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on International Finance |
| By: | Balázs Égert (Oesterreichische Nationalbank; MODEM, University of Paris X-Nanterre and William Davidson Institute) |
| 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 inuence the exchange rate. |
| Keywords: | central bank intervention, communication, foreign exchange intervention, verbal intervention |
| JEL: | F31 |
| Date: | 2006–12–22 |
| URL: | http://d.repec.org/n?u=RePEc:onb:oenbwp:134&r=ifn |
| By: | Charles Wyplosz (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | This paper looks at the measures taken by East Asian countries since the 1997-8 crisis to reduce the odds of a new crisis. It finds that odds are low, but far from zero. Much progress has been done to deal with the vulnerabilities that have been identified so far, but some remain. The massive accumulation of foreign exchange reserves is raising the threshold at which markets would trigger speculative attacks, but the threshold is still well within reach of international markets. Efforts at building a regional defense system are slow and unlikely to come to fruition in the near future. |
| Keywords: | International Economics, Exchange Rates, Currency rises, Foreign exchange reserves |
| JEL: | F33 F36 |
| Date: | 2006–05 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp02-2007&r=ifn |
| By: | Beverly Lapham (Queen's University); Danny Leung (Bank of Canada) |
| Abstract: | Consumer prices are not very responsive to movements in nominal exchange rates and their response has fallen in Canada since the mid 1980s. This paper explores two of the most likely explanations for this decline in exchange rate pass-through to consumer prices: (1) lower inflation and (2) restructuring in the retail sector. We believe that both explanations are important but our primary focus in this paper is on the second explanation. We discuss the restructuring that has occurred in Canadian retail and trends in mark-ups and concentration in that sector. We argue that to understand these trends, it is important to examine pass-through in industrial organization models with strategic elements. Finally, we present a series of such models and evaluate the effects of various forms of restructuring on mark-ups, concentration, and exchange rate pass-through. |
| Keywords: | Pass-Through, Restructuring, Strategic Pricing, Mark-ups, Exchange Rates, Imperfect Competition |
| JEL: | D40 F15 F31 F41 L16 |
| Date: | 2006–10 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1120&r=ifn |
| By: | Qayyum, Abdul; Kemal, A. R. |
| Abstract: | Our paper examines the volatility spillover between the stock market and the foreign exchange market in Pakistan. For long run relationship we use Engle Granger two step procedure and the volatility spillover is modelled through bivariate EGARCH method. The estimated results from cointegration analysis show that there is no long run relationship between the two markets. The results from the volatility modelling show that the behaviour of both the stock exchange and the foreign exchange markets are interlinked. The returns of one market are affected by the volatility of other market. Particularly the returns of the stock market are sensitive to the returns as well as the volatility of foreign exchange market. On the other hand returns in the foreign exchange market are mean reverting and they are affected by the volatility of stock market returns. There is strong relationship between the volatility of foreign exchange market and the volatility of returns in stock market. |
| Keywords: | Stock Market; Forex Market; EGARCH; Volatility Spillover; Stock market return; Foreign Exchange return; Pakistan |
| JEL: | G1 |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1715&r=ifn |
| By: | Enzo Weber |
| Abstract: | The present paper analyses interactions between the foreign exchange, money and stock markets in Asian Pacific countries from 1999 till 2006. Considering influences on financial market volatility, the estimations are carried out in multivariate EGARCH models using structural residuals. This approach consequently allows the identification of the contemporaneous effects between the variables. Structural VARs or VECMs can therefore give answers to questions of exchange rate stabilisation, monetary policy behaviour or equity market reagibility. Additionally, a correlation analysis of the identified innovations reveals the degree of coherence in the Asian Pacific region. |
| Keywords: | Structural EGARCH, Financial Markets, Asia Pacific |
| JEL: | C32 G15 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:hum:wpaper:sfb649dp2007-004&r=ifn |
| By: | Herciu, Mihaela; Toma, Ramona |
