nep-ifn New Economics Papers
on International Finance
Issue of 2008‒02‒02
nine papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Volatility Regimes in Central and Eastern European Countries’ Exchange Rates By M. FRÖMMEL
  2. Assessing the Effect of Current Account and Currency Crises on Economic Growth By Aßmann, Christian
  3. A note on long horizon forecasts of nonlinear models of real exchange rates: Comments on Rapach and Wohar (2006) By Buncic, Daniel
  4. East Asian Crisis and Currency Pressure: The Case of India By Pami Dua; Arunima Sinha
  5. Irving Fisher and the UIP Puzzle: Meeting the Expectations a Century Later By Campbell, R.A.J.; Koedijk, C.G.; Lothian, J.R.; Mahieu, R.J.
  6. Explaining Movements in the NZ Dollar - Central Bank Communication and the Surprise Element in Monetary Policy? By Özer Karagedikli; Pierre L. Siklos
  7. Exchange rate dynamics, asset market structure and the role of the trade elasticity By Christoph Thoenissen
  8. Estimation and Model Selection of Copulas with an Application to Exchange Rates By Manner Hans
  9. East Asian Currency Area: A Bayesian Dynamic Factor Model Analysis By Toan Nguyen

  1. By: M. FRÖMMEL
    Abstract: The choice of an exchange rate arrangement affects exchange rate volatility: higher flexibility goes ahead with increasing volatility and vice versa (Flood and Rose 1995, 1999). We investigate five Central and Eastern European countries between 1994 and 2004. The analysis merges two approaches, the GARCH-model (Bollerslev 1986) and the Markov Switching- Model (Hamilton 1989). We discover switches between high and low volatility regimes consistent with policy settings for Hungary, Poland and, less pronounced, the Czech Republic, whereas Romania and Slovakia do not show a clear picture.
    Keywords: CEEC, exchange rate volatility, regime switching GARCH, Markov switching model, transition economies
    JEL: E42 F31 F36
    Date: 2007–10
  2. By: Aßmann, Christian
    Abstract: Several empirical studies are concerned with measuring the effect of currency and current account crises on economic growth. Using different empirical models this paper serves two aspects. It provides an explicit assessment of country specific factors influencing the costs of crises in terms of economic growth and controls via a treatment type model for possible sample selection governing the occurrence of crises in order to estimate the impact on economic growth correctly. The applied empirical models allow for rich intertemporal dependencies via serially correlated errors and capture latent country specific heterogeneity via random coe±cients. For accurate estimation of the treatment type model a simulated maximum likelihood approach employing efficient importance sampling is used. The results reveal significant costs in terms of economic growth for both crises. Costs for reversals are linked to country specific variables, while costs for currency crises are not. Furthermore, shocks explaining current account reversals and growth show strong significant positive correlation.
    Keywords: Currency crises, Current account reversals, Treatment Model, Discrete dependent variable, Efficient Importance Sampling, Panel Data
    JEL: C15 C23 C33 F32 O10
    Date: 2008
  3. By: Buncic, Daniel
    Abstract: We show that long horizon forecasts from the nonlinear models that are considered in the study by Rapach andWohar (2006) cannot generate any forecast gains over a simple AR(1) specification. This is contrary to the findings reported in Rapach and Wohar (2006). Moreover, we illustrate graphically that the nonlinearity in the forecasts from the ESTAR model is the strongest when forecasting one step-ahead and that it diminishes as the forecast horizon increases. There exists, therefore, no potential whatsoever for the considered nonlinear models to outperform linear ones when forecasting far ahead. We also illustrate graphically why one step-ahead forecasts from the nonlinear ESTAR model fail to yield superior predictions to a simple AR(1).
    Keywords: PPP; regime modelling; nonlinear real exchange rate models; ESTAR; forecast evaluation.
    JEL: C53 C52 F47 C22 F31
    Date: 2008–01–24
  4. By: Pami Dua (Department of Economics, Delhi School of Economics, Delhi, India and Economic Cycle Research Institute, New York); Arunima Sinha (Department of Economics, Columbia University, New York, NY)
    Abstract: This paper tests and explains the impact of the East Asian crisis on India’s exchange rate. To examine this, an index of currency pressure is estimated for four countries -- Thailand, South Korea, Malaysia and India covering the period just before, during and after the crisis. A contagion model with panel data for these four countries is also estimated during the crisis period. On the basis of the panel data estimates, the paper concludes that while India experienced some effects of the crisis, these were not substantive. This is partly attributed to the role of stabilisation policy in India that included intervention in the foreign exchange market by the central bank, phased tightening of monetary policy and restrictions on capital flows.
