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on International Finance |
| By: | Daniel L.Thornton |
| Abstract: | There are two unresolved puzzles in the empirical foreign exchange literature. The first is the finding that tests of forward rate unbiasedness using the forward rate and forward premium equations yield markedly different conclusions. A companion puzzle - the forward premium puzzle - is the fact that the forward premium incorrectly predicts the direction of the subsequent change in the spot rate, which implies a massive rejection of uncovered interest parity. This paper resolves both puzzles. |
| Keywords: | Foreign exchange |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2007-014&r=ifn |
| By: | Mohsen Bahmani-Oskooee; Magda E. Kandil |
| Abstract: | Conventional wisdom states that currency depreciation in oil-producing countries are contractionary because demand effects, limited by the prevalence of oil exports priced in dollars, are more than offset by adverse supply effects. Iran, however, has experienced a rapid increase in non-oil exports in the last decade. Against this background, the paper tests whether the conventional wisdom still applies to Iran and concludes that the emergence of the non-oil export sector has made currency depreciation expansionary. The expansionary effect is particularly evident with respect to anticipated persistent depreciation in the long-run. Notwithstanding the varying effects of exchange rate fluctuations on the demand and supply sides of the economy, managing a flexible exchange rate gradually over time towards achieving stability in the real effective exchange rate may strike the necessary balance. |
| Date: | 2007–05–09 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/113&r=ifn |
| By: | Pavasuthipaisit, Robert |
| Abstract: | This paper examines optimal exchange policy when nominal interest rates are unusually low, as experienced by several Asian economies and Japan since July 2006. The paper finds that in such environments, it is optimal to create a nominal depreciation to offset contractionary disturbances. However, the limited scope of monetary policy easing may compromise the ability of the central bank to create a nominal depreciation especially if the central bank makes decisions on monetary policy making on a discretionary basis. In order to successfully create a nominal depreciation, the central bank needs to rely on the expectations channel, by making a credible promise to keep its currency weak going forward. Finally, trade liberalization, by enhancing the role of the exchange rate channel on the transmission mechanism, may allow the central bank to achieve lower average inflation. |
| Keywords: | Zero lower bound; liquidity trap; exchange rate policy; open-economy macroeconomics. |
| JEL: | E58 E52 F41 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3596&r=ifn |
| By: | Jesus Crespo Cuaresma; Tomas Slacik |
| 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: | F31 F34 E43 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:inn:wpaper:2007-10&r=ifn |
| By: | Katherine A. Smith; Diego Valderrama |
| Abstract: | The composition of capital inflows to emerging market economies tends to follow a predictable dynamic pattern across the business cycle. In most emerging market economies, total inflows are procyclical, with debt and portfolio equity flowing in first, followed later in the expansion by foreign direct investment (FDI). To understand the timing of these flows, we use a small open economy (SOE) framework to model the composition of capital inflows as the equilibrium outcome of emerging market firms' financing decisions. We show how costly external financing and foreign direct investment search costs generate a state contingent cost of financing, so that the "cheapest" source of financing depends on the phase of the business cycle. In this manner, the financial frictions are able to explain the interaction between the types of flows and deliver a time varying composition of flows, as well as other standard features of emerging market business cycles. If, as this work suggests, flows are an equilibrium outcome of firms' financing decisions then volatility of capital inflows is not necessarily "bad" for an economy. Furthermore, using capital controls to shut down one type of flow and encourage another is certain to have both long- and short-run welfare implications. |
| Keywords: | Capital movements ; Emerging markets |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2007-13&r=ifn |
| By: | L. Zanforlin |
| Abstract: | The paper analyzes the factors that contribute to the re-access of countries that emerge from a severe financial crisis to the international capital markets. It conjectures that these factors depend on a sovereign's commitment and ability to repay its foreign debt, signaled by sound macroeconomic policies, and the global liquidity environment. Using panel data for 49 countries over a 24-year period, the analysis uses a simple probit approach to show that, indeed, a sustainable debt profile and a sound external position, accompanied by a favorable global liquidity environment, are key factors in affecting the likelihood a sovereign reaccesses international capital markets. |
| Date: | 2007–06–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/136&r=ifn |