nep-ifn New Economics Papers
on International Finance
Issue of 2008‒03‒15
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Testing for the Economic Impact of the U.S. Constitution: Purchasing Power Parity across the Colonies versus across the States, 1748-1811 By Farley Grubb
  2. Capital Inflows and Reserve Accumulation: The Recent Evidence By Carmen M. Reinhart; Vincent R. Reinhart
  3. Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks By Robert Lavigne
  4. Export-Oriented FDI, the Euro, and EU Enlargement By Hisham Foad
  5. China's Exchange Rate Policy: A Survey of the Literature By Robert Lafrance
  6. Are the exchange rates of EMU candidate countries anchored by their expected euro locking rates? By Anna Naszódi
  7. Exchange Rate Forecasting: Evidence from the Emerging Central and Eastern European Economies By Ardic, Oya Pinar; Ergin, Onur; Senol, G. Bahar
  8. Network analysis of exchange data: Interdependence drives crisis contagion By Matesanz, David; Ortega , Guillermo J.

  1. By: Farley Grubb
    Abstract: Exchange rates and price indices are constructed to test purchasing power parity between eight British North American colonial locations, five of whom issued their own fiat paper money. Purchasing power parity is then tested between these same locations after six became states politically and monetarily unified under the U.S. Constitution. Purchasing power parity cannot be rejected between all colonial locations or between the six U.S. states, if anything holding with more confidence prior to U.S. political and monetary unification. But it is rejected between U.S. states and nearby British colonies that stayed outside the U.S. union.
    JEL: D02 F15 F54 N11 N21 N41 N71 O24 O51
    Date: 2008–03
  2. By: Carmen M. Reinhart; Vincent R. Reinhart
    Abstract: Over the past decade, policymakers in many emerging market economies have opted to limit fluctuations of the value of their domestic currencies relative to the U.S. dollar. A simple interest-parity relationship is used to identify the potential sources of upward pressure on the value of a foreign exchange rate and to explain the policy options to damp them. The paper then documents the extent to which the accumulation of foreign exchange reserves has been sterilized and provides a comprehensive list of major policy initiatives related to stemming forces that would otherwise appreciate the exchange rate in over one hundred countries. This examination of policy efforts shows that a wide variety of tools are used in the attempt to stem the tide of capital flows.
    JEL: E0 F0 F3
    Date: 2008–03
  3. By: Robert Lavigne
    Abstract: The author examines recent trends in sterilized intervention among emerging-market economies, to determine the size and extent of this policy in relation to earlier periods of heavy reserve accumulation. He then analyzes whether the domestic costs and risks of substantial and prolonged sterilization are beginning to manifest themselves. In particular, the author discusses the fiscal costs of sterilization and the recent increase in non-market-friendly sterilization methods, such as the rapid rise in reserve requirement ratios.
    Keywords: Financial stability; Exchange rate regimes; International topics
    JEL: F31 E52 O24
    Date: 2008
  4. By: Hisham Foad (Department of Economics, San Diego State University)
    Abstract: Since 1999, the UK’s share of FDI heading into Europe has declined dramatically, while the Euro-Zone’s share has increased. I argue that the timing of this divergence is not coincidental. The formation of the Euro-Zone has eliminated nominal exchange rate volatility between member-states, increasing export market access intra-union. For source countries outside of Europe, Euro-Zone countries have become more attractive destinations for export-oriented FDI, as operations within the union are insulated from currency fluctuations. As exchange rate volatility between a non-Euro country and local export markets increases, or as the market size of the euro-zone increases, more and more investment will be diverted towards Euro-Zone countries. This theory is tested in two stages using detailed data on the operations of foreign affiliates of US multinationals across seventeen European countries from 1983 – 2004. A host country’s export market access is first estimated with an augmented gravity model. This export series is then included in a dynamic panel with US to host market exchange rate volatility and a range of FDI determinants to explain inflows of FDI from the US to European countries. Potential endogeneity issues are addressed using the Arellano and Bond (1991) GMM procedure. The ability to export from a particular host country has a positive and significant effect on inflows of FDI. Additionally, unobserved features of Euro-Zone membership (beyond the elimination of currency risk) have a positive effect on inflows. A counterfactual experiment sheds light on how much FDI the UK “lost” by not adopting the euro in 1999. Re-estimating the trade and FDI relations under the assumption that the UK had adopted the euro, I estimate that the UK has lost approximately $33 billion (2% of GDP) worth of FDI from the US. Similarly, the flight of FDI to the new EU accession countries has been slowed by these countries staying out of the Euro-Zone.
