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on International Finance |
| By: | Luca Antonio Ricci; Ronald MacDonald |
| Abstract: | This paper investigates the impact of the distribution sector on the real exchange rate, controlling for the Balassa-Samuelson effect, as well as other macro variables. Long-run coefficients are estimated using a panel dynamic OLS estimator. The main result is that an increase in the productivity and competitiveness of the distribution sector with respect to foreign countries leads to an appreciation of the real exchange rate, similarly to what a relative increase in the domestic productivity of tradables does. This contrasts with the result that one would expect by considering the distribution sector as belonging to the non-tradable sector. One explanation may lie in the use of the services from the distribution sector in the tradable sector. Our results also contribute to explaining the so-called PPP puzzle. |
| Keywords: | Purchasing power parity , Exchange rates , Trade , Prices , Economic models , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/38&r=ifn |
| By: | Raghuram Rajan; Eswar Prasad |
| Abstract: | In this paper, we develop a proposal for a controlled approach to capital account liberalization for economies experiencing large capital inflows. The proposal essentially involves securitizing a portion of capital inflows through closed-end mutual funds that issue shares in domestic currency, use the proceeds to purchase foreign exchange from the central bank and then invest the proceeds abroad. This would eliminate the fiscal costs of sterilizing those inflows, give domestic investors opportunities for international portfolio diversification and stimulate the development of domestic financial markets. More importantly, it would allow central banks to control both the timing and quantity of capital outflows. This proposal could be part of a broader toolkit of measures to liberalize the capital account cautiously when external circumstances are favorable. It is not a substitute for other necessary policies such as strengthening of the domestic financial sector or, in some cases, greater exchange rate flexibility. But it could in fact help create a supportive environment for these essential reforms. |
| Keywords: | Capital account liberalization , Capital controls , Capital inflows , Reserves , |
| Date: | 2005–11–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfpdp:05/7&r=ifn |
| By: | Balázs Égert |
| Abstract: | This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector's productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe |
| JEL: | O11 P17 E31 |
| Date: | 2005–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:liu:liucej:21&r=ifn |
| By: | Tigran Poghosyan; Evzen Kocenda; |
| Abstract: | This paper studies foreign exchange risk premium using the uncovered interest rate parity framework in a single country context. The analysis is performed using weekly data on foreign and domestic currency deposits in Armenian banking system. The paper provides the results of the simple tests of uncovered interest parity condition, which indicate that contrary to established view dominating in empirical literature there is a positive correspondence between exchange rate depreciation and interest rate differentials in Armenian deposit market. Furthermore, the paper presents and discusses a systematic positive risk premium required by the economic agents for foreign exchange transactions, which increases over the investment horizon. The two currency affine term structure framework is applied to identify the factors driving the systematic exchange rate risk premium in Armenia. At the end, possible directions for further research are outlined. |
| Keywords: | “forward discount” puzzle, exchange rate risk, affine term structure models, foreign and domestic deposits, transition and emerging markets, Armenia |
| JEL: | E43 E58 F31 G15 O16 P20 |
| Date: | 2006–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2006-811&r=ifn |
| By: | BEN ALI Mohamed Sami; ; |
| Abstract: | Capital account liberalization and exchange rate regime choice, what scope for flexibility in Tunisia? This study evaluates within a game-theoretic framework the exchange rate regime from a welfare perspective. In a tradable-nontradable goods model framework, Tunisia’s exchange rate regime choice is cast in terms of strategic interactions between the monetary authority and domestic enterprises. The monetary authority is assumed to choose an optimal exchange rate regime according to a welfare-related criterion by minimising a loss function defined in terms of external competitiveness and domestic inflation. Simulations outcomes reveal that capital account liberalization in the Tunisian economic context is compatible with a flexible exchange rate regime. |
| Keywords: | Exchange rate regime, Liberalization, Convertibility, Capital Account, Welfare, Tunisia. |
| JEL: | F31 F32 F37 F47 |
| Date: | 2006–03–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2006-815&r=ifn |
| By: | Hélène Poirson |
| Abstract: | This paper investigates the determinants of exchange rate regime choice in 93 countries during 1990-98. Cross-country analysis of variations in international reserves and nominal exchange rates shows that (i) truly fixed pegs and independent floats differ significantly from other regimes and (ii) significant discrepancies exist between de jure and de facto flexibility. Regression results highlight the influence of political factors (political instability and government temptation to inflate), adequacy of reserves, dollarization (currency substitution), exchange rate risk exposure, and some traditional optimal currency area criteria, in particular capital mobility, on exchange rate regime selection. |
