nep-ifn New Economics Papers
on International Finance
Issue of 2006‒09‒23
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating' By Reginaldo P. Nogueira Jnr
  2. Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from Five OECD Countries By Duo Qin
  3. Nonlinear Models with Strongly Dependent Processes and Applications to Forward Premia and Real Exchange Rates By Richard T. Baillie; George Kapetanios
  4. Customer order flow, information and liquidity on the Hungarian foreign exchange market By Áron Gereben; György Gyomai; Norbert Kiss M.
  5. The Euro and the Transatlantic Capital Market Leadership: A Recursive Cointegration Analysis By Enzo Weber
  6. Are twin currency and debt crises special? By Bauer, Christian; Herz, Bernhard; Karb, Volker
  7. The optimal degree of exchange rate flexibility: A target zone approach By Jesús Rodríguez López; Hugo Rodríguez Mendizábal
  8. Financial Market Imperfections and the impact of exchange rate movements on exports By Berman, Nicolas; Berthou, Antoine
  9. Intraday Linkages Across International Equity Markets By Harju, Kari; Hussain, Syed Mujahid
  10. Generic Determinacy and Money Non-Neutrality of International Monetary Equilibria By Dimitrios P. Tsomocos

  1. By: Reginaldo P. Nogueira Jnr
    Abstract: The paper presents evidence on exchange rate pass-through and the "Fear of Floating" hypothesis before and after Inflation Targeting for a set of developed and emerging market economies. We use a structural VAR model to estimate the effect of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. We then use several different methodologies to examine the existence of "Fear of Floating" practices. We observe a drastic reduction in direct foreign exchange market intervention after the adoption of Inflation Targeting. As the exchange rate pass-through still matters for the attainment of the inflation targets, "Fear of Floating" seems to play only a minor role for most economies in our sample.
    Keywords: Inflation Targeting; Exchange Rate Pass-Through, 'Fear of Floating'
    JEL: E31 E52 F31 F41
    Date: 2006–09
  2. By: Duo Qin (Queen Mary, University of London)
    Abstract: This study measures purchasing power parity (PPP) by means of the dynamic-factor errorcorrection model (DF-ECM) approach. Under this new approach, PPP is embedded in latent disequilibrium factors, which are extracted from a large variable set of bilateral price disparities; the factors are then used as error-correction leading indicators to explain exchange rate and inflation. Modelling experiments on five OECD countries using monthly data show promising results, which reverse the common belief that PPP is at best a very long-run relationship at the macro level.
    Keywords: Purchasing power parity, Law of one price, Dynamic factor, Error correction
    JEL: F31 C22 C33
    Date: 2006–09
  3. By: Richard T. Baillie (Michigan State University and Queen Mary, University of London); George Kapetanios (Queen Mary, University of London)
    Abstract: This paper considers estimation and inference in some general non linear time series models which are embedded in a strongly dependent, long memory process. Some new results are provided on the properties of a time domain <i>MLE</i> for these models. The paper also includes a detailed simulation study which compares the time domain <i>MLE</i> with a two step estimator, where the Local Whittle estimator has been initially employed to filter out the long memory component. The time domain <i>MLE</i> is found to be generally superior to two step estimation. Further, the simulation study documents the difficulty of precisely estimating the parameter associated with the speed of transition. Finally, the fractionally integrated, nonlinear autoregressive-<i>ESTAR</i> model is found to be extremely useful in representing some financial time series such as the forward premium and real exchange rates.
    Keywords: Non-linearity, <i>ESTAR</i> models, Strong dependence, Forward premium, Real exchange rates
    JEL: C22 C12 F31
    Date: 2006–09
  4. By: Áron Gereben (Magyar Nemzeti Bank); György Gyomai (Magyar Nemzeti Bank (at the time of writing)); Norbert Kiss M. (Magyar Nemzeti Bank)
    Abstract: Customer order flow – signed transaction volume between market makers and their customers – is a key concept in the microstructure approach to exchange rates. We attempt to explore what the data tells us about the role of customer order flow in the market for Hungarian forint, using the standard analytical framework of the FX microstructure literature. Our results confirm that customer order flow helps to explain exchange rate fluctuations, which suggests that customer order flow is a key source of information for the market makers. We also find that domestic and foreign customers play significantly different roles on the euro/Hungarian forint market: foreign players' order flow seems to provide the information that drives exchange rate fluctuations, whereas domestic customers are the source of market liquidity. We present evidence suggesting that current order flow from customers is able to provide a significantly better ‘forecast’ for the the exchange rate than the random walk benchmark in a simple Meese-Rogoff-type framework. However, we were unable to improve upon the random walk in a more realistic forecasting exercise. Finally, we highlight some features of our data that suggest that beyond microstructure, the traditional portfolio-balance channel of exchange rate determination is also in place.
