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on International Finance |
| By: | Diez de los Rios, Antonio; Sentana, Enrique |
| Abstract: | Nowadays researchers can choose the sampling frequency of exchange rates and interest rates. If the number of observations per contract period is large relative to the sample size, standard GMM asymptotic theory provides unreliable inferences in UIP regression tests. We specify a bivariate continuous-time model for exchange rates and forward premia robust to temporal aggregation, unlike the discrete time models in the literature. We obtain the UIP restrictions on the continuous-time model parameters, which we estimate efficiently, and propose a novel specification test that compares estimators at different frequencies. Our empirical results based on correctly specified models reject UIP. |
| Keywords: | Exchange Rates; Forward Premium Puzzle; Hausman Test; Interest Rates; Orstein-Uhlenbeck Process; Temporal Aggregation |
| JEL: | F31 G15 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6516&r=ifn |
| By: | Chowdhury, Khorshed (University of Wollongong) |
| Abstract: | This paper tests empirically the Balassa-Samuelson (BS) hypothesis using annual data for Australia. We applied the ARDL cointegration technique developed by Pesaran et al. (2001) and found evidence of a significant long-run relationship between real exchange rate and Australia-US productivity differential during the period of 1950-2003. We found that a one per cent increase in labour productivity in Australia relative to the US will lead to 5.6 per cent appreciation in the real exchange rate of Australia. We suspect that the elasticity coefficient is “over-estimated” due to the exclusion of relevant explanatory variables. The dynamics and the determinants of the real exchange rate movements are numerous; they include terms of trade, interest rate differentials, net foreign liabilities among others along with labour productivity differential. |
| Keywords: | Real Exchange Rate, Balassa-Samuelson hypothesis, Unit-root, Structural break and ARDL. |
| JEL: | C22 F11 F31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp07-11&r=ifn |
| By: | Petra Posedel (Faculty of Economics and Business, University of Zagreb); Josip Tica (Faculty of Economics and Business, University of Zagreb) |
| Abstract: | In this paper exchange rate pass-through effect in Croatia is estimated with nonlinear (asymmetric) threshold autoregressive model (TAR). In total 12285 regressions is estimated and a strong case of nonlinearity with single threshold is proven. According to our estimation there is a threshold at 2.69% of monthly change of nominal exchange rate of German mark (Euro) and the way in which nominal exchange rate affects inflation is asymmetric around it. Below the threshold, effect of change in nominal exchange rate on inflation is statistically insignificant and above the threshold the effect is strong and significant. |
| Keywords: | threshold autoregressive model, pass-through effect, exchange rate, inflation, nonlinear econometrics |
| JEL: | E31 E58 F31 |
| Date: | 2007–10–01 |
| URL: | http://d.repec.org/n?u=RePEc:zag:wpaper:0715&r=ifn |
| By: | Maurice J. Roche (Economics, National University of Ireland, Maynooth); Michael J. Moore (Queen's University Belfast, Northern Ireland) |
| Abstract: | We present a simple framework in which both the exchange rates disconnect and forward bias puzzles are simultaneously resolved. The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Habit persistence is modeled using Campbell Cochrane preferences with 'deep' habits. By deep habits, we mean habits defined over goods rather than countries. The model is simulated using the artificial economy methodology. It offers a neo-classical explanation of the Meese-Rogoff puzzle and mimics the failure of fundamentals to explain nominal exchange rates in a linear setting. Finally, the model naturally generates the negative slope in the standard forward market regression. |
| Keywords: | Exchange Rate Puzzles; Forward Foreign Exchange; Habit Persistence |
| JEL: | F31 F41 G12 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:may:mayecw:n1750507&r=ifn |
| By: | Cellini, Roberto; Paolino, Alessandro |
| Abstract: | The paper analyses the cointegration relationships and the causal links between the exchange rate of the US Dollar, on the one side, and different price indices of US products on the other side. Data are of monthly frequency and cover a period of two or three decades. We show that the exchange rate cointegrate with the Consumer Price Index and with the prices indices of several agricultural, manufactured and service goods; moreover a one-direction causal link is present, running from price to exchange rate. On the opposite, cointegrating relationships between exchange rate and price indices do not exist in the case of recreational products with “cultural” content. Tentative theoretical explanations are proposed. |
| Keywords: | Price Index; Exchange Rate; Cointegration; Causality |
| JEL: | Z11 C22 F13 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5194&r=ifn |
| By: | Gabriel Di Bella; Aurelie Martin; Mark Lewis |
| Abstract: | Assessing a country's competitiveness routinely starts with an analysis of the real exchange rate. However, in low-income countries, empirical analysis of the real exchange rate is often subject to important limitations that seriously weaken the results. This paper summarizes the methodologies used to assess real exchange rate misalignments and discusses the range of obstacles common to low-income countries. Recognizing the importance of using a wide range of indicators for assessing competitiveness in low-income countries, the paper discusses alternative competitive measures and then proposes a template of indicators to allow for a systematic assessment of competitiveness in low-income countries. The template is then used to rank countries according to their competitiveness performance in 2006. |
| Keywords: | Export competitiveness , Real effective exchange rates , Low-income developing countries , Working Paper , |
| Date: | 2007–08–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:07/201&r=ifn |
| By: | Julian di Giovanni; Jay C. Shambaugh |
| Abstract: | It is often argued that many economies are affected by conditions in foreign countries. This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high foreign interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which major-country interest rates affect other economies. The effect of foreign interest rates on domestic interest rates is the most likely channel when compared with other possibilities, such as a trade effect. |
| JEL: | F3 F4 |
| Date: | 2007–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13467&r=ifn |