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on International Finance |
| By: | Huisman, R.; Mahieu, R.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University) |
| Abstract: | In this paper, we examine in which periods uncovered interest rate parity was likely to hold. Empirical research has shown mixed evidence on UIP. The main finding is that it doesn?t hold, although some researchers were not able to reject UIP in periods with large interest differentials or high volatility. In this paper, we introduce a switching regime framework in which we assume that the exchange rate can switch between a UIP regime and a random walk regime. Our empirical results provide evidence that exchange rate movements were consistent with UIP over some periods, but not all. Consistent with the existing literature we also show that in periods with large interest differentials or increased exchange rate volatility, the exchange rate is more likely to follow UIP. |
| Keywords: | Markov regime switching;Uncovered interest rate parity;Exchange rate dynamics; |
| Date: | 2007–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:eureri:30009341&r=ifn |
| By: | Fanelli Luca (Department of Statistical Sciences, University of Bologna, Italy); Paruolo Paolo (Department of Economics, University of Insubria, Italy) |
| Abstract: | This paper addresses the problem of measuring the speed of adjustment of exchange rates and relative prices to purchasing power parity (PPP), in the multivariate context of Vector Autoregressive Processes (VAR). We consider the speed of adjustment of one variable y in response to another variable x, where x, y belong to the VAR. We propose a multivariate measure defined as the forecasting horizon for which the cumulated interim multiplier of x on y surpasses a given fraction p of the corresponding total multiplier. This measure of speed for p = 1/2 coincides with the usual concept of half-life when restricted to univariate processes. We emphasize the importance to separate the concepts of long run e¤ect size and its speed of adjustment, where the latter is unambiguosly defined only when the long run e¤ect is non-zero. We discuss likelihood-based point estimators and confidence sets for this notion of half-life, and reconsider evidence on adjustment to PPP in monthly post-Bretton Woods data for five major industrialized countries against the U.S. dollar. Results show that nominal exchange rates bu¤er the entire adjustment to PPP disequilibrium, wheras relative prices do not adjust either in the short or the long run to PPP deviations. Concluding in such a situation that prices adjust faster than exchange rates is a matter of how one interprets the absence of short run and long run effects. |
| Keywords: | Invariance, Half-life, purchasing power parity, impact factors, speed of adjustment, vector equilibrium correction, upcrossing and downcrossing. |
| JEL: | C32 C52 F31 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:ins:quaeco:qf0606&r=ifn |
| By: | Friberg, Richard (Stockholm School of Economics); Wilander, Fredrik (ECON) |
| Abstract: | This report, commissioned by Sveriges Riksbank, examines the role of currency denomination in international trade transactions. It is divided in two parts. The first part consists of a survey of the price setting and payment practices of a large sample of Swedish exporting firms. The second part analyzes payments data from the Swedish settlement reports from 1999-2002. We examine whether invoicing patterns of Swedish and European companies changed following the creation of the EMU and how the currency denomination of exports differ from that of imports. Finally we consider the possibility that changes in invoicing patterns are correlated with changes in nominal exchange rates. Our main finding is that the same currency to a large extent is used for price setting, invoicing and payment for exports to third parties. We also find that the currency of the customer is the most used and that the euro is replacing the Swedish krona both in transactions with EMU-member countries but outside the EMU. Finally we find some evidence of a weak correlation between aggregate changes in invoicing patterns and changes in the trade weighted exchange rate over the period 1999-2002. |
| Keywords: | Invoicing currency; exchange rate pass-through; price setting currency; exchange rate exposure; nominal rigidity |
| JEL: | F31 F41 G32 |
| Date: | 2007–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:rbnkwp:0201&r=ifn |
| By: | Juan Carlos Cuestas (Universidad de Alicante); Javier Ordoñez (Universitat Jaume I); Mariam Camarero (Universitat Jaume I) |
| Abstract: | The aim of this article is to provide additional evidence on the fulfilment of the Purchasing Power Parity hypothesis in the so-called Mediterranean countries. In order to test for the empirical validity of such hypothesis, we have applied two types of unit root tests. The first group is due to Bierens (1997) who generalizes the alternative hypothesis to nonlinear trend stationarity and, the second is the Leybourne, Newbold and Vougas (1998) approach that uses a nonlinear specification for the intercept and slope in order to detrend the series. The results suggest that the evidence in favour of the Purchasing Power Parity hypothesis increases when we allow for nonlinear alternatives. |