    Keywords: customer order flow, microstructure, exchange rate.
    JEL: F31 G15
    Date: 2006
  5. By: Enzo Weber
    Abstract: In this paper, the capital market relations between the Euro area and the USA are subject to investigation. Formally based on the uncovered interest rate parity (UIP), first a longrun equilibrium between Euro and US government bond yields is established in backward recursively estimated vector error correction models (VECMs). Subsequently, the focus lies on interest rate leadership and adjustment as well as capital market integration. One major finding shows, that the foundation of the European Monetary Union (EMU) strengthened its role relative to the USA. Furthermore, the transatlantic connections have become closer in the course time.
    Keywords: Capital Market, UIP, Euro, Transatlantic Relations
    JEL: E44 F36 C32
    Date: 2006–09
  6. By: Bauer, Christian; Herz, Bernhard; Karb, Volker
    Abstract: We show theoretically and empirically that twin currency and debt crises should be treated as a particular crisis type. Twin currency and debt crises differ from both pure currency and pure debt crises in their determinants, the course of the crises, and their economic consequences. We find that each crises type has a unique set of macroeconomic causes. We also uncover internal contagion and selection bias effects which may lead to biased results if twin crises are not treated separately. Such a separation considerably improve the efficiency of early warning systems especially on debt and twin crises.
    Date: 2006
  7. By: Jesús Rodríguez López (Department of Economics, Universidad Pablo de Olavide); Hugo Rodríguez Mendizábal (Department of Economics, Universidad Autónoma de Barcelona)
    Abstract: This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature on target zones that previous models were not able to generate jointly, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.
    Keywords: Target zones, exchange rate agreements, monetary policy, time consistency.
    JEL: E52 F31 F33
    Date: 2006–09
  8. By: Berman, Nicolas; Berthou, Antoine
    Abstract: This paper studies the role of financial market imperfections in the way countries' exports react to a currency depreciation. Using quarterly data for 27 developed and developing countries over the period 1990-2005, we show that the impact of a depreciation will be less positive - or even negative - for a country as: (i) firms borrow in foreign currency ; (ii) they are credit constrained ; (iii) they are specialized in industries that require more external capital; (iv) the depreciation's or devaluation's magnitude is large. This last result confirms the existence of a non-linear relationship between an exchange rate depreciation and a country's exports reaction when financial imperfections are observed. This work offers a new explanation for the consequences of recent currency crises in middle income countries.
    Keywords: International Trade, Exchange Rate Movements, Financial Development, Financial Market Imperfections
    JEL: F10 F32 F37
    Date: 2006
  9. By: Harju, Kari (Swedish School of Economics and Business Administration); Hussain, Syed Mujahid (Swedish School of Economics and Business Administration)
    Abstract: Utilizing concurrent 5-minute returns, the intraday dynamics and inter-market dependencies in international equity markets were investigated. A strong intraday cyclical autocorrelation structure in the volatility process was observed to be caused by the diurnal pattern. A major rise in contemporaneous cross correlation among European stock markets was also noticed to follow the opening of the New York Stock Exchange. Furthermore, the results indicated that the returns for UK and Germany responded to each other’s innovations, both in terms of the first and second moment dependencies. In contrast to earlier research, the US stock market did not cause significant volatility spillover to the European markets.
    Keywords: Intraday; diurnal pattern; conditional mean; volatility spillovers; Flexible Fourier Form; VAR; EGARCH; asymmetry
    Date: 2006–09–13
  10. By: Dimitrios P. Tsomocos
    Abstract: I address the issue of the 'number' of International Monetary Equilibria that the international finance model of Geanakoplos and Tsomocos (2002) possesses. The mainstream competitive model has locally unique equilibria with respect to the real side of the economy; however, it manifests nominal indeterminacy. Kareken and Wallace (1981) extend the O.L.G. indeterminacy result to a monetary model of the international economy. However, the role of monetary sector together with the market and agent heterogeneity remove real and nominal indeterminacy in the Geanakoplos and Tsomocos model. In particular, nominal indeterminacy abruptly disappears when private liquid wealth is non-zero. Finally, monetary policy becomes non-neutral since monetary changes affect nominal variables which in turn determine different real allocations. Lucas did not find these non-neutral effects in his model of international finance because he postulated a 'sell-all model' in which every agent sells everything he owns in every period. Thus, the number of transactions remain unaffected by definition regardless of any policy changes. Instead, when transactions emerge endogenously in equilibrium monetary policy has non-neutral effects provided that there exist potential gains to trade at the initial allocation of goods.
    Keywords: Determinacy, exchange rates, liquid wealth, non-neutrality, monetary policy
    JEL: D5 E5 E6 F1 F2 F3
    Date: 2006

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