nep-ifn New Economics Papers
on International Finance
Issue of 2007‒03‒24
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Purchasing Power Parity among developing countries and their trade-partners. Evidence from selected CEECs and Implications for their membership of EU. By Nikolaos Giannellis; Athanasios Papadopoulos
  2. The Forward Premium Puzzle: new evidence from futures contracts By Kerstin Bernoth; Juergen von Hagen; Casper de Vries
  3. Exchange Rate Policy and Liability Dollarization: An Empirical Study By Pelin Berkmen; Eduardo E. Cavallo
  4. Testing for Efficiency in Selected Developing Foreign Exchange Markets: An Equilibrium-based Approach. By Nikolaos Giannellis; Athanasios Papadopoulos
  5. Nonlinear Exchange Rate Adjustment in the Enlarged Euro zone. Evidence and Implications for Candidate Countries. By Nikolaos Giannellis; Athanasios Papadopoulos
  6. Central bank intervention, sterilization and monetary independence: the case of Pakistan By Waheed, Muhammad
  7. Foreign Exchange Intervention and Equilibrium Real Exchange Rates By Dimitrios A. Sideris
  8. Fixed Exchange Rates and the Autonomy of Monetary Policy: The Franc Zone Case By Romain Veyrune
  9. Estimating the Equilibrium Effective Exchange Rate for Potential EMU members By Nikolaos Giannellis; Athanasios Papadopoulos
  10. The effect of monetary policy on exchange rates during currency crisis : the role of debt, institutions and financial openness By Eijffinger,Sylvester C.W.; Goderis,Benedikt
  11. Modeling the impact of real and financial shocks on Mercosur: the role of the exchange rate regime By Jean-Pierre Allegret; Alain Sand

  1. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece)
    Abstract: The purpose of the paper is twofold. Firstly, we test the validity of the PPP hypothesis for selected CEEC (Czech Republic; Hungary; Poland and Slovak Republic). Secondly, we attempt to define those countries’ trade linkages between Euro Area; US and the rest of the world. By applying univariate unit root tests as well as a multivariate cointegration test, we find stronger evidence of PPP from the latter test. Moreover, any failure to accept PPP cannot be attributed to structural breaks, apart from one case (between Czech Republic and EU). In overall, there is evidence of strong-form PPP in 6 out of the 8 cases, while for the rest two, weak-form PPP is accepted. Thus, we confirm PPP as a long run equilibrium baseline for these exchange rates per EURO. Furthermore, the fact that PPP holds between these countries and Euro Area indicates absence of trade frictions and other barriers. The implied well-developed trade relations are consistent with those countries’ entry into EMU.
    Keywords: PPP, Unit Root, Structural Breaks, Cointegration, Developing Countries
    JEL: C22 C32 C52 F31
    Date: 2006–10–01
  2. By: Kerstin Bernoth; Juergen von Hagen; Casper de Vries
    Date: 2007–01
  3. By: Pelin Berkmen; Eduardo E. Cavallo
    Abstract: The paper identifies the contemporaneous relationship between the exchange rate policy and external debt dollarization in a panel of industrial and developing countries. The presence of endogeneity makes the task of empirical identification elusive. The paper uses the method of "identification through heteroskedasticity" developed by Rigobon (2003) to solve the problem of identification in the present context. It finds that, controlling for endogeneity, countries with aggregate liability dollarization tend to be more actively involved in exchange rate stabilization operations, but it finds mixed results for the reverse causality.
    Keywords: Dollarization , exchange rate policy , Dollarization , Exchange rate policy , External debt ,
    Date: 2007–02–21
  4. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece)
    Abstract: This paper proposes an alternative way of testing FOREX efficiency for developing countries. The FOREX market will be efficient if fully reflects all available information. If this holds, the actual exchange rate will not deviate significantly from its equilibrium rate. Moreover, the spot rate should deviate from its equilibrium rate by only transitory components (i.e. it should follow a white noise process). This test is applied to three Central & Eastern European Countries – members of the EU. Considering an LSTAR model we find no evidence of nonlinear adjustment in the misalignment series. So, linear unit root tests imply that the Poland/Euro FOREX market is efficient, the Czech/Euro FOREX market is not, while the Slovak/Euro FOREX market is quasi-efficient.
    Keywords: FOREX efficiency; BEER; Linearity test; Unit Root.
    JEL: C12 C32 C51 E58
    Date: 2006–10–30
  5. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece)
    Abstract: This paper sheds light on the importance of the validity of PPP hypothesis for the accessing process of the candidate countries towards EMU. The evidence of nonlinear adjustment in real exchange rates insists the estimation of a nonlinear SETAR model. While linear half-life estimates are biased upward (5 years on average), SETAR half-life estimates imply a faster reverting process (1.5 years on average). As a consequence, the evidence in favor of PPP hypothesis and the fast equilibrium adjustment of real exchange rates (setting Euro as the numeraire currency) imply that candidate countries follow a normal integration process towards EMU.
    Keywords: EMU enlargement; PPP; Half-life; Nonlinearity; SETAR.