| Keywords: | purchasing power parity, real exchange rate, unit roots, structural change, nonlinearity |
| JEL: | C22 F31 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2006-27&r=ifn |
| By: | Sophocles N. Brissimis (Bank of Greece, Economic Research Department and University of Piraeus); Theodora S. Kosma (Bank of Greece, Economic Research Department) |
| Abstract: | This paper develops an international oligopoly model where foreign and domestic firms simultaneously choose their pricing strategies under the assumption of non-zero conjectural variations. The model captures the links between domestic and foreign producers’ prices and establishes a relationship between the price of domestically produced goods and the exchange rate, which appears to be important for the determination of exchange rate pass-through. It is also found that the equilibrium pass-through elasticity can be less than, equal to or greater than one depending on exporting and domestic firms’ conjectural variations. The empirical implications of the model are tested with the Johansen multivariate cointegration technique using data for Japanese firms’ exports to the US market. The results indicate that US producer prices are indeed influenced by the prices of their Japanese competitors and that the pass-through elasticity is less than one. |
| Keywords: | Money demand; Exchange rate pass-through; Conjectural variations; Translog expenditure function; Multivariate cointegration |
| JEL: | C32 F39 L13 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:51&r=ifn |
| By: | Giuseppe Marotta |
| Abstract: | We search for multiple unknown structural breaks in the short term business lending rate pass-through in euro countries, possibly associated with the introduction of the single currency. One break is detected in five EMU countries, two are found in other four, and in the UK as well. The last break occurs much before the event for France, several quarters later for Austria, Germany, Italy and Portugal, and the UK, hinting at best at a loose link with the inception of EMU. Long run pass-throughs decrease (except for France), becoming even more incomplete (except for the Netherlands and the UK); though the adjustment to equilibrium has become faster, cross-country heterogeneity in the euro area has barely changed. An incomplete lending rate pass-through, even in the long run, for the least sticky bank rate and the persistence of cross-country heterogeneity make tougher for the ECB to realize an effective area-wide monetary policy. |
| Keywords: | Interest rates; Monetary policy; Economic and Monetary Union (EMU); Cointegration analysis; Structural breaks |
| JEL: | E43 E52 E58 F36 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:mod:modena:0612&r=ifn |
| By: | Tassos G. Anastasatos (Bank of Greece and Business School, University of Loughborough); Ian R. Davidson (Business School, University of Loughborough) |
| Abstract: | This paper presents evidence that currency episodes display heterogeneity in terms of their evolution, their impact on the inflicted economy and their links with financial, political and macroeconomic fundamentals. Limited-dependent variable models for ordered and unordered outcomes along with their heteroskedastic and random effects extensions are applied to a large panel of data comprising 40 years of monthly observations on 23 developed countries. Heterogeneity, complemented by indications of self-fulfilling expectations and noise, suggest that time and region specific predictive approaches and policy responses are more useful than trying to base analysis and policy decisions on more general patterns. Results are established with formal specification tests. |
| Keywords: | Money demand; Currency crises; speculative pressure; exchange rate; devaluation; Limited-dependent variable models |
| JEL: | F31 C23 C25 E44 G15 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:52&r=ifn |
| By: | Mete Feridun (Department of Economics, Loughborough University) |
| Abstract: | This article aims at identifying the leading indicators of currency crises in Turkey in its post-liberalization history through the signals approach introduced by Kaminsky et al (1998). Based on a broad set of potential indicators, a number of variables are found to be persistently signaling the currency crises during the period 1980:01-2006:06. Particularly, variables such as short-term debt/international reserves, imports, exports, M2/international reserves, and current account balance/GDP are consistent with the results of previous work in the literature. Analysis of the average lead time of the indicators reveals that the first signal is issued 4.4 months before a crisis erupts with public debt/GDP offering the longest lead time with 10.2 months, and government consumption/GDP offering the shortest with 2.2 months. Analysis of the persistence of the indicators reveals that the indicator issuing the most persistent signals is the government consumption/GDP and the one issuing the least persistent signals is FDI/GDP. Results are encouraging from the vantage point of an early warning system since signaling, on average, occurs sufficiently early to allow preemptive policy actions. |
