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on International Finance |
| By: | Rabanal, Pau; Tuesta Reátegui, Vicente |
| Abstract: | Central puzzles in international macroeconomics are why fluctuations of the real exchange rate are so volatile with respect to other macroeconomic variables, and the contradiction of efficient risk-sharing. Several theoretical contributions have evaluated alternative forms of pricing under nominal rigidities along with different asset markets structures to explain real exchange dynamics. In this paper, we use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics (NOEM) using data for the United States and the Euro Area, and perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility, but at the cost of implying too high volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in local currency pricing (LCP) improves the fit of the baseline model, but not by as much as by introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behaviour of the real exchange rate, while both demand and technology shocks have been important. |
| Keywords: | Bayesian estimation; model comparison; real exchange rates |
| JEL: | C11 F41 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5957&r=ifn |
| By: | Katerina Smídková; Aleš Bulir |
| Abstract: | Estimation and simulation of sustainable real exchange rates in some of the new EU accession countries point to potential difficulties in sustaining the ERM2 regime if entered too soon and with weak policies. According to the estimates, the Czech, Hungarian, and Polish currencies were overvalued in 2003. Simulations, conditional on large-model macroeconomic projections, suggest that under current policies those currencies would be unlikely to stay within the ERM2 stability corridor during 2004-10. In-sample simulations for Greece, Portugal, and Spain indicate both a much smaller misalignment of national currencies prior to ERM2, and a more stable path of real exchange rates over the medium term than can be expected for the new accession countries. |
| Keywords: | Exchange rates , European Union , Real effective exchange rates , Foreign investment , |
| Date: | 2005–02–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:05/27&r=ifn |
| By: | Michel Beine (DULBEA, Free University of Brussels,University of Luxemburg and CESifo.); Oscar Bernal (DULBEA, Free University of Brussels); Jean-Yves Gnabo (University of Namur); Christelle Lecourt (University of Namur) |
| Abstract: | Intervening in the FX market implies a complex decision process for central banks. Monetary authorities have to decide whether to intervene or not, and if so, when and how. Since the successive steps of this procedure are likely to be highly interdependent, we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision. Our findings shed some light on the determinants of central bank interventions, on the so-called secrecy puzzle and on the identification of the variables influencing the detection of foreign exchange transactions by market traders. |
| Keywords: | Central bank interventions; Exchange rates market; Secrecy puzzle; Nested logit |
| JEL: | E58 F31 G15 |
| Date: | 2006–11 |
| URL: | http://d.repec.org/n?u=RePEc:dul:wpaper:06-15rs&r=ifn |
| By: | Ali Al-Eyd; Stephen Hall |
| Abstract: | This paper extends a standard open-economy New Keynesian model to examine the efficiency of alternative monetary policy rules (both fixed and nonlinear) during a period of financial crisis. A third-generation “balance sheet effect” is made operational through an endogenous risk premium which impacts on investment. Special attention is given to alternative expectations structures and our findings under both rational expectations and adaptive learning establish the Taylor rule as the dominant policy. Moreover, under adaptive learning, we find additional policy traction and less instrument variability in rules augmented with the exchange rate. Building on the nonlinear policy rule framework, we illustrate the debate stemming from the Asian crisis regarding the prescription of monetary policy in the presence of liability dollarization. Interestingly, under rational expectations, “Traditionalist” (or IMF-prescribed) policy is most effective at mitigating exchange rate variability, while “Revisionist” policy is most effective at mitigating real output variability. All rules in this study, however, advocate a sharp initial interest rate response to the crisis. |
| Date: | 2006–04 |
| URL: | http://d.repec.org/n?u=RePEc:nsr:niesrd:272&r=ifn |