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on International Finance |
| By: | Sergio Rebelo; Carlos A. Vegh |
| Abstract: | The influential Krugman-Flood-Garber (KFG) model of balance of payment crises assumes that a fixed exchange rate is abandoned if and only if international reserves reach a critical threshold value. From a positive standpoint, the KFG rule is at odds with many episodes in which the central bank has plenty of international reserves at the time of abandonment. We study the optimal exit policy and show that, from a normative standpoint, the KFG rule is suboptimal. We consider a model in which the fixed exchange rate regime has become unsustainable due to an unexpected increase in government spending. We show that, when there are no exit costs, it is optimal to abandon immediately. When there are exit costs, the optimal abandonment time is a decreasing function of the size of the fiscal shock. For large fiscal shocks immediate abandonment is optimal. Our model is consistent with the evidence that many countries exit fixed exchange rate regimes with plenty of international reserves in the central bank's vault. |
| JEL: | F31 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12793&r=ifn |
| By: | Gabriele Galati; Patrick Higgins; Owen F. Humpage; William Melick |
| Abstract: | A vast literature on the effects of sterilized intervention by the monetary authorities in the foreign exchange markets concludes that intervention systematically moves the spot exchange rate only if it is publicly announced, coordinated across countries, and consistent with the underlying stance of fiscal and monetary policy. Over the past fifteen years, researchers have also attempted to determine if intervention has any effects on the dispersion and directionality of market views concerning the future exchange rate. These studies usually focus on the variance around the expected future exchange rate—the second moment. In this paper we demonstrate how to use over-the-counter option prices to recover the risk-neutral probability density function (PDF) for the future exchange rate. Using the yen/dollar exchange rate as an example, we calculate measures of dispersion and directionality, such as variance and skewness, from estimated PDFs to test whether intervention by the Japanese Ministry of Finance had any impact on the higher moments of the exchange rate. We find little or no systematic effect, consistent with the findings of the literature on the spot rate as Japanese intervention during the period 1996-2004 was not publicly announced, rarely coordinated across countries and, in hindsight, probably inconsistent with the underlying stance of monetary policy. |
| Keywords: | Options (Finance) ; Foreign exchange administration |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedcwp:0618&r=ifn |
| By: | Lane, Philip R. (The Institute for International Integration Studies) |
| Abstract: | This paper addresses the dynamics of the Swedish external position, with a particular focus on its inter-relation with the external value of the krona. We argue that financial globalisation means that a broader conceptual framework is required, whereby exchange rate fluctuations operate through the ‘valuation channel’ of external adjustment, in addition to the traditional trade balance channel. In the other direction, we highlight that the projected trend for the trade balance is an important influence on the long-term prospects for the krona. Finally, we seek to assess the future direction for the Swedish net foreign asset position by investigating the likely impact of demographic change and shifts in the Swedish position in the world income distribution. |
| Keywords: | real exchange rate; external adjustment; Sweden |
| JEL: | F00 F20 F30 |
| Date: | 2006–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0200&r=ifn |
| By: | Balázs Égert |
| Abstract: | This paper analyses the effectiveness of foreign exchange interventions in Croatia, the Czech Republic, Hungary, Romania, Slovakia and Turkey using the event study approach. Interventions are found to be effective only in the short run when they ease appreciation pressures. Central bank communication and interest rate steps considerably enhance their effectiveness. The observed effect of interventions on the exchange rate corresponds to the declared objectives of the central banks of Croatia, the Czech Republic, Hungary and perhaps also Romania, whereas this is only partially true for Slovakia and Turkey. Finally, interventions are mostly sterilized in all countries except Croatia. Interventions are not much more effective in Croatia than in the other countries studied. This suggests that unsterilized interventions do not automatically influence the exchange rate. |
| Keywords: | central bank intervention, foreign exchange intervention, verbal intervention, central bank communication, Central and Eastern Europe, Turkey |
| JEL: | F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1869&r=ifn |
| By: | Guglielmo Maria Caporale; Mario Cerrato |
| Abstract: | This paper presents further empirical evidence on the relationship between black market and official exchange rates in six emerging economies (Iran, India, Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series techniques and heterogeneous panel methods to test for the existence of a long-run relationship between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, it also analyses the short-run dynamic responses of both markets to shocks. Finally, it tries to shed some light on the determinants of the market premium. Evidence of slow reversion to the long-run equilibrium is found. Further, it appears that capital controls and expected currency devaluation are the two main factors affecting the size of the premium and determining the breakdown in the proportionality relationship. |
| Keywords: | black market and official exchange rates, panel cointegration, impulse response functions |
| JEL: | C23 F31 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1851&r=ifn |