| Keywords: | Speculative attacks; currency crises; signals approach, Turkey. |
| JEL: | F30 E44 |
| Date: | 2006–12 |
| URL: | http://d.repec.org/n?u=RePEc:lbo:lbowps:2006_25&r=ifn |
| By: | Erlandsson, Mattias (National Institute of Economic Research); Markowski, Alek (National Institute of Economic Research) |
| Abstract: | The world trade patterns have changed over the recent years, and for Sweden many important trading partners have emerged. The National Institute of Economic Research has therefore compiled a new effective exchange rate of index for the Swedish krona, KIX. KIX is a chain-linked index that includes the currencies of 32 countries. The weight attached to each country is based on the patterns of international trade in manufactured goods and commodities. The index includes a number of emerging economies and gives in this way a more adequate definition of the effective exchange rate of the krona than the traditional indices. Furthermore, it allows for the changes in relative importance of Sweden´s trading partners. The calculation of KIX is now documented in a Working Paper: The Effective Exchange Rate Index KIX - Theory and Practise. |
| Date: | 2006–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:nierwp:0095&r=ifn |
| By: | Patrick Honohan |
| Abstract: | Although the worldwide growth in dollarization of bank deposits has recently slowed, it has already reached very high levels in dozens of countries. Building on earlier findings that allowed the main cross-country variations in the share of dollars to be explained in terms of national policies and institutions, this paper turns to analysis of short-run variations, particularly the response of dollarization to exchange rate changes, which is shown to be too small to warrant ‘fear of floating’ by dollarized economies. But high dollarization is shown to increase the risk of depreciation and even suspension, as indicated by interest rate spreads. While specific policy is needed to deal with the risks associated with dollarization, the underlying causes of unwanted dollarization should also be tackled. |
| Date: | 2007–01–17 |
| URL: | http://d.repec.org/n?u=RePEc:iis:dispap:iiisdp201&r=ifn |
| By: | Gabriel Fagan (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Vítor Gaspar (Banco de Portugal, Avenida Almirante Reis, 71-8o, 1150, Lisboa, Portugal.) |
| Abstract: | In this paper we argue that, for a group of converging economies of the European Union, participation in the euro area has been associated with easier access to financing by domestic economic agents. Easier access to financing was a significant impulse leading to a sharp increase in households' expenditures and a corresponding fall in the savings ratio. Increased expenditure was associated with current account deficits, a sharp fall in the net foreign asset position and an increase in the households' indebtedness. At the same time there was a sizeable increase in the real exchange rate. In this paper, we show that it is possible to obtain all these qualitative features of adjustment using a simple analytical model of intertemporal equilibrium. Specifically, we consider a simple endowment economy with traded and non-traded goods populated by Blanchard-Yaari households. We also argue that the consideration of external habit formation improves the model's ability to mimic short to medium term adjustment dynamics while, at the same time, improving the plausibility of steady state effects. JEL Classification: F36, E21, F32. |
| Keywords: | Euro area, interest rate convergence, overlapping generations model. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070716&r=ifn |
| By: | Matthieu Bussière (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | Although many papers have already proposed empirical models of currency crises, the timing of such crises has received relatively little attention so far. Most papers use indeed a static specification and impose the same lag structure across all explanatory variables. This, by construction, prevents from specifically timing the crisis signals sent by the leading indicators. The objective here is to fill this gap by considering a set of dynamic discrete choice models. The first contribution is to identify how early in advance each explanatory variable sends a warning signal. Some indicators are found to signal a crisis in the very short run while others signal a crisis at more distant horizons. The second contribution is to show that state dependence matters, albeit mostly in the short run. The results have important implications for crisis prevention in terms of the timeliness and usefulness of the envisaged policy response. JEL Classification: C23, F15, F14. |
| Keywords: | Dynamic discrete choice, panel data, currency crises, emerging markets, balance of payments, sudden stop, debt ratios. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20070713&r=ifn |