| Keywords: | Exchange rate regimes , Developing countries , Dollarization , Monetary unions , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/46&r=ifn |
| By: | Vivek B. Arora; Olivier Jeanne |
| Abstract: | The Canadian experience with a floating exchange rate regime can shed some light on the question of whether A question of current interest in many parts of the world is whether with growing economic integration among groups of countries makes a fixed exchange rate, or even a common currency, becomes more desirable. This paper looks at the lessons that one may draw from tThe Canadian experience, with a floating exchange rate regime, especially since the inception of the 1989 U.S.-Canada Free Trade Agreement, suggests. We find that exchange rate flexibility has not prevented economic integration between Canada and the United States from increasing substantially, during the 1990s, and has played a useful role in buffering the Canadian economy against asymmetric external shocks. A fixed exchange rate thus does not seem to be a prerequisite for economic integration. It may, however, yield substantial have benefits for some countries that lack monetary credibility or that may be tempted by self-destructive beggar-thy-neighbor policies. |
| Keywords: | Exchange rate regimes , Canada , United States , Floating exchange rates , Trade , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfpdp:01/1&r=ifn |
| By: | Armando Méndez Morales |
| Abstract: | This paper surveys concepts, practices and analytical literature to assess benefits and risks for monetary stability of cross-border currency and interest rate derivative operations in calm and turbulent periods, with a view of extracting implications for emerging economies. Monetary authorities must prevent one-sided positions in the currency, favor asset substitutability, and incorporate the enriched information set provided by derivative-based transactions into monetary policy design. In some circumstances, the use of derivatives by monetary authorities may help fulfill this role. By contrast, surcharges to compensate for a downward impact of derivatives on the cost of capital appear neither advisable nor necessary. |
| Keywords: | Financial systems , Currencies , Spot exchange rates , Foreign exchange , Economic models , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/58&r=ifn |
| By: | Aasim M. Husain |
| Abstract: | This paper proposes a template for assessing whether or not a country's economic and financial characteristics make it an appropriate candidate for a pegged exchange rate regime. The template employs quantifiable measures of attributes-trade orientation, financial integration, economic diversification, macroeconomic stabilization, credibility, and "fear-offloating" type effects-that have been identified in the literature as key potential determinants of regime choice. To illustrate, the template is applied to Kazakhstan and Pakistan. The results indicate a fairly strong case against a pegged regime in Pakistan. The implications for Kazakhstan are mixed, although changes in that economy in recent years strengthen the case against a peg. |
| Keywords: | Exchange rate regimes , Pakistan , Kazakhstan , |
| Date: | 2006–03–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/54&r=ifn |
| By: | W. Max Corden (Department of Economics, The University of Melbourne) |
| Abstract: | The international current account imbalance, where the United States has a vast deficit and several countries, notably Japan, China, Germany and the oil exporters have corresponding surpluses, is usually seen as a problem. The argument here is that current account imbalances simply indicate intertemporal trade – the exchange of goods and services for claims. There are likely to be gains from trade of that kind as from ordinary trade. What then are the problems? This paper considers several scenarios, notably one where net savings of the surplus countries decline so that the world real interest rate rises, and another where the US fiscal deficit is reduced, so that the world real interest rate falls and there could be a world wide aggregate demand problem, essentially caused by the high net savings of the surplus countries. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:iae:iaewps:wp2006n13&r=ifn |
| By: | Østrup, Finn (Department of Finance, Copenhagen Business School) |
| Abstract: | The article analyses how government spending is determined under different exchange rate regimes in the context of a small open economy. Assuming nominal wage contracts which last for one period and assuming a benevolent government which determines government spending to optimise a representative individual’s utility, it is demonstrated that there are differences between exchange rate regimes with respect to the level of government spending. These differences arise first because a rise in government spending affects macroeconomic variables differently under different exchange rate regimes, and second because the government’s inclination to expand government spending is affected by inflation which depends on the exchange rate regime. At low rates of inflation, the government is inclined to set a higher level of government spending under a fixed exchange rate regime than under a floating exchange rate regime in which the monetary authority optimises preferences which include an employment target and an inflation target. As government spending affects the representative individual’s utility, the choice of exchange rate regime has an impact on welfare. |
