nep-ifn New Economics Papers
on International Finance
Issue of 2007‒11‒24
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Behavioural equilibrium exchange rate estimates and implied exchange rate adjustments for ten countries. By Ronald MacDonald; Preethike Dias
  2. Using a New Open Economy Macroeconomics model to make real nominal exchange rate forecasts By Sellin, Peter
  3. The timing and magnitude of exchange rate overshooting By Hoffmann, Mathias; Sondergaard, Jens; Westelius, Niklas J.
  4. Cointegration in the Foreign Exchange Market and Market Efficiency since the ntroduction of the Euro: Evidence based on bivariate Cointegration Analyses By Michael Kühl
  5. The Thai Currency Crisis: Fracture in a Fixed Exchange Rate Regime By Hartogh, Matthew
  6. Resurrecting Keynes to Revamp the International Monetary System By Pietro Alessandrini; Michele Fratianni

  1. By: Ronald MacDonald; Preethike Dias
    Abstract: In this paper we estimate the behaviour equilibrium exchange rates (BEERs) of Clark and MacDonald (1999) for the effective exchange rates of ten industrialised and emerging market economies that rank within the top 15 contributory economies to global imbalances. The sample period is 1988, quarter 1 to 2006 quarter 1. The conditioning variables used in the estimation of the BEER are: net exports as a proportion of GDP, a real interest differential, a terms of trade differential and GDP per capita differential. The ‘foreign’ magnitudes in the differentials were constructed using the trade weights used to construct the effective exchange rates. Using both single country and panel econometric methods, plausible BEER estimates were reported. These estimates were then used to back out the required exchange rate adjustments necessary to fulfil the three scenarios of Williamson (2006). The ball park currency adjustments required are in the range of 27.3 to 46.6 per cent devaluations for the Chinese renminbi, 5 to 11 per cent for the US dollar, approximately 6 per cent for the Japanese yen and no adjustment for the euro or Sterling.
    Date: 2007–06
  2. By: Sellin, Peter (Monetary Policy Department, Central Bank of Sweden)
    Abstract: In this paper we undertake an out-of-sample evaluation of the ability of a model to forecast the Swedish Krona’s real and nominal effective exchange rate, using a cointegrating relation between the real exchange rate, relative output, terms of trade and net foreign assets (or alternatively the trade balance). The cointegrating relation is derived from a theoretical model of the New Open Economy Macroeconomics type. The forecasting performance of our estimated vector error correction model is quite good once the dynamics of the model have been augmented with an interest rate differential.
    Keywords: New Open Economy Macroeconomics; real exchange rate; nominal exchange rate; forecasting
    JEL: C52 C53 F31
    Date: 2007–10–01
  3. By: Hoffmann, Mathias; Sondergaard, Jens; Westelius, Niklas J.
    Abstract: Empirical evidence suggests that a monetary shock induces the exchange rate to overshoot its long-run level. The estimated magnitude and timing of the overshooting, however, varies across studies. This paper generates delayed overshooting in a new Keynesian model of a small open economy by incorporating incomplete information about the true nature of the monetary shock. The framework allows for a sensitivity analysis of the overshooting result to underlying structural parameters. It is shown that policy objectives and measures of the economy's sensitivity to exchange rate dynamic affect the timing and magnitude of the overshooting in a predictable manner, suggesting a possible rationale for the cross-study variation of the delayed overshooting Phenomenon.
    Keywords: Exchange rate overshooting, Partial information, Learning
    JEL: E31 F31 F41
    Date: 2007
  4. By: Michael Kühl
    Abstract: The aim of this paper is to investigate the market efficiency on the foreign exchange market since the introduction of the Euro by applying the cointegration analysis to exchange rates. The introduction of the Euro has changed the structure of the global foreign exchange market to the extent that the second most important currency in the world with the highest credibility in the foreign exchange market, namely the Deutsche Mark, has been assimilated into the Euro. In order to evaluate if the introduction of a new currency has resulted in inefficient markets, a bivariate cointegration analysis should be applied to the seven most important exchange rates. The empirical analysis predominantly draws on the Johansen (1988, 1991) approach and the Gregory-Hansen (1996) approach whereas the latter takes endogenous structural breaks into account. We show that the foreign exchange market is broadly consistent with the market efficiency hypothesis. A very important result is that we can find a longrun relationship between the exchange rate pairs EUR/USD and GBP/USD whereas the no-arbitrage condition is satisfied. Since the EUR/USD exchange rate is weakly exogenous the GBP/USD exchange rate takes the burden of adjustment to the long-run equilibrium.
    Keywords: Foreign Exchange Market, Market Efficiency, Cointegration
    JEL: C32 F31 F33 G14 G15
    Date: 2007–10–31
  5. By: Hartogh, Matthew
    Abstract: Abstract If the financial press had been paying attention to some crucial barometers of currency instability in Thailand last year, the ensuing crisis in Asia would perhaps not have been so much of a surprise. On July 2,1997, the Thai government allowed the Baht to float against the Dollar for the first time in a decade. As we all now know, this effective devaluation set of a train of events which would shock all of the Asian economies which had hitherto enjoyed unqualified growth and prosperity for the last several years.
    Keywords: Exchange Rates Currency Baht
    JEL: E42
    Date: 2007–01–01
  6. By: Pietro Alessandrini (Department of Economics, Università Politecnica delle Marche, Ancona); Michele Fratianni (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)
    Abstract: There is a broad consensus that the current, large U.S. current-account deficits financed with foreign capital inflows at low interest rates cannot continue forever; there is much less consensus on when the system is likely to end and how badly it will end. The paper resurrects the basic principles of the plan Keynes wrote for the Bretton Woods Conference to propose an alternative to the current international monetary system. We argue for the creation of a supranational bank money that would coexist along side national currencies and for the establishment of a new international clearing union. The new international money would be created against domestic earning assets of the Fed and the ECB. In addition to recording credit and debit entries of the supranational bank money, the new agency would determine the size of quotas, the size and time length of overdrafts, and the coordination of monetary policies. The substitution of supranational bank money for dollars would harden the external constraint of the United States and resolve the n-1 redundancy problem.
    Keywords: Keynes Plan, external imbalances, exchange rates, international monetary system, key currency, supranational bank money
    JEL: E42 E52 F33 F36
    Date: 2007–11

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