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on International Finance |
| By: | Jose Eduardo de A. Ferreira |
| Abstract: | This paper investigates the presence of periodically collapsing rational bubbles in exchange rates for a sample of industrialised countries. A periodically collapsing rational bubble is defined as an explosive deviation from economic fundamentals with distinct expansion and contraction phases in finite time. By using Markov-switching regime models we were not able to find robust evidence of a bubble driving the exchange rate away from fundamentals. Moreover, the results also revealed significant non-linearities and different regimes. The importance of these findings suggests that linear monetary models may not be appropriate to examine exchange rate movements. |
| Keywords: | Foreign Exchange; Bubbles; Fundamentals; Markov-Switching; Assets |
| JEL: | F31 F37 F41 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ukc:ukcedp:0604&r=ifn |
| By: | Linda Goldberg; Cedric Tille |
| Abstract: | The pattern of international trade adjustment is affected by the continuing international role of the dollar and related evidence on exchange rate pass-through to prices. This paper argues that a depreciation of the dollar would have asymmetric effects on flows between the United States and its trading partners. With low exchange rate pass-through to U.S. import prices and high exchange rate pass-through to the local prices of countries consuming U.S. exports, the effect of dollar depreciation on real trade flows is dominated by an adjustment in U.S. export quantities, which increase as U.S. goods become cheaper in the rest of the world. Real U.S. imports are affected less because U.S. prices are more insulated from exchange rate movements-pass-through is low and dollar invoicing is high. In relation to prices, the effects on the U.S. terms of trade are limited: U.S. exporters earn the same amount of dollars for each unit shipped abroad, and U.S. consumers do not encounter more expensive imports. Movements in dollar exchange rates also affect the international trade transactions of countries invoicing some of their trade in dollars, even when these countries are not transacting directly with the United States. |
| Keywords: | Foreign exchange rates ; Dollar, American ; Exports ; Imports - Prices ; International trade |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:255&r=ifn |
| By: | Linda S. Goldberg; Cédric Tille |
| Abstract: | The pattern of international trade adjustment is affected by the continuing international role of the dollar and related evidence on exchange rate pass-through into prices. This paper argues that a depreciation of the dollar would have asymmetric effects on flows between the United States and its trading partners. With low exchange rate pass-through to U.S. import prices and high exchange rate pass-through to the local prices of countries consuming U.S. exports, the effect of dollar depreciation on real trade flows is dominated by an adjustment in U.S. export quantities, which increase as U.S. goods become cheaper in the rest of the world. Real U.S. imports are affected less because U.S. prices are more insulated from exchange rate movements — pass-through is low and dollar invoicing is high. In relation to prices, the effects on the U.S. terms of trade are limited: U.S. exporters earn the same amount of dollars for each unit shipped abroad, and U.S. consumers do not encounter more expensive imports. Movements in dollar exchange rates also affect the international trade transactions of countries invoicing some of their trade in dollars, even when these countries are not transacting directly with the United States. |
| JEL: | F1 F3 F4 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12495&r=ifn |
| By: | Jeffrey Frankel; Jumana Poonawala |
| Abstract: | Many studies have replicated the finding that the forward rate is a biased predictor of the future change in the spot exchange rate. Usually the forward discount actually points in the wrong direction. But virtually all those studies apply to advanced economies and major currencies. We apply the same tests to a sample of 14 emerging market currencies. We find a smaller bias than for advanced country currencies. The coefficient is on average positive, i.e., the forward discount at least points in the right direction. It is never significantly less than zero. To us this suggests that a time-varying exchange risk premium may not be the explanation for traditional findings of bias. The reasoning is that emerging markets are probably riskier; yet we find that the bias in their forward rates is smaller. Emerging market currencies probably have more easily-identified trends of depreciation than currencies of advanced countries. |
| JEL: | F0 F15 F31 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12496&r=ifn |
| By: | Craig Burnside; Martin Eichenbaum; Isaac Kleshchelski; Sergio Rebelo |
| Abstract: | Currencies that are at a forward premium tend to depreciate. This `forward-premium puzzle' represents an egregious deviation from uncovered interest parity. We document the properties of returns to currency speculation strategies that exploit this anomaly. The first strategy, known as the carry trade, is widely used by practitioners. This strategy involves selling currencies forward that are at a forward premium and buying currencies forward that are at a forward discount. The second strategy relies on a particular regression to forecast the payoff to selling currencies forward. We show that these strategies yield high Sharpe ratios which are not a compensation for risk. However, these Sharpe ratios do not represent unexploited profit opportunities. In the presence of microstructure frictions, spot and forward exchange rates move against traders as they increase their positions. The resulting `price pressure' drives a wedge between average and marginal Sharpe ratios. We argue that marginal Sharpe ratios are zero even though average Sharpe ratios are positive. |
| JEL: | E24 F31 G15 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12489&r=ifn |
| By: | Giancarlo Corsetti; Luca Dedola; Sylvain Leduc |