| Keywords: | exchange rate regimes; fiscal policy; monetary union; inflation targeting |
| JEL: | E42 E61 E62 F33 |
| Date: | 2005–05–19 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cbsfin:2005_001&r=ifn |
| By: | Robert Dekle; Kenneth Kletzer |
| Abstract: | A model of the domestic financial intermediation of foreign capital inflows based on agency costs is developed for studying financial crises in emerging markets. In equilibrium, the banking system becomes progressively more fragile under imperfect prudential regulation and public sector loan guarantees until a crisis occurs with a sudden reversal of capital flows. The crisis evolves endogenously as the banking system becomes increasingly vulnerable through the renegotiation of loans after idiosyncratic firm-specific revenue shocks. The model generates dynamic relationships between foreign capital inflows, domestic investment, corporate debt and equity values in an endogenous growth model. The model's assumptions and implications for the behavior of the economy before and after crisis are compared to the experience of five East Asian economies. The case studies compare three that suffered a crisis or near-crisis, Thailand and Malaysia, to two that did not, Taiwan Province of China and Singapore, and lend support to the model. |
| Keywords: | Bank regulations , Asia , Financial crisis , Exchange rate regimes , Capital inflows , Economic models , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/63&r=ifn |
| By: | Lucjan Orlowski; Kryzstof Rybinski; |
| Abstract: | This study proposes an extension to the inflation targeting framework for Poland that takes into consideration the exchange rate stability constraints imposed by the obligatory participation in the ERM2 on the path to the euro. The modified policy framework is based on targeting the differential between the domestic and the implicit euro area inflation forecasts. The exchange rate stability objective enters the central bank reaction function and is treated as an indicator variable. Adjustments of interest rates respond to changes in the relative inflation forecast, while foreign exchange market intervention is applied for the purpose of stabilizing the exchange rate. The dynamic market equilibrium exchange rate is ascertained by employing the Johanssen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED). |
| Keywords: | inflation targeting, monetary convergence, ERM2, euro, Poland, cointegration, GARCH |
| JEL: | E58 E61 F33 P24 |
| Date: | 2005–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2005-802&r=ifn |
| By: | Goldberg, Linda S. (Federal Reserve Bank of New York); Campa, Jose M. (IESE Business School) |
| Abstract: | Border prices of traded goods are highly sensitive to exchange rates, but the CPI and the retail prices of traded goods are more stable. Our paper decomposes the sources of this stability for twenty-one OECD countries, focusing on the important roles of distribution margins and imported inputs in transmitting exchange rate fluctuations into consumption prices. We provide rich cross-country and cross-industry details on distribution margins and their sensitivity to exchange rates, imported inputs used in different categories of consumption goods, and weights in consumption of nontradables, home tradables and imported goods. While distribution margins damp the sensitivity of consumption prices of tradable goods to exchange rates, they also lead to enhanced pass-through when nontraded goods prices are sensitive to exchange rates. Such price sensitivity arises because imported inputs are used in production of home nontradables. Calibration exercises show that, at under 5%, the United States has the lowest expected CPI sensitivity to exchange rates of all countries examined. On average, calibrated exchange rate pass-through into CPIs is expected to be closer to 15%. |
| Keywords: | Exchange rate; pass through; import prices; distribution margins; |
| Date: | 2006–04–03 |
| URL: | http://d.repec.org/n?u=RePEc:ebg:iesewp:d-0625&r=ifn |
| By: | C. Randall Henning (Institute for International Economics) |
| Abstract: | Scholarship on European integration has extensively debated the external character of the monetary union. The institutions of exchange rate policymaking bear substantially on the euro area’s role in international monetary conflict and cooperation. This working paper examines the institutional arrangements for foreign exchange intervention within the euro area and the policymaking surrounding the market operations of autumn 2000—the only case to date of euro area intervention in currency markets. Drawing on interviews of officials in finance ministries, central banks, European institutions, and international organizations, as well as public sources, the paper specifies the division of labor among the European Central Bank (ECB), Eurogroup, and other European actors and compares that arrangement with corresponding arrangements in the G-7 partners. It concludes, among other things, that (1) the interinstitutional understanding within the euro area gives substantial latitude to the ECB, greater latitude than held by central banks in its G-7 partners, (2) but the understanding is susceptible to renegotiation over time, and (3) economic divergence within the euro area potentially threatens the ability of the monetary union to act coherently externally. |
| Keywords: | Foreign Exchange Intervention, Exchange Rate Policy and Policymaking, Economic and Monetary Union, Euro-Dollar Exchange Rate, European Central Bank, Eurogroup, G-7 Cooperation, Transatlantic Monetary Relations, Political Economy of Exchange Rates |
