nep-ifn New Economics Papers
on International Finance
Issue of 2007‒03‒10
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. East Asian Real Exchange Rates and PPP: New Evidence from panel-data tests By Baharumshah, Ahmad Zubaidi; Aggarwal, Raj; Chan, Tze-Haw
  2. Re-examining Purchasing Power Parity for East-Asian Currencies: 1976-2002 By Barumshah, Ahmad Zubaidi; Chan, Tze-Haw; Fountas, Stilianos
  3. Real exchange rates, dollarization and industrial employment in Latin America By Arturo Galindo; Alejandro Izquierdo; José M. Montero
  4. Currency substitution in a de-dollarizing economy: The case of Russia By Harrison , Barry; Vymyatnina, Yulia
  5. Latin American foreign exchange intervention - Updated By Da Silva, Sergio; Nunes, Mauricio
  6. Are Pound and Euro the Same Currency? - Updated By Matsushita, Raul; Gleria, Iram; Figueiredo, Annibal; Da Silva, Sergio
  7. Exchange Rate Arrangements in Central and Eastern European Countries – Evolutions and Characteristics By Toma, Ramona
  8. An "almost-too-late" warning mechanism for currency crises By Crespo Cuaresma, Jesýs; Slacik, Tomas
  9. Long Run Macroeconomic Relations in the Global Economy By Stephane Dees; Sean Holly; M. Hashem Pesaran; L. Vanessa Smith
  10. On the Impact of Fundamentals, Liquidity and Coordination on Market Stability By Francisco Peñaranda; Jón Daníelsson
  11. Inappropriate Detrending and Spurious Cointegration By Heejoon Kang

  1. By: Baharumshah, Ahmad Zubaidi; Aggarwal, Raj; Chan, Tze-Haw
    Abstract: Abstract: This paper empirically tests purchasing power parity (PPP) using panel unit root designed for heterogeneous panels. Monthly data of six East Asian countries (South Korea, Thailand, Indonesia, Malaysia, Singapore and the Philippines) were used to test the long-run PPP relationship. This study documents the fact that unlike the pre-crises period, mean reversion in real Asian exchange rates is a feature of the post-crises period in all six countries considered in this study. It turns out that our finding based on an array of panel unit root tests appears to be invariant to the choice of the numeraire currency, namely the US and Japanese yen.
    Keywords: Purchasing power parity; Panel unit root tests; Asian financial crisis
    JEL: F41 F31 C23 C12
    Date: 2005
  2. By: Barumshah, Ahmad Zubaidi; Chan, Tze-Haw; Fountas, Stilianos
    Abstract: We investigate the behavior of real exchange rates of six East-Asia countries in relation to their two major trading partners – the US and Japan. These countries, Singapore excepted, were affected by the financial crisis of the fall 1997. Using monthly frequency data from 1976 to 2002 and the ARDL cointegration procedure we test for the long-run PPP hypothesis. We find no evidence for the weak form of PPP in the pre-crisis period but strong evidence in the post-crisis period. For the post-crisis period, we also find very small persistence of PPP deviations as indicated by very small half-lives (less than 7 months) and narrow confidence intervals with an upper bound of 1 year or less in most countries. Our findings reveal that the East Asian countries are returning to some form of PPP-oriented rule as a basis for their exchange rate policies.
    Keywords: Purchasing power parity; Asian financial crisis; bounds test; half-lives; confidence intervals
    JEL: F40 F31 C23 C12
    Date: 2004
  3. By: Arturo Galindo (Universidad de los Andes); Alejandro Izquierdo (Inter-American Development Bank (IDB)); José M. Montero (Banco de España)
    Abstract: We use a panel dataset on industrial employment and trade for 9 Latin American countries for which liability dollarization data at the industrial level is available. We test whether real exchange rate fluctuations have a significant impact on employment, and analyze whether the impact varies with the degree of trade openness and liability dollarization. Econometric evidence supports the view that real exchange rate depreciations can impact employment growth positively, but this effect is reversed as liability dollarization increases. In industries with high liability dollarization, the overall impact of a real exchange rate depreciation can be negative.
    Keywords: manufacturing employment, real exchange rates, debt composition, balance sheet effects
    JEL: E24 F31 F34 G32
    Date: 2006–01
  4. By: Harrison , Barry (BOFIT); Vymyatnina, Yulia (BOFIT)
    Abstract: Currency substitution, the use of foreign money to finance transactions between domestic residents, is a common feature of emerging market economies. Currency substitution re-duces the stability of money demand functions in ways that can seriously undermine cen-tral bank credibility and its efforts to implement monetary policy. Most transition econo-mies, including Russia, experienced widespread currency substitution in the early phase of transition. Following Russia’s financial meltdown in 1998, its monetary authorities intro-duced a raft of changes that substantially improved the stability and performance of the macroeconomy and reduced currency substitution. This paper investigates currency substi-tution in the Russian economy in the post-crisis period of 1999–2005. Several measures of currency substitution and different modelling frameworks consistently suggest an on-going decline in currency substitution, a shift that has important implications for Russian mone-tary policy.