| Abstract: | This paper investigates the international transmission of productivity shocks in a sample of five G7 countries. For each country, using long-run restrictions, we identify shocks that increase permanently domestic labor productivity in manufacturing (our measure of tradables) relative to an aggregate of other industrial countries including the rest of the G7. We find that, consistent with standard theory, these shocks raise relative consumption, deteriorate net exports, and raise the relative price of nontradables --- in full accord with the Harrod-Balassa-Samuelson hypothesis. Moreover, the deterioration of the external account is fairly persistent, especially for the US. The response of the real exchange rate and (our proxy for) the terms of trade differs across countries: while both relative prices depreciate in Italy and the UK (smaller and more open economies), they appreciate in the US and Japan (the largest and least open economies in our sample); results are however inconclusive for Germany. These findings question a common view in the literature, that a country's terms of trade fall when its output grows, thus providing a mechanism to contain differences in national wealth when productivity levels do not converge. They enhance our understanding of important episodes such as the strong real appreciation of the dollar as the US productivity growth accelerated in the second half of the 1990s. They also provide an empirical contribution to the current debate on the adjustment of the US current account position. Contrary to widespread presumptions, productivity growth in the US tradable sector does not necessarily improve the US trade deficit, nor deteriorate the US terms of trade, at least in the short and medium run. |
| JEL: | F32 F41 F42 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12483&r=ifn |
| By: | Michael Bordo; Thomas Helbling; Harold James |
| Abstract: | In this paper we examine the experience of Switzerland’s devaluation in 1936. The Swiss case is of interest because Switzerland was a key member of the gold bloc, and much of the modern academic literature on the Great Depression tries to explain why Switzerland and the other gold bloc countries, France, and the Netherlands, remained on the gold standard until the bitter end. We ask the following questions: what were the issues at stake in the political debate? What was the cost to Switzerland of the delay in the franc devaluation? What would have been the costs and benefits of an earlier exchange rate policy? More specifically, what would have happened if Switzerland had either joined the British and devalued in September 1931, or followed the United States in April 1933? To answer these questions we construct a simple open economy macro model of the interwar Swiss economy. On the basis of this model we then posit counterfactual scenarios of alternative exchange rate pegs in 1931 and 1933. Our simulations clearly show a significant and large increase in real economic activity. If Switzerland had devalued with Britain in 1931, the output level in 1935 would have been some 18 per cent higher than it actually was in that year. If Switzerland had waited until 1933 to devalue, the improvement would have been about 15 per cent higher. The reasons Switzerland did not devalue earlier reflected in part a conservatism in policy making as a result of the difficulty of making exchange rate policy in a democratic setting and in part the consequence of a political economy which favored the fractionalization of different interest groups. |
| JEL: | N1 N13 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12491&r=ifn |
| By: | Mark J. Jensen |
| Abstract: | Empirical support for the long-run Fisher effect, a hypothesis that a permanent change in inflation leads to an equal change in the nominal interest rate, has been hard to come by. This paper provides a plausible explanation of why past studies have been unable to find support for the long-run Fisher effect. This paper argues that the necessary permanent change to the inflation rate following a monetary shock has not occurred in the industrialized countries of Australia, Austria, Belgium, Canada, Denmark, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States. Instead, this paper shows that inflation in these countries follows a mean-reverting, fractionally integrated, long-memory process, not the nonstationary inflation process that is integrated of order one or larger found in previous studies of the Fisher effect. Applying a bivariate maximum likelihood estimator to a fractionally integrated model of inflation and the nominal interest rate, the inflation rate in all seventeen countries is found to be a highly persistent, fractionally integrated process with a positive differencing parameter significantly less than one. Hence, in the long run, inflation in these countries will be unaffected by a monetary shock, and a test of the long-run Fisher effect will be invalid and uninformative as to the truthfulness of the long-run Fisher effect hypothesis. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2006-11&r=ifn |
| By: | Beckmann, Daniela; Menkhoff, Lukas; Sawischlewski, Katja |
| Abstract: | Early warning systems (EWSs) are subject to restrictions that apply to exchange rates in general: fundamentals matter but their influence is small and unstable. Keeping this in mind, five lessons emerge : First, EWSs have robust forecasting power and thus help policy-makers to prevent crises. Second, among competing crisis definitions there is one which is most practical. Third, take a logit model to condense information from various fundamental variables. Fourth, add a regional contagion dummy to the standard set of variables. Fifth, one may be tempted to address instability over time and countries by taking shorter samples and regional EWSs. |
| Keywords: | early warning system, currency crises, emerging markets |
| JEL: | F31 F33 F37 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec05:3476&r=ifn |
| By: | Saubhik Deb (Department of Economics) |
