r=ifn |
| By: | Lynda Khalaf; Maral Kichian |
| Abstract: | The authors address empirically the implications of structural breaks in the variance-covariance matrix of inflation and import prices for changes in pass-through. They define pass-through within a correlated vector autoregression (VAR) framework as the response of domestic inflation to an impulse in import price inflation. This approach allows them to examine changes in both the amount and the duration of pass-through. |
| Keywords: | Econometric and statistical methods |
| JEL: | F40 F31 C52 E31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-2&r=ifn |
| By: | Ingrid Lo; Stephen G. Sapp |
| Abstract: | Traders using the electronic limit order book in the foreign exchange market can watch the posted price and depth of the best quotes change over the day. The authors use a structural errorcorrection model to examine the dynamics of the relationship between the best bid price, the best ask price, and their associated depths. They incorporate measures of the market depth behind the best quotes as regressors. They report four main findings. First, best prices and their associated depths are contemporaneously related to each other. More specifically, an increase in the ask (bid) price is associated with a drop (rise) in the ask (bid) depth. This suggests that sell traders avoid the adverse-selection risk of selling in a rising market. Second, when the spread-the error-correction term-widens, the bid price rises and the ask price drops, returning the spread to its long-term equilibrium value. Further, the best depth on both sides of the market drops, due to increased market uncertainty. Third, the lagged best depth impacts the price discovery on both sides of the market, with the effect being strongest on the same side of the market. Fourth, changes in the depth behind the best quotes impact both the best prices and quantities, even though those changes are unobservable to market participants. |
| Keywords: | Exchange rates; Financial markets |
| JEL: | C3 D8 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-8&r=ifn |
| By: | Hans Gersbach (Alfred-Weber-Institut, Department of Economics, University of Heidelberg); Armin Schmutzler (Socioeconomic Institute, University of Zurich) |
| Abstract: | We analyze a two-country model of Foreign Direct Investment (FDI). Two firms, each of which is originally situated in only one of the two countries, first decide whether to build a plant in the foreign country. Then, they decide whether to relocate R&D activities. Finally, they engage in product-market competition. Our main points are: first, FDI liberalization causes a relocation of R&D activities if intrafirm communication is sufficiently well developed, external spillovers are substantial, competition is not too strong and foreign markets are not too small. Second, such a relocation of R&D activities will usually nevertheless increase domestic welfare since it only occurs if intrafirm communication is well developed and therefore knowledge generated and obtained abroad flows back to the domestic country. Third, the potential of R&D offshoring makes FDI itself more likely. Fourth, when countries are asymmetric, the small-country firm is more likely to offshore its R&D activities into the large country than conversely. |
| Keywords: | Foreign Direct Investment, R&D, Spillovers, Research Relocation |
| JEL: | F23 O30 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:soz:wpaper:0606&r=ifn |
| By: | Morten Spange; Pawel Zabczyk |
| Abstract: | This paper investigates the potential implications for sterling of the US current account returning to balance. The analysis is conducted using a three-country model comprising the United Kingdom, the United States and a block that is meant to represent the rest of the world. The main conclusion from our analysis is that the potential implications for sterling of a US current account reversal are highly uncertain - one can derive a wide range of estimates for the potential changes. Estimates of the sterling adjustments are smaller than the implied movements in the dollar and depend heavily on (a) the cause of the US current account adjustment; (b) the assumptions one makes about the associated adjustment of the UK current account deficit; and (c) assumptions about key model parameters. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:296&r=ifn |
| By: | John Bluedorn; Christopher Bowdler |
| Abstract: | We characterize the channels by which a failure to distinguish intended/unintended and anticipated/unanticipated monetary policy may lead to attenuation bias in monetary policy`s open economy effects. Using a U.S. monetary policy measure which isolates the intended and unanticipated component of federal funds rate changes, we quantify the magnitude of the attenuation bias for the exchange rate and foreign variables, finding it to be substantial. The exchange rate appreciation following a monetary contraction is up to 4 times larger than a recursively-identified VAR estimate. There is stronger evidence of foreign interest rate pass-through. The expenditure-reducing effects of a U.S. monetary policy contraction dominate any expenditure-switching effects, leading to a positive conditional correlation of international outputs and prices. |
