nep-ifn New Economics Papers
on International Finance
Issue of 2006‒07‒09
nine papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Merging the Purchasing Power Parity and the Phillips Curve Literatures: Regional Evidence from Italy By Andrea Vaona
  2. Implicit Bands in the Yen/Dollar Exchange Rate By Francisco Ledesma-Rodríguez; Manuel Navarro-Ibáñez; Jorge Pérez-Rodríguez; Simón Sosvilla-Rivero
  3. Optimal Currency Shares in International Reserves: The Impact of the Euro and the Prospects for the Dollar By Elias Papaioannou; Richard Portes; Gregorios Siourounis
  4. Exchange Rate Cycles and Canada- U.S. Manufacturing Prices By Baldwin, John R.; Yan, Beiling
  5. Exchange-rate effects on China’s trade: an interim report By Jaime Marquez; John W. Schindler
  6. Switching Between Expectation Processes in the Foreign Exchange Market: A Probabilistic Approach Using Survey Data By Georges Prat; Remzi Uctum
  7. Monetary policy, determinacy, and learnability in a two-block world economy By James B. Bullard; Eric Schaling
  8. Nontraded goods, market segmentation, and exchange rates. By Michael Dotsey; Margarida Duarte
  9. Monetary policy implementation without averaging or rate corridors By William Whitesell

  1. By: Andrea Vaona (Dipartimento di Scienze economiche (Università di Verona))
    Abstract: The main purpose of this paper is to merge together two strands of the literature regarding, either directly or indirectly, infation: the PPP and the Phillips curve ones. In order to accomplish this task, this contribution applies the tools of the Empirical Growth Literature and of Dynamic Panel Data estimation on a sample of 81 Italian provinces from the year 1986 to the year 1998, exploiting cross-sectional variation to avoid to use instruments not directly connected with the inflation generating process. This research strategy allows to conclude that inflation is characterized by a low degree of persistence and by conditional B-convergence across provinces. Its most suitable driving vari- able is the unemployment rate and there are long-term non neutralities at the regional level.
    Keywords: Phillips Curve, Regions, Inflation
    JEL: E31 E32 R10
    Date: 2006–06
  2. By: Francisco Ledesma-Rodríguez; Manuel Navarro-Ibáñez; Jorge Pérez-Rodríguez; Simón Sosvilla-Rivero
    Abstract: This paper attempts to identify implicit exchange rate regimes for the Yen/Dollar exchange rate. To that end, we apply a sequential procedure that considers both the dynamics of exchange rates and central bank interventions to data covering the period from 1971 to 2003. Our results would suggest that implicit bands existed in two subperiods: April-December 1980 and March-December 1987, the latter coinciding with the Louvre Accord. Furthermore, the study of the credibility of such implicit bands indicates the high degree of confidence attributed by economic agents to the evolution of the Yen/Dollar exchange rate within the detected implicit band rate, thus lending further support to the relevance of such implicit bands.
  3. By: Elias Papaioannou; Richard Portes; Gregorios Siourounis
    Abstract: Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance-covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank’s desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency ("punching above its weight"). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important.
    JEL: F02 F30 G11 G15
    Date: 2006–06
  4. By: Baldwin, John R.; Yan, Beiling
    Abstract: During the post-1970 period, Canadian manufacturing prices have alternately increased and fallen relative to U.S. prices' just the reverse of the cycle in the Canada' U.S. exchange rate. But not all manufacturing industries have experienced the same amplitude of relative price changes. This paper examines the industry characteristics that are related to the shifts in competitiveness, measured as the relative price ratio between Canadian prices and U.S. prices adjusted by the exchange rate. We find that relative factor input costs and relative productivity growth are the two most important factors influencing changes in relative Canada' U.S. prices. Competitive pressures emanating from trade are important determinants of the extent to which relative productivity differences are passed through to cross-country relative prices in the manufacturing sector. We also find that the magnitude of domestic market competition and export intensity affects the short-run relative price shifts over the cycle of exchange rate.
