nep-ifn New Economics Papers
on International Finance
Issue of 2007‒08‒14
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Uncover Latent PPP by Dynamic Factor Error Correction Model (DF-ECM) Approach: Evidence from five OECD countries By Qin, Duo
  2. Measuring Long-Run Exchange Rate Pass-Through By de Bandt, Olivier; Banerjee, Anindya; Kozluk, Tomasz
  3. Market Integration in the Golden periphery The Lisbon/London Exchange, 1854-1891 By Rui Pedro Esteves; Jaime Reis; Fabiano Ferramosca
  4. Multilateral Adjustment and Exchange Rate Dynamics: The Case of Three Commodity Currencies By Jeannine Bailliu; Ali Dib; Takashi Kano; Lawrence Schembri
  5. Are All Measures of International Reserves Created Equal? An Empirical Comparison of International Reserve Ratios By Cheung, Yin-Wong; Yuk-Pang Wong, Clement
  6. Efectos de valoración en la posición de inversión internacional de España By Arturo Macías; Álvaro Nash
  8. CHINA'S REAL EXCHANGE RATE PUZZLE By Rod Tyers; Jane Golley; Iain Bain

  1. By: Qin, Duo
    Abstract: This study explores a new modelling approach to bridge the gap between the bilateral setting of one ‘domestic’ economy facing one ‘foreign’ entity in theory and multilateral country data in reality. Under the approach, purchasing power parity (PPP) is embedded in latent disequilibrium factors, being extracted from a large set of bilateral price disparities; the factors are then used as error-correction leading indicators to explain exchange rate and inflation. Modelling experiments on five OECD countries using monthly data show promising results, which reverse the common belief that PPP is at best a very long-run relationship at the macro level.
    Keywords: PPP, law of one price, dynamic factor, error correction
    JEL: C22 C33 F31
    Date: 2007
  2. By: de Bandt, Olivier; Banerjee, Anindya; Kozluk, Tomasz
    Abstract: The paper discusses the issue of estimating short- and long-run exchange rate pass-through to import prices in euro area countries and reviews some problems with the measures recently proposed in the literature. Theoretical considerations suggest a long-run Engle and Granger cointegrating relationship (between import unit values, the exchange rate and foreign prices), which is typically ignored in existing empirical studies. We use time series and up-to-date panel data techniques to test for cointegration with the possibility of structural breaks and show how the long-run may be restored in the estimation. The main finding is that allowing for possible breaks around the formation of EMU and the appreciation of the euro starting in 2001 helps restore a long run cointegration relationship, where over the sample period the fixed component of the pass-through decreased while the variable component tended to increase.
    Keywords: exchange rates, pass-through, import prices, panel cointegration, structural break
    JEL: C23 F14 F31 F36 F42
    Date: 2007
  3. By: Rui Pedro Esteves; Jaime Reis; Fabiano Ferramosca
    Abstract: The existence of a self-regulating arbitrage mechanism under the gold standard has been traditionally considered as one of its main advantages, and attracted a corresponding research interest. This research is arguably relevant not only to test for the efficiency of the "gold points", but also to study the evolution of financial integration during the so-called first era of globalization. Our first aim with this paper is to contribute to the enlargement of the scope of the literature by considering the case of Portugal that adhered to the system, in 1854, at a much earlier phase than the majority of countries, thus allowing for a broader perspective on the evolution of the efficiency of the foreign exchange market. As a typical "peripheral" country, Portugal can be used as the starting point for a study of the degree of integration of the periphery within the system. Furthermore, the Portuguese exchange also illustrates the role in practice of large players in sustaining currency stability, over and beyond the atomistic forces of arbitrage and speculation assumed in conventional theoretical frameworks. We also address the question of the credibility of the authorities` commitment to the standard, through the perspective of the target zone literature.
    Keywords: Gold Standard, Credibility, Portugal, Pre-1913
    JEL: F31 F33 N23
    Date: 2007
  4. By: Jeannine Bailliu; Ali Dib; Takashi Kano; Lawrence Schembri
    Abstract: In this paper, we empirically investigate whether multilateral adjustment to large U.S. external imbalances can help explain movements in the bilateral exchange rates of three commodity currencies -- the Australian, Canadian and New Zealand (ACNZ) dollars. To examine the relationship between exchange rates and multilateral adjustment, we develop a new regimeswitching model that augments a standard Markov-switching framework with a threshold variable. This enables us to model the exchange rate dynamics of our commodity currencies in the context of two regimes: one in which multilateral adjustment to large U.S. external imbalances is an important factor driving the commodity currencies and the second in which there are no significant U.S. external imbalances and hence multilateral adjustment is not a factor. We compare the performance of this model, both in and out-of-sample, to several other alternative models. In addition to developing this new model, another distinguishing feature of our paper is that we estimate all of our models using a Bayesian approach. We opt for a Bayesian approach in this context because it provides a simpler and more intuitive means of evaluating and comparing our different non-nested models. Moreover, it is relatively straightforward using a Bayesian approach to evaluate the importance of nonlinearities in the relationship between exchange rates and multilateral adjustment. Our findings suggest that during periods of large U.S. imbalances, fiscal and external, an exchange rate model for the ACNZ dollars should allow for multilateral adjustment effects. Moreover, we also find evidence to suggest that the adjustment of exchange rates to multilateral adjustment factors is best modelled as a non-linear process.