    Keywords: currency substitution; transition economies; de-dollarization
    JEL: E58 F31 F41
    Date: 2007–03–02
  5. By: Da Silva, Sergio; Nunes, Mauricio
    Abstract: We examine Latin American foreign exchange intervention in a framework where the exchange rate regime is endogenous and there exists an inefficient, equilibrium foreign exchange intervention bias. The model suggests that greater central bank independence is associated with lesser intervention in the foreign exchange market, and also with leaning-against-the-wind intervention. Both results are confirmed by data from 13 Latin American countries.
    Keywords: foreign exchange intervention; exchange rates; Latin America
    JEL: F41 F31
    Date: 2007
  6. By: Matsushita, Raul; Gleria, Iram; Figueiredo, Annibal; Da Silva, Sergio
    Abstract: Based on long range dependence, some analysts claim that the exchange rate time series of the pound sterling and of an artificially extended euro have been locked together for years despite daily changes [1, 9]. They conclude that pound and euro are in practice the same currency. We assess the long range dependence over time through Hurst exponents of pound-dollar and extended euro-dollar exchange rates employing three alternative techniques, namely rescaled range analysis, detrended fluctuation analysis, and detrended moving average. We find the result above (which is based on detrended fluctuation analysis) not to be robust to the changing techniques and parameterizing.
    Keywords: False euro; exchange rates; financial efficiency; Hurst exponent; R/S analysis; detrended fluctuation analysis; detrending moving average
    JEL: F31 C63 G10
    Date: 2007
  7. By: Toma, Ramona
    Abstract: The process of choosing the exchange rate regime for the new EU member states has been influenced by other criteria than the traditional ones, which belong to macroeconomic criteria. This paper make a comparative analyze of the exchange rate arrangements in Central and Eastern European after 1990. These arrangements are dynamic on the one hand due to their permanent diversification and on the other hand because the values established this way are rapidly changing. In essence, they differ according to the degree of flexibility adopted when the exchange rate is established: from more rigid forms – currency board or pegging the currency to a foreign currency – to free floating.
    Keywords: exchange rate; arrangements; Central and Eastern European countries
    JEL: F31 F33 E42
    Date: 2007–03–01
  8. By: Crespo Cuaresma, Jesýs (BOFIT); Slacik, Tomas (BOFIT)
    Abstract: We propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.
    Keywords: currency crisis; term structure of interest rates; transition economies
    JEL: E43 F31 F34
    Date: 2007–03–02
  9. By: Stephane Dees; Sean Holly; M. Hashem Pesaran; L. Vanessa Smith
    Abstract: This paper focuses on testing long run macroeconomic relations for interest rates, equity, prices and exchange rates within a model of the global economy. It considers a number of plausible long run relationships suggested by arbitrage in financial and goods markets, and uses the global vector autoregressive (GVAR) model developed in Dees, di Mauro, Pesaran and Smith (2007) to test for long run restrictions in each country/region conditioning on the rest of the world. Bootstrapping is used to compute both the empirical distribution of the impulse responses and the log-likelihood ratio statistic for over-identifying restrictions. The paper also examines the speed with which adjustments to the long run relations take place via the persistence pro.les. We .nd strong evidence in favour of the uncovered interest parity and to a lesser extent the Fisher equation across a number of countries, but our results for the PPP are much weaker. Also as to be expected, the transmission of shocks and subsequent adjustments in financial markets are much faster than those in goods markets.
    Keywords: Global VAR, interdependencies, Fisher relationship, Uncovered Interest Rate Parity , Purchasing Power Parity, persistence profile, error variance decomposition
    JEL: C32 E17 F47 R11
    Date: 2007–01
  10. By: Francisco Peñaranda; Jón Daníelsson
    Abstract: Complex interactions between fundamentals and liquidity during unstable periods in financial markets are succinctly modeled with co- ordination games. We propose a flexible framework to estimate such a model and use the efficient method of moments as estimation proce- dure. We illustrate the model by using exchange rates from the yen– dollar carry trade induced uncertainty in 1998, interest rate spreads and global market volatility. The model fits the data well, with ev- idence of low information disparities, the market is generally very deep, where global volatility is more important than fundamental un- certainty in the determination of liquidity. There is clear evidence of asymmetry between the buy and sell sides of the market.
    Keywords: Carry trades, currency crises, efficient method of moments, global games
    JEL: C22 C51 F31 G15
    Date: 2007–01
  11. By: Heejoon Kang (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: The empirical literature is abundant with detrended cointegration, where cointegration relationships are tested and estimated with deterministic trend terms. Cointegration is, however, critically dependent on whether time series is detrended or not. A series of Monte Carlo experiments show that inappropriately detrended time series tend to exhibit a spurious cointegration. Although true time series are known not to be cointegrated, inappropriately detrended series tend to be cointegrated. Foreign exchange rates are analyzed to demonstrate the relevance and importance of the inappropriate detrending in the cointegration analysis.
    Keywords: Deterministic trend, Foreign exchange rates, Monte Carlo study, Stochastic trend
    JEL: C22 C15 E31
    Date: 2006

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