    Keywords: Trade, Prices and price indexes, Manufacturing, International trade, Prices, Manufacturing industries
    Date: 2006–06–28
  5. By: Jaime Marquez; John W. Schindler
    Abstract: Though China's share of world trade is comparable to that of Japan, little is known about the response of China's trade to changes in exchange rates. The few estimates available suffer from two limitations. First, the data for trade prices are based on proxies for prices from other countries. Second, the estimation sample includes the period of China's transformation from a centrally-planned economy to a market-oriented system. To address these limitations, this paper develops an empirical model explaining the shares of China's exports and imports in world trade in terms of the real effective value of the renminbi. The specifications control for foreign direct investment and for the role of imports of parts to assemble merchandise exports. Parameter estimation uses disaggregated monthly trade data and excludes the period during which most of China's decentralization occurred. The estimation results suggest that a ten-percent real appreciation of the renminbi lowers the share of aggregate Chinese exports by a half of a percentage point. The same appreciation lowers the share of aggregate imports by about a tenth of a percentage point.
    Keywords: Foreign exchange rates - China ; Trade ; Econometric models
    Date: 2006
  6. By: Georges Prat (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre]); Remzi Uctum (EconomiX - [CNRS : UMR7166] - [Université de Paris X - Nanterre])
    Abstract: This paper relaxes a fundamental hypothesis commonly accepted in the expectation formation literature: expectations are, unchangingly, either rational or generated by one of the three simple extrapolative, regressive or adaptive processes. Using expectations survey data provided by Consensus Forecasts on six European exchange rates against US Dollar, we find that the rational expectation hypothesis is rejected at the aggregate level. By implementing a switching regression methodology with stochastic choice of regime, we show that the expectation generating process is given at any time by some combination of the three simple processes. An interpretation of this framework in terms of economically rational expectations is suggested.
    Keywords: expectation formation; switching-regime; exchange rates; survey data; cost and advantage analysis
    Date: 2006–06–23
  7. By: James B. Bullard; Eric Schaling
    Abstract: We study how determinacy and learnability of worldwide rational expectations equilibrium may be affected by monetary policy in a simple, two country, New Keynesian framework under both fixed and flexible exchange rates. We find that open economy considerations may alter conditions for determinacy and learnability relative to closed economy analyses, and that new concerns can arise in the analysis of classic topics such as the desirability of exchange rate targeting and monetary policy cooperation.
    Keywords: Monetary policy ; Foreign exchange
    Date: 2006
  8. By: Michael Dotsey; Margarida Duarte
    Abstract: Empirical evidence suggests that movements in international relative prices (such as the real exchange rate) are large and persistent. Nontraded goods, both in the form of final consumption goods and as an input into the production of final tradable goods, are an important aspect behind international relative price movements. In this paper we show that nontraded goods have important implications for exchange rate behavior, even though fluctuations in the relative price of nontraded goods account for a relatively small fraction of real exchange rate movements. In our quantitative study nontraded goods magnify the volatility of exchange rates when compared to the model without nontraded goods. Cross-country correlations and the correlation of exchange rates with other macro variables are closer in line with the data. In addition, contrary to a large literature, standard alternative assumptions about the currency in which firms price their goods are virtually inconsequential for the properties of aggregate variables in our model, other than the terms of trade.
    Keywords: Markets ; Foreign exchange rates
    Date: 2006
  9. By: William Whitesell
    Abstract: Most central banks now implement monetary policy by trying to hit a target overnight interest rate using one of two types of frameworks. The first involves arrangements for depository institutions to hold a minimum account balance over a multi-day averaging period. The second uses the central bank's lending rate as a ceiling and its deposit rate as a floor for overnight interest rates. Either averaging or a rate corridor can help a central bank hit a target interest rate, but each framework can also have weaknesses in achieving that goal and, in some cases, other associated drawbacks. This paper discusses an alternative possible policy implementation regime, involving a specially designed facility for the payment of interest on a daily basis on balances held at the central bank. This new type of regime could potentially allow smooth monetary policy implementation without the problems associated with averaging or a rate corridor.
    Date: 2006

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