    Keywords: Exchange rates; Econometric and statistical methods
    JEL: F31 F32 C11 C22
    Date: 2007
  5. By: Cheung, Yin-Wong; Yuk-Pang Wong, Clement
    Abstract: Using available annual data of 174 economies since 1957, we examine the similarities and differences of seven international reserve ratios. While individual international reserve ratios display substantial variations across economies, they are associated with an economy’s characteristics including geographic location, income level, stage of development, degree of indebtedness, and exchange rate regime. The association pattern varies across time and type of international reserve ratios. Interestingly, there is only limited evidence that Asian and non-Asian economies have significantly different international reserve hoarding behavior. Our results suggest that the inference about whether an economy is hoarding too many or too few international reserves depends on the choice of international reserve ratio. Further, different international reserve ratios exhibit different persistence profiles, but the evidence of dependence on structural characteristics is rather weak.
    Keywords: International Reserve Ratios, Structural Characteristics, Cross-Economy Analysis
    JEL: F30 F40
    Date: 2007
  6. By: Arturo Macías (Banco de España); Álvaro Nash (Banco Central de Chile)
    Abstract: The International Investment Position records the value of foreign assets and liabilities of an economy in a given date. Its evolution is determined by the financial transactions of the Balance of Payments, which affects the volume of assets and liabilities, by differences in the valuation of the stock, derived from changes in prices or exchange rates, and by other adjustments, that are primarily reclassifications of foreign assets. The objective of this article is to compute the price and exchange rate effects implicit in the evolution of the International Investment Position of Spain, taking into account its possible limitations. The valuation effects are determined by the characteristics of the financial instrument and the information sources available for every heading of the IIP. In this article, disaggregated data by denomination currency of the instrument are used for every heading. On the other hand, for portfolio investment, asset-by-asset data available for 2003 and 2004 are used. In addition, for IED data, which are mainly not recorded at market price (and given that price changes for those instruments between 1993 and 2006 have been substantial), it is developed a methodology in order to reconstruct the value of IED assets and liabilities, including the valuation associated with price changes. The conclusions of this work for the Spanish case provide evidence that stock revaluation explains a very important share of the IIP changes for the latest years. The 55% of the increase of the IIP between 1993 and 2004 is related to value changes due to price or exchange rate changes. The accumulation of these value changes is equal to the 19% of the GDP of the year 2004. The decomposition of this effect between price effect and exchange rate effect can be estimated for 1997-2004 period, and the increase in the net IIP debt position (247.930 million euros) can be explained in a 52% by Balance of Payments transactions, and 47.3% is the result of revaluation of the instruments and other adjustments. This 47.3% can be decomposed in a 27.6% due to price effects, 10.1% due to exchange rate effects and the remaining 9.6% is the result of other non determined variations.
    Keywords: posición de inversión internacional, balanza de pagos, efecto valoración, inversión exterior directa, international investment position, balance of payments, valuation effects, foreign direct investment
    JEL: F10 F20 F40
    Date: 2007–08
  7. By: Simon Gilchrist (Boston University and NBER); Jae W. Sim (Boston University)
    Abstract: Without capital market imperfections, the capital structure of a firm, including the size, the maturity and the currency composition of debts, should not matter for investment decisions. The Asian financial crises provide a good opportunity to test this hypothesis. We approach the problem in two ways: First, we apply a conventional reduced-form analysis to a panel data of Korean manufacturing firms, arguing that the devaluation that occurred during the crisis provides a natural experiment in which to assess the effect of balance sheet shocks to investment. Second, we use indirect inference to estimate a structural dynamic programming problem of a firm with foreign debts and financial constraints. Both reduced-form evidence and structural parameter estimates imply an important role for finance in investment at the firm level. Counterfactual simulations imply that balance sheet effects may account for 50% to 80% of the drop in investment during the crisis period. Although our estimates suggest that foreign denominated debt had relatively little effect on aggregate investment spending for the Korean economy during this crisis episode, counterfactual experiments imply sizeable contractions in investment through this mechanism for economies that are more heavily dependent on foreign-denominated debt.
    Date: 2007–01
  8. By: Rod Tyers; Jane Golley; Iain Bain
    Abstract: International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with a real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis under which economic growth, stemming from improvements in traded sector productivity, causes non-traded prices to rise. The puzzle is that, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate has shown no long run tendency to appreciate. Resolution requires extension of the hypothesis to allow for effects on the real exchange rate due to non-traded productivity improvements or, in association with failures of the law of one price for traded goods, labour supply growth and growth-related demand switches due to changes in financial capital flows and trade distortions. The sensitivity of China’s real exchange rate to these determinants is reviewed with the results confirming that financial and capital outflows are dominant depreciating forces in the short run. Along with WTO accession trade reforms, it is shown that the heretofore rising surplus of Chinese domestic saving over its investment has restrained the real exchange rate from appreciating since the late 1990s.
    JEL: C68 C53 E27 F21 F43 F47 O11
    Date: 2007–06

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