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on International Finance |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | A DSGE model with a Taylor rule is augmented with an evolutionary switching between technical and fundamental analyses in currency trade, where the fractions of these trading tools are determined within the model. Then, a shock hits the economy. As a result, chaotic dynamics and long swings may occur in the exchange rate, which are appealing features of the model given existing empirical evidence on chaos and long swings in exchange rate fluctuations. |
| Keywords: | chaotic dynamics; foreign exchange; fundamental analysis; monetary policy; technical analysis |
| JEL: | C65 E32 E44 E52 F31 |
| Date: | 2007–11–12 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_019&r=ifn |
| By: | Enrique Martinez-Garcia |
| Abstract: | Data for the U.S. and the Euro area during the post-Bretton Woods period shows that nominal and real exchange rates are more volatile than consumption, very persistent, and highly correlated with each other. Standard models with nominal rigidities match reasonably well the volatility and persistence of the nominal exchange rate, but require an average contract duration above 4 quarters to approximate the real exchange rate counterparts. I propose a two-country model with financial intermediaries and argue that: First, sticky and asymmetric information introduces a lag in the consumption response to currently unobservable shocks, mostly foreign. Accordingly, the real exchange rate becomes more volatile to induce enough expenditure-switching across countries for all markets to clear. Second, differences in the degree of price stickiness across markets and firms weaken the correlation between the nominal exchange rate and the relative CPI price. This correlation is important to match the moments of the real exchange rate. The model suggests that asymmetric information and differences in price stickiness account better for the stylized facts without relying on an average contract duration for the U.S. larger than the current empirical estimates. |
| Keywords: | Foreign exchange rates |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:02&r=ifn |
| By: | Paul R. Bergin; Robert C. Feenstra |
| Abstract: | This paper studies how a rise in China's share of U.S. imports could lower pass-through of exchange rates to U.S. import prices. We develop a theoretical model with variable markups showing that the presence of exports from a country with a fixed exchange rate could alter the competitive environment in the U.S. market. In particular, this encourages exporters from other countries to lower markups in response to a U.S. depreciation, thereby moderating the pass-through to import prices. Free entry is found to further moderate the pass-through, in that a U.S. depreciation encourages entry of exporters whose costs are shielded by the fixed exchange rate, which further intensifies the competitive pressure on other exporters. The model predicts that certain conditions are necessary to facilitate this 'China explanation' for falling pass-through, including a 'North America bias' in U.S. preferences. The model also produces a log-linear structural equation for pass-through regressions indicating how to include the China share. Panel regressions over 1993–1999 support the prediction that a high China share in imports lowers pass-through to U.S. import prices. |
| JEL: | F4 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13620&r=ifn |
| By: | Corsetti, Giancarlo |
| Abstract: | 'New open economy macroeconomics' (NOEM) refers to a body of literature embracing a new theoretical framework for policy analysis in open economy, aiming to overcome the limitations of the Mundell-Fleming model while preserving the empirical wisdom and policy friendliness of traditional analysis. NOEM contributions have developed general equilibrium models with imperfect competition and nominal rigidities, to reconsider conventional views on the transmission of monetary and exchange rate shocks; they have contributed to the design of optimal stabilization policies, identifying international dimensions of optimal monetary policy; and they have raised issues about the desirability of international policy coordination. |
| Keywords: | exchange rates; international policy coordination; Mundell-Fleming model; open economy models; stabilization policy |
| JEL: | F33 F40 F41 F42 |
| Date: | 2007–11 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6578&r=ifn |
| By: | Tatom, John |
| Abstract: | China-bashing has become a popular media and political sport. This is largely due to the U.S. trade imbalance and the belief, by some, that China is responsible for it because it manipulates its currency to hold down the dollar prices of its goods, unfairly creating a trade advantage that has contributed to the loss of U.S. businesses and jobs. This paper reviews the problem of the large trade imbalance that the United States has with China and its relationship to Chinese exchange rate policy. It examines the link between a Chinese renminbi appreciation and the trade balance and also whether a generalized dollar decline could solve the global or Chinese U.S. trade imbalance. The consensus view explained here is that a renminbi appreciation is not likely to fix either the trade imbalance with China or overall. Though these perceived benefits of a managed float are small or non-existent, perhaps they should be pursued anyway because of small costs or even benefits for China. Section IV looks at the costs of a managed float in terms of the benefits of the earlier peg. Opponents of a fixed dollar/yuan exchange rate ignore the costs of a managed float for China, especially with limits on currency convertibility. These costs are outlined here in order to provide an economic basis for the earlier fixed rate and China’s reluctance to appreciate. Finally it is suggested that the necessary convertibility on capital account, toward which China is moving, could easily result in yuan depreciation under a floating rate regime. This is hardly the end that China critics have in mind and it is not one that would improve U.S. or other trade imbalances with China. |
| Keywords: | exchange rate policy; China; currency manipulation; current account imbalance. |
| JEL: | F41 E58 |
| Date: | 2007–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:5366&r=ifn |
| By: | Hefeker, Carsten |
| Abstract: | The paper explores the interaction between debt crises and devaluation. Since the optimal level of devaluation in a crisis depends on the level of debt that has to be serviced, a default makes a devaluation less likely. Expected devaluation depends thus on expectations about default which is also a function of the type of policymaker. Therefore, the decision to devalue can be forced upon the government by adverse expectations about default and the type of policymaker in office. I also explore how these uncertainties affect the policymaker’s choice of exchange rate regime. |
| Keywords: | debt crisis, currency crisis, exchange rate regime |
| JEL: | F33 F34 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:gdec07:6536&r=ifn |
| By: | Bask, Mikael (Bank of Finland Research) |
| Abstract: | We embed different instrument rules into a New Keynesian model for a small open economy that is augmented with technical trading in currency trade to examine the prerequisites for monetary policy. Specifically, this paper focuses on conditions for a determinate, least-squares learnable rational expectations equilibrium (REE). Under an interest rate rule with only contemporaneous macroeconomic data, the intensity of technical trading or trend-seeking in currency trade does not affect these conditions, except in the case of an extensive use of trend-seeking. On the other hand, if the central bank uses only forward-looking information in its interest rate rule, a determinate and learnable REE is a less likely outcome when trend-seeking in currency trade becomes more popular. The interest rate rule followed by the central bank in the model incorporates interest rate smoothing. |
| Keywords: | determinacy; DSGE model; interest rate rule; least-squares learning; technical trading |
| JEL: | C62 E52 F31 F41 |
| Date: | 2007–11–20 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2007_022&r=ifn |