| Keywords: | Open economy monetary policy identification, Exchange rate adjustment, Interest rate pass-through |
| JEL: | E52 F31 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:wpaper:265&r=ifn |
| By: | Richard N. Cooper (Paper 1) (Harvard University); Michael Bordo (Paper 2) (Economics Department, Rutgers University and Harvard University); Harold James (Paper 2) (History Department and Woodrow Wilson School, Princeton University) |
| Abstract: | Paper 1: This paper suggests that some time in the not-too-distant future the governments of the industrialized democracies – concretely, the United States, the European Union, and Japan – should consider establishing a common currency for their collective use. A common currency would credibly eliminate exchange rate uncertainty and exchange rate movements among major currencies, both of which are significant sources of disturbance to important economies. One currency would of course entail one monetary policy for the currency area, and a political mechanism to assure accountability. This proposal is not realistic today, but is set as a vision for the second or third decade into the 21st century. Europeans, in creating EMU, have taken a major step in the direction indicated. Their idea could be taken further. Paper 2: In this paper, we look at the major arguments for monetary simplification and unification before explaining why the nineteenth century utopia is an idea whose time has gone, not come. |
| Date: | 2006–09–06 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:127&r=ifn |
| By: | Fabrizio Zampolli |
| Abstract: | This paper examines the trade-offs that a central bank faces when the exchange rate can experience sustained deviations from fundamentals and occasionally collapse. The economy is modelled as switching randomly between different regimes according to time-invariant transition probabilities. We compute both the optimal regime-switching control rule for this economy and optimised linear Taylor rules, in the two cases where the transition probabilities are known with certainty and where they are uncertain. The simple algorithms used in the computation are also of independent interest as tools for the study of monetary policy under general forms of (asymmetric) additive and multiplicative uncertainty. An interesting finding is that policies based on robust (minmax) values of the transition probabilities are usually more conservative. |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:297&r=ifn |
| By: | Christopher M. Cornell; Raphael H. Solomon |
| Abstract: | Suppose that the dynamics of the macroeconomy were given by (partly) random fluctuations between two equilibria: "good" and "bad." One would interpret currency crises (or recessions) as a shift from the good equilibrium to the bad. In this paper, the authors specify a dynamic investment-savings-aggregate-supply (IS-AS) model, determine its closed-form solution, and examine numerically its comparative statics. The authors estimate the model via maximum likelihood, using data for Argentina, Canada, and Turkey. Since the data show no support for the multiple-equilibrium explanation of fluctuations, the authors cast doubt on the third-generation models of currency crisis. |
| Keywords: | Uncertainty and monetary policy |
| JEL: | C62 E59 F41 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:06-5&r=ifn |
| By: | Hans Genberg (Executive Director (Research), Hong Kong Monetary Authority) |
| Abstract: | Financial integration in Ease Asia is actively being pursued and will in due course lead to substantial mobility of capital between economies in the region. Plans for monetary cooperation as a prelude to monetary integration and ultimately monetary unification are also proposed. These plans often suggest that central banks should adopt some form of common exchange rate policy in the transition period towards full monetary union. This paper argues that this is a dangerous path in the context of highly integrated financial markets. An alternative approach is proposed where independent central banks coordinate their monetary policies through the adoption of common objectives and by building an appropriate institutional framework. When this coordination process has progressed to the point where interest rate developments are similar across the region, and if in the meantime the required institutional infrastructure has been build, the next step towards monetary unification can be taken among those central banks that so desire. The claim is that this transition path is likely to be robust and will limit the risk of currency crises. |
| Date: | 2006–05–05 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:122&r=ifn |
| By: | Sebastian Edwards (University of California, Los Angeles and National Bureau of Economic Research) |
| Abstract: | During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional “optimal currency area” criteria. These include: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union does not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks are amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries. |
| Date: | 2006–05–06 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:126&r=ifn |