| JEL: | F31 F32 F33 F42 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp06-4&r=ifn |
| By: | Tushar Poddar; Hasmik Khachatryan; Randa Sab |
| Abstract: | This paper examines monetary transmission in Jordan using the vector autoregressive approach. We find that the real 3-month CD rate, the Central Bank's operating target, affects bank retail rates and that monetary policy, measured by the spread between the 3-month CD rate and the U.S. Federal Funds rate, is effective in influencing foreign reserves. We do not find evidence of monetary policy affecting output. Output responds very little to changes in bank lending rates. Furthermore, equity prices and the exchange rate are not significant channels for transmitting monetary policy to economic activity. The effect of monetary policy on the stock market seems insignificant. |
| Keywords: | Monetary policy , Jordan , Bank rates , Foreign exchange reserves , Stock markets , Exchange rates , Economic models , |
| Date: | 2006–03–02 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:06/48&r=ifn |
| By: | H. L. Leon; DeLisle Worrell |
| Abstract: | Statistical measures of the volatility of exchange rates, interest rates, and stock prices are estimated for a number of countries. Periods of high volatility are identified and compared with periods of financial difficulty. The results indicate that GARCH models of volatility could be potentially useful in assessing financial soundness. Daily data are more revealing, but monthly series allow comparisons among many countries. Country specific models may be needed for more reliable inference. |
| Keywords: | Exchange rates , Stock markets , Exchange rate instability , Price stabilization , Economic models , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/60&r=ifn |
| By: | Thomas I. Palley |
| Abstract: | The stability of the international financial system is in doubt. Analysis of the system has focused mainly on the sustainability of financing the U.S. trade deficit and has failed to understand the microeconomics of transactions within the system. According to this brief by Thomas I. Palley, the international financial system is unsustainable for reasons of demand, not supply. He recommends a global system of managed exchange rates to replace the current system before it crashes, along with the U.S. economy. East Asian economies are pursuing export-led growth and running huge trade surpluses with the United States by actively pursuing policies aimed at maintaining undervalued exchange rates. Their governments continue to accumulate U.S. financial assets in order to support and stabilize the international financial system.While East Asian policymakers are correct in their belief that they can improve economic outcomes through exchange rate intervention, the system is undermining the structure of income and aggregate demand and eroding U.S. manufacturing capacity. |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:lev:levppb:ppb_85&r=ifn |
| By: | Piti Disyatat |
| Abstract: | This paper shows that the quality of banks within each country is one of the important factors that can account for the fact that developing economies tend to suffer more severe output contractions in the wake of a currency crisis than more mature economies. In particular, countries with a banking sector whose balance sheets are healthy, in terms of having high net worth and low foreign currency exposure, are much less likely to suffer a contraction in the wake of an unexpected depreciation. |
| Keywords: | Financial crisis , Banks , Financial sector , External debt , Economic models , |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:01/49&r=ifn |
| By: | Sergio L. Schmukler; Tatiana Didier; Paolo Mauro |
| Abstract: | While a number of emerging market crises were characterized by widespread contagion during the 1990s, more recent crises (notably, in Argentina) have been mostly contained within national borders. This has led some observers to wonder whether contagion might have become a feature of the past, with markets now better discriminating between countries with good and bad fundamentals. This paper argues that a prudent working assumption is that contagion has not vanished permanently. Available data do not seem to point to a disappearance of the main channels that contribute to transmitting crises across countries. Moreover, anticipation of the Argentine crisis by international investors may help explain the recent absence of contagion. |
| Keywords: | Financial crisis , Emerging markets , |
| Date: | 2006–01–25 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfpdp:06/01&r=ifn |
| By: | Marin, Dalia; Schnitzer, Monika |
| Abstract: | In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. Frequently, foreign direct investment is financed in the host country without an international capital movement. We develop a model in which the optimal choice of financing an international investment trades off the relative costs and benefits associated with the allocation and effectiveness of control rights resulting from the financing decision. We find that the financing choice is driven by managerial incentive problems and that FDI involves an international capital flow when these problems are not too large. Our results are consistent with data from a survey on German and Austrian investments in Eastern Europe. |
| Keywords: | Multinational firms; Firm specific capital costs; Internal capital markets; international capital flows |
| JEL: | F23 F21 G32 L20 D23 |
| Date: | 2006–06 |
| URL: | http://d.repec.org/n?u=RePEc:lmu:muenec:1158&r=ifn |