nep-ifn New Economics Papers
on International Finance
Issue of 2007‒04‒21
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Convergence, capital accumulation and the nominal exchange rate By Péter Benczúr; István Kónya
  4. Central Bank Interventions, Communication & Interest Rate Policy in Emerging European Economies By Balázs Égert
  5. Is Mercosur an optimum currency area? By Neves, J. Anchieta; Stocco, Leandro; Da Silva, Sergio
  6. A Multivariate Integer Count Hurdle Model: Theory and Application to Exchange Rate Dynamics By Katarzyna Bien; Ingmar Nolte; Winfried Pohlmeier

  1. By: Péter Benczúr (Magyar Nemzeti Bank); István Kónya (Magyar Nemzeti Bank)
    Abstract: This paper develops a flexible price, two-sector nominal growth model, in order to study the role of the exchange rate regime in capital accumulation (convergence). We adopt a standard model of a small open economy with traded and nontraded goods, and enrich its structure with costly investment and a preference for real money holdings. We find that (i) the choice of exchange rate regime influences the transition dynamics of a small open economy, (ii) a one-sector model does not adequately capture the channels through which the nominal side interacts with real variables, and (iii) as a consequence, sectoral asymmetries are important for understanding the effects of the exchange rate regime on capital accumulation.
    Keywords: two-sector growth model, small open economy, capital accumulation, household portfolios, real effects of nominal shocks.
    JEL: F32 F41 F43
    Date: 2007
  2. By: Aleksander Aristovnik
    Abstract: The article examines the question of whether the current account deficits seen in selected transition economies in recent years mainly as a symptom of the dynamic economic activity of the catching-up process are a source of potential macroeconomic destabilisation. Given the possible significant reduction of capital flows, as well as restrictions and lessons from recent financial crises, current account deficits must be closely monitored in the region. In this respect, the issue of ‘current account sustainability’ in seventeen transition economies is investigated. For this purpose, two accounting frameworks (Milesi-Ferreti and Razin, 1996; Reisen, 1998) based on certain strict assumptions are employed. The results show that if the observed level of foreign direct investment (FDI) flows is kept in the medium run almost all countries could optimally have a higher level of external deficit, with the exception of countries such as Baltic States, Hungary, Macedonia, Moldova and Romania. Accordingly, the maintenance of relatively large FDI inflows (especially greenfield investments) to national economies is a key priority in securing future external sustainability. In the end, the results indicate that current account deficits of transition economies that exceed 5 percent of GDP generally involve problems of their external sustainability.
    Keywords: transition economies, current account deficits, sustainability, FDI
    JEL: C33 F32
    Date: 2006–11–01
  3. By: Jong-Wha Lee; Warwick J. McKibbin
    Abstract: Since the 1997-98 financial crisis, many East Asian economies have experienced permanent declines of domestic investment and output growth, mainly resulting from the increase in financial risk and decrease in the return on investment. The investment decline in East Asia, outside of China, combined with the falling in public and private savings in the United States, has contributed to recent surges in global current account imbalances. The reduction of global current account imbalances requires adjustment policies to raise domestic investment in East Asia, such as expansion of public infrastructure investment and an increase in R&D and human capital investment. Continuous structural reforms in the corporate and financial sectors are also required to lower financial risk and improve investment efficiency. Simulations with a global general equilibrium model support the positive role of the investment increase or strong productivity related growth in reducing current account surpluses in East Asia. Nevertheless, a discal adjustment in the United States turns out to be more effective in reducing the US current account deficit and thereby correcting global imbalance.
    Date: 2006–10
  4. 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 inuence the exchange rate.
    Keywords: central bank intervention, communication, foreign exchange intervention, verbal intervention
    JEL: F31
    Date: 2006–11–01
  5. By: Neves, J. Anchieta; Stocco, Leandro; Da Silva, Sergio
    Abstract: We find that generalized purchasing power parity does not hold for Mercosur, and thus that the South American trade group does not constitute an optimum currency area. We also find that the role of the United States cannot be neglected in the region, and that high short run volatility of real exchange rates is accompanied by slow adjustment processes of between 2 and 16 years (PPP puzzle).
    Keywords: generalized purchasing power parity; optimum currency area; Mercosur; PPP puzzle
    JEL: F31 F36
    Date: 2007–04–16
  6. By: Katarzyna Bien (University of Konstanz); Ingmar Nolte (University of Konstanz); Winfried Pohlmeier (University of Konstanz)
    Abstract: In this paper we propose a model for the conditional multivariate density of integer count variables defined on the set Zn. Applying the concept of copula functions, we allow for a general form of dependence between the marginal processes which is able to pick up the complex nonlinear dynamics of multivariate financial time series at high frequencies. We use the model to estimate the conditional bivariate density of the high frequency changes of the EUR/GBP and the EUR/USD exchange rates.
    Keywords: Integer Count Hurdle, Copula Functions, Discrete Multivariate, Distributions, Foreign Exchange Market
    JEL: G10 F30 C30
    Date: 2006–11–14
  7. By: Aleksander Aristovnik
    Abstract: The main aim of the paper is to examine the short- and medium-term empirical link between current account balances and a broad set of (economic) variables proposed by theoretical and empirical literature. The paper focuses on the Middle East and North Africa (MENA), an economically diverse region, which has so far mainly been neglected in such empirical analyzes. For this purpose, a (dynamic) panel-regression technique is used to characterize the properties of current account variations across selected MENA economies in the 1971-2005 period. The results, which are generally consistent with theoretical and previous empirical analyses, indicate that higher (domestic and foreign) investment, government expenditure and foreign interest rates have a negative effect on the current account balance. On the other hand, a more open economy, higher oil prices and domestic economic growth generate an improvement in the external balance, whereas the latter implies that the domestic growth rate is associated with a larger increase in domestic savings than investment. Finally, the results show a relatively high persistency of current accounts and reject the validity of the stages of development hypothesis as poorer countries in the region reveal a higher current account surplus (or lower deficit).
    Keywords: MENA countries, current account, determinants, dynamic panel data
    JEL: C23 F32 O53
    Date: 2007–03–01

This nep-ifn issue is ©2007 by Yi-Nung Yang. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.