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on International Finance |
| By: | Guglielmo Maria Caporale; Christoph Hanck |
| Abstract: | We analyse whether tests of PPP exhibit erratic behaviour (as previously reported by Caporale et al., 2003) even when (possibly unwarranted) homogeneity and proportionality restrictions are not imposed, and trivariate cointegration (stage-three) tests between the nominal exchange rate, domestic and foreign price levels are carried out (instead of stationarity tests on the real exchange rate, as in stage-two tests). We examine the US dollar real exchange rate vis-à-vis 21 other currencies over a period of more than a century, and find that stage-three tests produce similar results to those for stage-two tests, namely the former also behave erratically. This confirms that neither of these traditional approaches to testing for PPP can solve the issue of PPP. |
| Keywords: | Purchasing Power Parity (PPP), real exchange rate, cointegration, stationarity, parameter instability |
| JEL: | C12 C22 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1811&r=ifn |
| By: | Jose Manuel Campa; Linda S. Goldberg |
| Abstract: | In this paper, we use cross-county and time series evidence to argue that retail price sensitivity to exchange rates may have increased over the past decade. This finding applies to traded goods, as well as to non-traded goods. We highlight three reasons for changing pass through at the level of retail prices of goods. First, pass through may have declined at the level of import prices, but the evidence is mixed over types of goods and countries. Second, there has been a large expansion of imported input use across sectors. This means that the costs of imported goods as well as home tradable goods have heightened sensitivity to import prices and exchange rates. The final channel we consider is whether there have been changing sectoral expenditures on distribution services, with the direction of change negatively correlated with pass through into final consumption prices. We find that this channel, which has been a means of insulating consumption prices from import content and exchange rates, has not systematically changed in recent years. The balance of effects weighs in favor of increased sensitivity of consumption prices to exchange rates, even if exchange-rate pass-through into import prices has declined for some types of goods. |
| JEL: | F3 F4 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12547&r=ifn |
| By: | Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz |
| Abstract: | The deterioration in the U.S. balance of payments after 1957 and an accelerating loss of gold reserves prompted U.S. monetary authorities to undertake foreign-exchange-market interventions beginning in 1961. We discuss the events leading up to these interventions, the institutional arrangements developed for that purpose, and the controversies that ensued. Although these interventions forestalled a loss of U.S. gold reserves, in the end, they only delayed more fundamental adjustments and, in that respect, were a failure. |
| Keywords: | Foreign exchange administration ; Bretton Woods Agreements Act |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0609&r=ifn |
| By: | Matesanz Gómez, David; Fugarolas Álvarez-Ude, Guadalupe |
| Abstract: | Using multivariate cointegration tests for non-stationary data and vector error correction models, this paper examines the determinants of trade balance for Argentina over the last forty to fifty years. Our investigation confirms the existence of long-run relationships among trade balance, Real Exchange Rate (RER) and foreign and domestic incomes for Argentina during different real exchange rate management policies. Based on the estimations, the Marshall-Lerner condition is examined and, by means of impulse response functions, we trace the effect of a one-time shock to the RER on the trade balance checking the J-curve pattern. |
| Keywords: | Argentina; Marshall-Lerner; J-Curve; cointegration and impulse response analysis |
| JEL: | C22 F43 C32 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:151&r=ifn |
| By: | Saki Bigio (New York University and Central Bank of Peru); Jorge Salas (Central Bank of Peru) |
| Abstract: | We study whether monetary policy and real exchange rate shocks have non-linear effects on output and inflation in a partially dollarized economy such as Peru. For this purpose, we use a Smooth Transition Vector Autoregression methodology and then report impulse-response functions for shocks of different sign and size, and conditional to the initial position in the business cycle. We find evidence of non-linearities which imply a convex aggregate supply curve: in particular, monetary policy is more likely to affect the output during recessions than in booms, while the opposite is found for the inflation. Regarding real exchange rate shocks, we show that depreciations have greater negative effects during economic downturns and a higher pass-through rate in the positive side of the business cycle. |
| Keywords: | Non-linearities, Monetary Policy, Smooth Transition VAR, Dollarization |
| JEL: | E32 E52 E58 C32 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:rbp:wpaper:2006-008&r=ifn |
| By: | Matesanz Gómez, David; Ortega, Guillermo J. |
| Abstract: | We propose a country classification of economic growth currency crisis consequences based on the entropic analysis of the real exchange rate. We show that this ranking is highly correlated with the annual minimum rate of growth, a proxy used to quantify real currency crisis effects. |
| Keywords: | currency crises; entropy; growth effects of currency crises |
| JEL: | C82 F40 F31 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:211&r=ifn |
| By: | Christopher Gust; Sylvain Leduc; Robert J. Vigfusson |
| Abstract: | Over the past twenty years, U.S. import prices have become less responsive to the exchange rate. We propose that a significant portion of this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model in which trade occurs along both the intensive and extensive margins. The key element we introduce into this environment is strategic complementarity in price setting. As a result, a firm's pricing decision depends on the prices set by its competitors. This feature implies that a foreign exporter finds it optimal to vary its markup in response to shocks that change the exchange rate, insulating import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate. |
| Keywords: | Foreign exchange rates ; Imports - Prices |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:864&r=ifn |
| By: | Cambell Leith; Simon Wren-Lewis |
| Abstract: | A common feature of exchange rate misalignments is that they produce a divergence between traded and non-traded goods sectors, which appears to pose a dilemma for policy makers. In this paper we develop a small open economy model which features traded and non-traded goods sectors with which to assess the extent to which monetary policy should respond to exchange rate misalignments. To do so we initially contrast the efficient outcome of the model with that under flexible prices and find that the flex price equilibrium exhibits an excessive exchange rate appreciation in the face of a positive UIP shock. By introducing sticky prices in both sectors we provide a role for policy in the face of UIP shocks. We then derive a quadratic approximation to welfare which comprises quadratic terms in the output gaps in both sectors as well as sectoral rates of inflation. These can be rewritten in terms of the usual aggregate variables, but only after including terms in relative sectoral prices and/or the terms of trade to capture the sectoral composition of aggregates. We derive optimal policy analytically before giving numerical examples of the optimal response to UIP shocks. Finally, we contrast the optimal policy with a number of alternative policy stances and assess the robustness of results to changes in model parameters. |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:san:cdmacp:0605&r=ifn |
| By: | Joshua V. Rosenberg; Leah G. Traub |
| Abstract: | In this paper, we compare price discovery in the foreign exchange futures and spot markets during a period in which the spot market was less transparent but had higher volume than the futures market. We develop a foreign exchange futures order flow measure that is a proxy for the order flow observed by Chicago Mercantile Exchange pit traders. We find that both foreign currency futures and spot order flow contain unique information relevant to exchange rate determination. When we measure contributions to price discovery using the methods of Hasbrouck and of Gonzalo and Granger, we obtain results consistent with our order flow findings. Taken together, our evidence suggests that the amount of information contained in currency futures prices is much greater than one would expect based on relative market size. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:262&r=ifn |