    Date: 2007–08
  5. By: Campbell, R.A.J.; Koedijk, C.G.; Lothian, J.R.; Mahieu, R.J. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: We review Irving Fisher’s seminal work on UIP and on the closely related equation linking interest rates and inflation. Like Fisher, we find that the failures of UIP are connected to individual episodes in which errors surrounding exchange rate expectations are persistent, but eventually transitory. We find considerable commonality in deviations from UIP and PPP, suggesting that both of these deviations are driven by a common factor. Using a dynamic latent factor model, we find that deviations from UIP are almost entirely due to expectational errors in exchange rates, rather than attributable to the risk premium; a result consistent with those reported by Fisher a century ago.
    Keywords: Irving Fisher;UIP;PPP;inflation;interest rates;exchange rates
    Date: 2007–12–07
  6. By: Özer Karagedikli; Pierre L. Siklos (Reserve Bank of New Zealand)
    Abstract: We conduct a high frequency event analysis to estimate the effects of monetary policy surprises, data surprises, and central bank verbal statements on the New Zealand-US dollar and the New Zealand-Australian dollar exchange rates. We find data surprises and monetary policy surprises have significant and large effects on exchange rate movements. More importantly, RBNZ interest rate decisions have a largely permanent impact on the exchange rate. Significantly, the impact of the published interest rate track seems to explain some 10 per cent additional variation in the exchange rate.
    JEL: E43 E44 E52
    Date: 2008–02
  7. By: Christoph Thoenissen
    Abstract: This paper shows that a canonical flexible price international real business cycle model with incomplete financial markets can address the exchange rate volatility puzzle, the exchange rate persistence puzzle, the consumption real exchange rate anomaly, as well as the quantity anomaly. Crucial for the success of the model is the choice of the elasticity of substitution between home and foreign produced goods. The paper shows that the range of this parameter which allows the model to address these international macroeconomics anomalies is very narrow. Furthermore, the paper highlights an anomalous relationship between real exchange rate persistence and the elasticity of substitution between home and foreign-produced goods.
    Keywords: real exchange rate dynamics, incomplete ?nancial markets, Backus-Smith puzzle, exchange rate persistence, trade elasticity.
    JEL: F31 F41
    Date: 2008–01
  8. By: Manner Hans (METEOR)
    Abstract: Copulas are the part of a multivariate distribution function that fully captures the cross sectional dependence between the variables of interest and they have become a very popular tool to model dependencies different from the linear correlation of elliptical distributions. We review the theory of copula functions, present a number of examples and describe how to sample random data from these. Different techniques for estimation and model selection are discussed and compared in an extensive Monte Carlo study. We find that a test not considered in the literature, namely the Jarque-Bera test applied on transformed data from the conditional copula, has the best properties of the presented tests, but that the most reliable criterion for selecting the best fitting copula is the Akaike information criterion. We model exchange rate returns of Latin American currencies against the euro with copulas and we find evidence of symmetric dependence, excess upper tail dependence and excess lower tail dependence.
    Keywords: econometrics;
    Date: 2007
  9. By: Toan Nguyen (Economic Research Section, 1st Floor Engineering Building No 4 Kyoto Univeristy Yoshida Honmachi, Sakyo-ku Kyoto, Japan)
    Abstract: There has been recently increasing interest in the establishment of a common currency area in East Asia in the aftermath of the East Asian financial crisis. In this paper, we examine the desirability and feasibility of forming a currency area in the region by checking the symmetry of shocks as an important criterion of the Theory of Optimum Currency Area. We employ a Dynamic Factor Model to decompose aggregate output into global, regional and country-specific components and estimate the model using Gibbs sampling simulation. Persistent properties of those components are examined and variance decomposition analysis is performed to investigate the role of each component in output variance. Based on variance analysis, we find that East Asia countries, on average, are less plausible candidates for a currency area than European counterparts. However, a subgroup of countries in East Asia are as qualified as those in Europe. Given the ongoing integration in East Asia, it is not premature to prepare for such a currency area in this region.
    Keywords: East Asia, Currency Area, Bayesian, Dynamic Factor Model, Gibbs Sampling
    JEL: F33 F42
    Date: 2008

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