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on International Finance |
| By: | Menzie D. Chinn; Ron Alquist |
| Abstract: | We examine the relative predictive power of the sticky price monetary model, uncovered interest parity, and a transformation of net exports and net foreign assets. In addition to bringing Gourinchas and Rey’s new approach and more recent data to bear, we implement the Clark and West (forthcoming) procedure for testing the significance of out-of-sample forecasts. The interest rate parity relation holds better at long horizons and the net exports variable does well in predicting exchange rates at short horizons in-sample. In out-of-sample forecasts, we find evidence that our proxy for Gourinchas and Rey’s measure of external imbalances outperforms a random walk at short horizons as do some of other models, although no single model uniformly outperforms the random walk forecast. |
| JEL: | F31 F47 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12481&r=ifn |
| By: | Kleopatra Nikolaou (Warwick Business School, Finance Group, Univeristy of Warwick, Coventry, CV32 7AL, United Kingdom.) |
| Abstract: | We test for mean reversion in real exchange rates using a recently developed unit root test for non-normal processes based on quantile autoregression inference in semi-parametric and non-parametric settings. The quantile regression approach allows us to directly capture the impact of different magnitudes of shocks that hit the real exchange rate, conditional on its past history, and can detect asymmetric, dynamic adjustment of the real exchange rate towards its long run equilibrium. Our results suggest that large shocks tend to induce strong mean reverting tendencies in the exchange rate, with half lives less than one year in the extreme quantiles. Mean reversion is faster when large shocks originate at points of large real exchange rate deviations from the long run equilibrium. However, in the absence of shocks no mean reversion is observed. Finally, we report asymmetries in the dynamic adjustment of the RER. JEL Classification: F31. |
| Keywords: | Real exchange rate,purchasing power parity, quantile regression. |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20060667&r=ifn |
| By: | Horst Siebert |
| Abstract: | This paper analyzes institutional arrangements for exchange rate systems and reviews what we know. It looks at the foreign exchange market, different balance of payment situations in which countries find themselves and the necessary exchange rate adjustments. It studies the options that are available to countries in choosing their exchange rate system (type of nominal anchor, nominal anchor versus real target and the degree of sovereignty to be given up) and reviews the historical experience for multilateral options. The actual system is a fragile low-inflation central bank dominated arrangement. Options for the future rest on quite a few idealistic ideas. In addition to choosing the exchange rate system, adopting the right exchange rate is also addressed. |
| Keywords: | Exchange rate systems, Balance of payments situations, External and internal equilibrium, Choosing the exchange rate system, Unilateral and multilateral arrangements, Options for the future, Universal money |
| JEL: | E E5 E42 E58 E61 F31 F32 F33 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:kie:kieliw:1288&r=ifn |
| By: | Macedo, Jorge Braga de; Braz, José; Pereira, Luis brites; Nunes, Luis C. |
| Abstract: | In this study, we assess the credibility of the currency board arrangement (CBA) of the Macau Special Administrative Region by studying the relationship between exchange market pressure (EMP) and the anchors of a rule-based CBA, namely, interest rate arbitrage, exchange rate arbitrage and economic discipline. A pure CBA signals its credibility by allowing the first two anchors to function automatically and by pursuing sound fiscal policies. The analysis’ results suggest that Macau’s CBA has been characterised by a state of low volatility since late 1992, with the brief exception of the East Asian financial crisis period. The paper’s main finding is that fiscal fundamentals seem to have a more pronounced role in reducing EMP’s variability during periods of low volatility whilst interest rate arbitrage is more important in periods of high volatility. We conclude that Macau’s CBA is credible at present as reflected in the low frequency of observed EMP, in the narrowing of Macau’s interest rate differential vis-à-vis U.S. interest rates and in Macau’s substantial fiscal reserves. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp492&r=ifn |
| By: | Areendam Chanda; Laura Alfaro; Sebnem Kalemli-Ozcan; Selin Sayek |
| Abstract: | The empirical literature finds mixed evidence on the existence of positive productivity externalities in the host country generated by foreign multinational companies. We propose a mechanism that emphasizes the role of local financial markets in enabling foreign direct investment (FDI) to promote growth through backward linkages, shedding light on this empirical ambiguity. In a small open economy, final goods production is carried out by foreign and domestic firms, which compete for skilled labor, unskilled labor, and intermediate products. To operate a firm in the intermediate goods sector, entrepreneurs must develop a new variety of intermediate good, a task that requires upfront capital investments. The more developed the local financial markets, the easier it is for credit constrained entrepreneurs to start their own firms. The increase in the number of varieties of intermediate goods leads to positive spillovers to the final goods sector. As a result financial markets allow the backward linkages between foreign and domestic firms to turn into FDI spillovers. Our calibration exercises indicate that a) holding the extent of foreign presence constant, financially well-developed economies experience growth rates that are almost twice those of economies with poor financial markets, b) increases in the share of FDI or the relative productivity of the foreign firm leads to higher additional growth in financially developed economies compared to those observed in financially under-developed ones, and c) other local conditions such as market structure and human capital are also important for the effect of FDI on economic growth. |
| URL: | http://d.repec.org/n?u=RePEc:lsu:lsuwpp:2006-13&r=ifn |