    JEL: C22 F31
    Date: 2007–01–10
  6. By: Waheed, Muhammad
    Abstract: This paper analyzes the response of the State bank of Pakistan—the central bank, to foreign exchange inflows for the period of 2001:1 to 2006:8. In this context, we estimated sterilization and offset coefficients using vector autoregression (VAR) model to account for the issue of endogeneity of domestic credit with the foreign exchange interventions. In addition, the paper also analyzes the role of foreign and domestic interest rate differentials in pulling in or pushing out of these foreign exchange flows. We found that the offset coefficient is very small and insignificant (0.16) implying that changes in credit resulted in very minimal offsetting reserve flows. The study found out that for the sample period, SBP only partially sterilized the inflows with magnitude of coefficient at (0.50) confirming the stylized facts. Results also indicate that inflows were neither pulled into the country due to high domestic interest rates due to some domestic policy nor they are pushed into Pakistan owing to low interest rates abroad.
    Keywords: Sterilization; Monetary independence; VAR
    JEL: E58 C32
    Date: 2007–03–16
  7. By: Dimitrios A. Sideris (Bank of Greece and University of Ioannina)
    Abstract: Monetary authorities intervene in the currency markets in order to pursue a monetary rule and/or to smooth exchange rate volatility caused by speculative attacks. In the present paper we investigate for possible intervention effects on the volatility of nominal exchange rates and the estimated equilibrium behaviour of real exchange rates. The main argument of the paper is that omission of intervention effects -when they are significant- would bias the ability to detect any PPP-based behaviour of the real exchange rates in the long run. Positive evidence for this argument comes from the experience of six Central and Eastern European economies, whose exchange markets are characterised by frequent interventions.
    Keywords: Foreign Exchange Market Intervention; Real Exchange Rates; PPP.
    JEL: F31 C32 E58
    Date: 2007–02
  8. By: Romain Veyrune
    Abstract: This paper compares monetary policy of currency boards with that of the franc zone during the period 1956-2005. It concludes that monetary policy in the zone was more autonomous than under a currency board, even though both systems faced the same exchange rate constraint. So far, the contingency line provided by the French treasury and capital controls have allowed the zone to combine a fixed exchange rate and a relatively autonomous monetary policy. Financial development and zone enlargement would challenge this relative autonomy for two reasons: (1) the potential cost to the French treasury would increase; and (2) residents would potentially be able to avoid capital controls. For the zone to maintain its fixed exchange rate, close targeting of foreign reserves would become important.
    Keywords: Franc zone , currency boards , monetary policy , fixed exchange rate , Exchange rate policy , Monetary unions , Currency boards , Monetary policy ,
    Date: 2007–02–21
  9. By: Nikolaos Giannellis (Department of Economics, University of Crete, Greece); Athanasios Papadopoulos (Department of Economics, University of Crete, Greece)
    Abstract: In this study, we attempt to examine the possibility of emergence of significant fluctuations of the exchange rates in the future for the candidate EMU countries. In doing so, we estimate the equilibrium rate of the nominal effective exchange rate for Poland, Hungary, Slovak Republic and Malta through the BEER and PEER approaches. While the PEER-based estimation implies a large misalignment rate for the Hungarian forint, the BEER-based analysis shows that the present exchange rates of the countries considered do not deviate significantly from their equilibrium rates. As a consequence, based on BEER analysis, we do not expect large fluctuations in the effective exchange rates among the currencies considered. Hence, the relevant effective exchange rates are expected to be relatively stable. As a matter of fact, the entry of those countries into EMU is not expected to weaken the stability of Euro.
    Keywords: Exchange rate - cointegration - BEER - PEER
    JEL: C32 C51 C52 E52
    Date: 2005–12–01
  10. By: Eijffinger,Sylvester C.W.; Goderis,Benedikt (Tilburg University, Center for Economic Research)
    Abstract: This paper examines the effect of monetary policy on the exchange rate during currency crises. Using data for a number of crisis episodes between 1986 and 2004, we find strong evidence that raising the interest rate: (i) has larger adverse balance sheet effects and is therefore less effective in countries with high domestic corporate short-term debt; (ii) is more credible and therefore more effective in countries with high-quality institutions; iii) is more credible and therefore more effective in countries with high external debt; and (iv) is less effective in countries with high capital account openness. We predict that monetary policy would have had the conventional supportive effect on the exchange rate during five of the crisis episodes in our sample, while it would have had the perverse effect during seven other episodes. For four episodes, we predict a statistically insignificant effect. Our results support the idea that the effect of monetary policy depends on its impact on fundamentals, as well as its credibility, as suggested in the recent theoretical literature. They also provide an explanation for the mixed findings in the empirical literature.
    Keywords: currency crisis;institutions;monetary policy;short-term debt;external debt; capital account openness
    JEL: E52 E58
    Date: 2007
  11. By: Jean-Pierre Allegret (GATE CNRS); Alain Sand (GATE CNRS)
    Abstract: This paper studies to what extent the diversity of exchange rate regimes within Mercosur exerts an influence on the feasibility of a monetary union in this area. A semi-structural VAR model is built for each country, including a set of international and domestic variables. Based on impulse response functions and forecast error decomposition, we conclude that differences of exchange rate regime explain significantly the divergences of economic dynamics triggered by foreign or domestic shocks. Second, we decompose the structural innovations generated by each country model into unobservable common and idiosyncratic components, using a state-space model. This last exercise, intended to assess the degree of policy coordination between the Mercosur members, did not disclose any common component for the structural innovations generated by the three national models.
    Keywords: co-movement, cycles, Mercosur, optimum currency area, unobserved components model, VAR
    JEL: C32 E32 F42
    Date: 2007–01

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