nep-ifn New Economics Papers
on International Finance
Issue of 2007‒09‒02
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Exchange rate dynamics in a target zone: a heterogeneous expectations approach By Bauer, Christian; De Grauwe, Paul; Reitz, Stefan
  2. Volatility dependence across Asia-Pacific on-shore and off-shore U.S. dollar futures markets By Colavecchio , Roberta; Funke, Michael
  3. International Investment Positions and Exchange Rate Dynamics: A Dynamic Panel Analysis By Michael Binder; Christian Offermanns
  4. Global Current Account Imbalances and Exchange Rate Adjustment: The Role of Oil Suppliers Valuation Effects and Interest Rate Changes By Christian M. Oberpriller
  5. Financial Globalization and Emerging Market Portfolios By Michael B Devereux
  6. The Renminbifs Dollar Peg at the Crossroads By Maurice Obstfeld
  7. Do China's capital controls still bind? Implications for monetary autonomy and capital liberalisation By Guonan Ma; Robert N. McCauley

  1. By: Bauer, Christian; De Grauwe, Paul; Reitz, Stefan
    Abstract: We present a simple behavioral model with chartists and fundamentalists and analyze their trading behavior in a floating regime and in a target zone regime. Regarding the floating regime the model replicates the well-known stylized facts like excessive volatility, fat tails, volatility clustering and the exchange rate disconnect. When introducing a credible target zone the exchange rate remains for a considerably long period in the center of the band albeit the fundamental exchange rate does not exhibit mean reversion tendencies. The resulting hump-shaped distribution of the exchange rate greatly reduces the frequency of central bank intervention. The introduction of a target zone regime significantly reduces exchange rate volatility by decreasing speculative activity in the FX market.
    Keywords: Exchange rate, heterogeneous agents, target zones
    JEL: F31 F41
    Date: 2007
  2. By: Colavecchio , Roberta (BOFIT); Funke, Michael (BOFIT)
    Abstract: This paper estimates switching autoregressive conditional heteroscedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China´s U.S. dollar future rates upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes.
    Keywords: China; renminbi; Asia; forward exchange rates; non-deliverable forward market; SWARCH models
    JEL: C22 F31 F36
    Date: 2007–08–29
  3. By: Michael Binder (Frankfurt University and CFS); Christian Offermanns (Frankfurt University and Deutsche Bundesbank)
    Abstract: In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks.
    Keywords: Exchange Rate Determination, International Financial Integration, Dynamic Panel Data Models
    JEL: F31 F37 C23
    Date: 2007–08–23
  4. By: Christian M. Oberpriller
    Abstract: The present paper extends the Obstfeld and Rogoff (2005) framework of current account imbalances by the oil exporting countries as a fourth region. It sets the stage for a variety of analysis that can be conducted within a four-region-setting that accounts for the importance of OPEC as a major current account surplus provider in the process of narrowing global current account imbalances. We find that including the oil exporting countries as an additional region consisting of OPEC and Russia lowers the adjustment effects predicted by Obstfeld and Rogoff. Depending on different assumptions on how global imbalances might be eliminated, our model predicts a real dollar depreciation in the range of 29.9 to 52.6 percent.
    Keywords: current account, exchange rates, global imbalances
    JEL: F31 F32 F41
    Date: 2007–07
  5. By: Michael B Devereux (Centre for Economic Policy Research, University of British Columbia, and International Monetary Fund (E-mail: devm@
    Abstract: Although emerging market Asian economies have experienced high growth without crises for close to a decade, many commentators find the large buildup of foreign exchange reserves among these economies both puzzling and evidence of incipient global imbalances. This paper reviews some of the experience of Asian countries over the last decade. We focus on the degree to which Asian economies have experienced financial globalization, meaning that their gross external asset and liability positions have grown significantly. In particular, while Asian economies have become significant gross creditors in bonds and other fixed income assets, their liability position in equity and FDI assets has also grown significantly. We show that a simple dynamic general equilibrium model of portfolio choice in an emerging market economy can account for this trend remarkably well.
    Keywords: Asia, Financial Globalization, FDI, Foreign Exchange Rate Reserves
    JEL: E52 E58 F41
    Date: 2007–08
  6. By: Maurice Obstfeld (University of California, Berkeley (E-mail:
    Abstract: In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, Chinafs large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital markets. A feasible and attractive exit strategy from the essentially fixed RMB exchange rate would be a two-stage approach, consistent with the steps already taken since July 2005, but going beyond them. First, establish a limited trading band for the RMB relative to a basket of major trading partner currencies. Set the band so that it allows some initial revaluation of the RMB against the dollar, manage the basket rate within the band if necessary, and widen the band over time as domestic foreign exchange markets develop. The ultimate goal is a floating exchange rate coupled with some relative of inflation targeting. Second, put on hold ad hoc measures of financial account liberalization. They will be less helpful for relieving exchange rate pressures once the yuan/basket rate is allowed to move flexibly within a band, and they are best postponed until domestic foreign exchange markets develop further, the exchange rate is fully flexible, and the domestic financial system has been strengthened and placed fully on a market-oriented basis.
    Keywords: Renminbi, China Currency, China Balance of Payments, Fixed Exchange Rate Exit Strategy
    JEL: F32
    Date: 2007–08
  7. By: Guonan Ma; Robert N. McCauley
    Abstract: The paper argues that China's capital controls remain substantially binding. This has allowed the Chinese authorities to retain some degree of short-term monetary autonomy, despite the fixed exchange rate up to July 2005. Although the Chinese capital controls have not been watertight, we find sustained and significant gaps between onshore and offshore renminbi interest rates and persistent dollar/renminbi interest rate differentials during the period of a de facto dollar peg. While some cross-border flows do respond to market expectations and relative yields, they have not been large enough to equalise onshore and offshore renminbi yields.
    Keywords: Foreign exchange market, capital flows, capital controls, monetary policy, financial stability and the Chinese economy
    Date: 2007–08

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