| Abstract: | In the new context of European Integration, Romania has to improve some important macroeconomic indicators, such as: competitiveness, economic freedom and real exchange rate for a sustainable economic growth. Many authors emphasize that competitiveness and economic freedom affects economic growth through stimulating investment and business environment. The equilibrium exchange rate is crucial as it directly influences external competitiveness, especially through export prices. For Romania, the competitiveness can be improved through the economic freedom growth and the real exchange rate appreciation. But this appreciation must be accompanied by a rise in productivity and in the quality of the products offered on the external markets in order not to affect Romania’s external competitiveness. |
| Keywords: | competitiveness; economic freedom; real exchange rate; Romania |
| JEL: | M21 O11 F31 |
| Date: | 2006–12–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1722&r=ifn |
| By: | OGAWA Eiji; SHIMIZU Junko |
| Abstract: | Ogawa and Shimizu (2005, 2006a) have proposed a possible way to create an Asian Monetary Unit (AMU) as a weighted average of the thirteen East Asian currencies (ASEAN + China, Japan, and Korea) and developed AMU Deviation Indicators for a surveillance process under the Chiang Mai Initiative. Both the AMU and the AMU Deviation Indicators are important in helping the countries in the region to recognize the necessity of moving toward a common currency basket system. However, there remains an open question about how to implement this system in East Asian countries. The purpose of this paper is to compile the latest issues of currency basket itself and to develop concrete steps toward a common currency basket system in East Asia. Particularly, we simulate possible individual currency basket weights based on trade shares of each East Asian country and convert them to G3 currency (the US dollar, the euro, and the Japanese yen) basket weights. We also investigate the discrepancies between the converted G3 currency basket weight of the AMU and the weights of the common G3 currency basket, which is to illustrate the reality of implementing a common currency basket system. We propose a possible way to shift from an individual G3 currency basket system to the AMU currency basket system. In this process, we expect that the Japanese yen would play a varying role at each stage toward monetary coordination in East Asia. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:07002&r=ifn |
| By: | Leo Krippner (AMP Capital Investors and University of Waikato) |
| Abstract: | This article uses a dynamic multi-factor model of the yield curve with a rational-expectations, general-equilibrium-economy foundation to investigate the uncovered interest parity hypothesis(UIPH). The yield curve model is used to decompose the interest rate data used in the UIPH regressions into components that reflect rationally-based expectations of the cyclical and fundamental components of the underlying economy. The UIPH is not rejected based on the fundamental components of interest rates, but is soundly rejected based on the cyclical components. These results provide empirical support for suggestions in the existing theoretical literature that rationally-based interest rate and exchange rate dynamics associated with cyclical inter-linkages between the economy and financial markets may contribute materially to the UIPH puzzle. |
| Keywords: | uncovered interest parity; forward rate unbiasedness hypothesis; yield curve; term structure of interest rates; ANS model; Nelson and Siegel model |
| JEL: | E43 F31 |
| Date: | 2006–12–21 |
| URL: | http://d.repec.org/n?u=RePEc:wai:econwp:06/16&r=ifn |
| By: | Sebastian Edwards |
| Abstract: | In this paper I analyze whether restrictions to capital mobility reduce vulnerability to external shocks. More specifically, I ask if countries that restrict the free flow of international capital have a lower probability of experiencing a large contraction in net capital flows. I use three new indexes on the degree of international financial integration and a large multi-country data set for 1970-2004 to estimate a series of random-effect probit equations. I find that the marginal effect of higher capital mobility on the probability of a capital flow contraction is positive and statistically significant, but very small. Having a flexible exchange rate greatly reduces the probability of experiencing a capital flow contraction. The benefits of flexible rates increase as the degree of capital mobility increases. A higher current account deficit increases the probability of a capital flow contraction, while a higher ratio of FDI to GDP reduces that probability. |
| JEL: | F3 F32 F34 |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:12852&r=ifn |
| By: | John M Maheu; Thomas H McCurdy |