| Abstract: | This paper studies the effects of capital flow reversals and sudden stop crises on output growth and how these effects vary across regions and between emerging and industrial countries. We found that capital flow reversals are generally contractionary in the developing countries and particularly in Asia and Africa. But neither capital flow reversals nor sudden stop crises have any significant growth effect in the industrial countries. Our initial estimates for sudden stop crises support the widely held belief regarding the contractionary nature of such crises. Further robustness checks indicate that the estimated negative growth effects for such crises are mainly driven by the presence of the Asian countries in the sample. Moreover, when the turbulent years of the East Asian crises are excluded from the sample, no significant effect of sudden stop crises could be found. Our research reconfirms the contractionary nature of capital flow reversals in developing countries but raises doubt about the existence of contractionary sudden stop crises. |
| Keywords: | Currency Crisis, Capital Flow Reversal, Sudden Stop Crisis |
| JEL: | F32 F43 |
| Date: | 2006–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200606&r=ifn |
| By: | Christopher J. Neely; Paul A. Weller; Joshua M. Ulrich |
| Abstract: | We analyze the intertemporal stability of returns to technical trading rules in the foreign exchange market by conducting true, out-of-sample tests on previously published rules. The excess returns of the 1970s and 1980s were genuine and not just the result of data mining. But these profit opportunities had disappeared by the mid-1990s for filter and moving average (MA) rules. Returns to less-studied rules, such as channel, ARIMA, genetic programming and Markov rules, also have declined, but have probably not completely disappeared. The volatility of returns makes it difficult to estimate mean returns precisely. The most likely time for a structural break in the MA and filter rule returns is the early 1990s. These regularities are consistent with the Adaptive Markets Hypothesis (Lo, 2004), but not with the Efficient Markets Hypothesis. |
| Keywords: | Foreign exchange market ; Foreign exchange |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2006-046&r=ifn |
| By: | Saubhik Deb (Department of Economics) |
| Abstract: | Over the last three decades, durations of recovery of output from contractionary currency crises have shown much variation both within and across countries. Using a dataset comprising of both developing and industrial countries, this paper examines the importance of economic fundamentals, international trade and liberalized capital account in determining the speed of recovery from such crises. We found that poor macroeconomic fundamentals and capital account liberalization have no significant effect on duration of recovery. However, all trade related variables were found to be significant. Our results indicate the preeminence of export led recovery. |
| Keywords: | Currency Crisis, Output Recovery, Duration Analysis |
| JEL: | F30 F41 C41 |
| Date: | 2006–04–06 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200607&r=ifn |
| By: | Macedo, Jorge Braga de; Pereira, Luis Brites |
| Abstract: | This paper studies the credibility of the currency peg of Cape Verde (CV) by assessing the impact of economic fundamentals, our explanatory variables, on the stochastic properties of Exchange Market Pressure (EMP), the dependent variable, using EGARCH-M models. Our EMP descriptive analysis finds a substantial reduction in the number of crisis episodes and of (unconditional) volatility after the peg’s adoption. Moreover, our estimation results suggest that mean EMP is driven by fundamentals and that conditional variability is more sensitive to negative shocks. We also find evidence that the expected return from holding CV’s assets is lower under the currency peg for the same increase in monthly volatility. The reason is that the return’s composition is “more virtuous”, as it results from the strengthening of CV’s foreign reserve position and is not due to either a larger risk premium or favourable exchange rate movements. We take this to be a sign of the credibility of the peg, which apparently reflects the intertemporal credibility of CV’s economic policy and so has successfully withstood international markets’ scrutiny. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:unl:unlfep:wp494&r=ifn |
| By: | Ansgar Belke (University of Hohenheim); Bernhard Herz (University of Bayreuth); Lukas Vogel (University of Bayreuth) |
| Abstract: | This paper investigates the relationship between the exchange rate regime and the degree of structural reforms using panel data techniques. We look at a broad sample of countries (the “world sample”) and also an OECD sample. Our main findings suggest that adopting a fixed exchange rate rule is positively correlated with the degree of overall structural reforms and the trade component. The paper also highlights the fact that considering a heterogeneous panel of countries as opposed to a limited does not matter for this results. |
| Date: | 2006–06–07 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:129&r=ifn |
| By: | Andrea Terzi |
| Abstract: | The 1990s witnessed an increase in international financial turbulence. In fact, financial crises have become a global policy issue, due to their frequency, size, geographic extension, and social costs, while an array of policy actions have been advocated to prevent crises from happening again. One significant, yet controversial question is whether efforts should be directed towards national reforms in emerging markets or, rather, towards a new international design of international payments. After a critical review of the standing proposals, this paper contends that this debate has not yet fully explored one of the problems of international instability, that is to say, the problem raised by international payments in a world where currencies are of diverse quality. As Keynes firmly contended, the monetary side of the (global) economy is not a neutral factor. In fact, it may be that some of the fundamental factors behind any model of international financial instability, are the problems posed by the different degrees of “international moneyness” that make currencies unequal. Viewed in this light, a major re-design of international payments systems is warranted, and options seem limited to either world dollarization or the ‘bancor’ solution. Recent reformulations of Keynes’s original ‘bancor’ proposal seem to be a more viable alternative to either the status quo or world dollarization. |
| Keywords: | Currency hierarchy, Currency crises, Banking crises, Capital flows, International monetary arrangements and institutions |
| JEL: | F02 F33 F34 G15 |
| Date: | 2005–10 |
| URL: | http://d.repec.org/n?u=RePEc:sac:wpaper:641005&r=ifn |