| Abstract: | We propose a new discrete-time model of returns in which jumps capture persistence in the conditional variance and higher-order moments. Jump arrival is governed by a heterogeneous Poisson process. The intensity is directed by a latent stochastic autoregressive process, while the jump-size distribution allows for conditional heteroskedasticity. Model evaluation focuses on the dynamics of the conditional distribution of returns using density and variance forecasts. Predictive likelihoods provide a period-by-period comparison of the performance of our heterogeneous jump model relative to conventional SV and GARCH models. Further, in contrast to previous studies on the importance of jumps, we utilize realized volatility to assess out-of-sample variance forecasts. |
| Keywords: | jump clustering, jump dynamics, MCMC, predictive likelihood, realized volatility, Bayesian model average |
| JEL: | C22 C11 G1 |
| Date: | 2007–02–02 |
| URL: | http://d.repec.org/n?u=RePEc:tor:tecipa:tecipa-279&r=ifn |
| By: | Cristina Arellano; Jonathan Heathcote |
| Abstract: | How does a country’s choice of exchange rate regime impact its ability to borrow from abroad? We build a small open economy model in which the government can potentially respond to shocks via domestic monetary policy and by international borrowing. We assume that debt repayment must be incentive compatible when the default punishment is equivalent to permanent exclusion from debt markets. We compare a floating regime to full dollarization. ; We find that dollarization is potentially beneficial, even though it means the loss of the monetary instrument, precisely because this loss can strengthen incentives to maintain access to debt markets. Given stronger repayment incentives, more borrowing can be supported, and thus dollarization can increase international financial integration. This prediction of theory is consistent with the experiences of El Salvador and Ecuador, which recently dollarized, as well as with that of highly-indebted countries like Italy which adopted the Euro as part of Economic and Monetary Union: in each case, around the time of regime change, spreads on foreign currency government debt declined substantially. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedmsr:385&r=ifn |
| By: | Fanelli, Luca |
| Abstract: | This paper addresses the issue of testing the 'hybrid' New Keynesian Phillips Curve (NKPC) through Vector Autoregressive (VAR) systems and likelihood methods, giving special emphasis to the case where variables are non stationary. The idea is to use a VAR for both the inflation rate and the explanatory variable(s) to approximate the dynamics of the system and derive testable restrictions. Attention is focused on the 'inexact' formulation of the NKPC. Empirical results over the period 1971-1998 show that the NKPC is far from being a `good first approximation' of inflation dynamics in the Euro area. |
| Keywords: | Inflation dynamics; Forecast model; New Keynesian Phillips Curve; Forward-looking behavior; VAR expectations. |
| JEL: | C32 C52 E31 |
| Date: | 2005–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:1617&r=ifn |
| By: | Galina Hale; Carlos Arteta |
| Abstract: | Currency crises of the past decade highlighted the importance of balance-sheet effects of currency crises. In credit-constrained markets such effects may lead to further declines in credit. Controlling for a host of fundamentals, we find a systematic decline in foreign credit to emerging market private firms of about 25% in the first year following currency crises, which we define as large changes in real value of the currency. This decline is especially large in the first five months, lessens in the second year and disappears entirely by the third year. We identify the effects of currency crises on the demand and supply of credit and find that the decline in the supply of credit is persistent and contributes to about 8% decline in credit for the first two years, while the 35% decline in demand lasts only five months. |
| Keywords: | Financial crises |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-02&r=ifn |
| By: | Lane, Philip R.; Schmukler, Sergio L. |
| Abstract: | Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities (with the exception of China ' s foreign direct investment liabilities), these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are " short equity, long debt. " Third, China and India have improved their net external positions over the past decade although, based on their income level, neoclassical models would predict them to be net borrowers. Domestic financial developments and policies seem essential in understanding these patterns of integration. These include financial liberalization and exchange rate policies, domestic financial sector policies, and the impact of financial reform on savings and investment rates. Changes in these factors will affect the international financial integration of China and India (through shifts in capital flows and asset and liability holdings) and, consequently, the international financial system. |
| Keywords: | Investment and Investment Climate,Economic Theory & Research,Banks & Banking Reform,Capital Flows,Financial Economics |
| Date: | 2007–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:4132&r=ifn |