    Date: 2007–05
  5. By: Robert Lafrance
    Abstract: China's integration into the world economy has benefited its people by reducing poverty and raising living standards, and it has benefited the industrialized world by producing manufactured goods at lower cost. It has also raised geopolitical concerns as China's power grows, economic concerns as the manufacturing base in many industrialized countries erodes, and polemics as proposals of protectionist measures to counter China's export growth are put forward. The author reviews the literature on how China's exchange rate regime could evolve and contribute, through greater flexibility, to tempering domestic inflationary pressures and to facilitating an orderly resolution of global imbalances. His main conclusions are that China would benefit from moving towards a more flexible exchange rate regime and allowing the People’s Bank of China greater independence to pursue an inflation-control objective. In a transition phase, a managed float would be useful to limit volatility as firms adapt to the new system and the banking system is put on a sounder footing, a monetary policy framework is put in place, and capital controls are progressively eased. Shock therapy (a quick and pronounced revaluation) would be ill advised.
    Keywords: Exchange rate regimes
    JEL: F33 F36
    Date: 2008
  6. By: Anna Naszódi (Magyar Nemzeti Bank)
    Abstract: This paper tests whether the exchange rates of the Czech koruna, the Hungarian forint, and the Polish zloty were anchored by market expectations concerning their euro locking rates. First, the process of the exchange rate is derived as a function of the following factors: (i) latent exchange rate, (ii) market expectations concerning locking rate, (iii) market expectations concerning locking date. Then, the locking dates and rates are filtered from historical exchange rates, currency option prices and yield curves. The main finding of the paper is that the relatively stable market expectations concerning the locking rates have substantially stabilized the three analyzed exchange rates.
    Keywords: Monetary union, eurozone entry, factor model, Kalman filter, exchange rate stabilization, asset-pricing exchange rate model.
    JEL: F31 F36 G13
    Date: 2008
  7. By: Ardic, Oya Pinar; Ergin, Onur; Senol, G. Bahar
    Abstract: There is a vast literature on exchange rate forecasting focusing on developed economies. Since the early 1990s, many developing economies have liberalized their financial accounts, and become an integral part of the international financial system. A series of financial crises experienced by these emerging market economies ed them to switch to some form of a flexible exchange rate regime, coupled with inflation targeting. These developments, in turn, accentuate the need for exchange rate forecasting in such economies. This paper is a first attempt to compile data from the emerging Central and Eastern European (CEE) economies, to evaluate the performance of versions of the monetary model of exchange rate determination, and time series models for forecasting exchange rates. Forecast performance of these models at various horizons are evaluated against that of a random walk, which, overwhelmingly, was found to be the best exchange rate predictor for developed economies in the previous literature. Following Clark and West (2006, 2007) for forecast performance analysis, we report that in short horizons, structural models and time series models outperform the random walk for the six CEE countries in the data set.
    Keywords: Exchange rate forecasting; Out-of-sample forecast performance
    JEL: C53 F31
    Date: 2008–03–06
  8. By: Matesanz, David; Ortega , Guillermo J.
    Abstract: In this paper we detect the linear and nonlinear co-movements presented on the real exchange rate in a group of 28 developed and developing countries that have suffered currency and financial crises during 15 years. We have used the matrix of Pearson correlation and Phase Synchronous (PS) coefficients and an appropriate metric distance between pairs of countries in order to construct a topology and hierarchies by using the Minimum Spanning Tree (MST). In addition, we have calculated the MST cost and global correlation coefficients to observe the co-movements dynamics along the time sample. By comparing Pearson and phase synchronous information we address a new methodology that can uncover meaningful information on the contagion economic issue and, more generally, in the debate around interdependence and/or contagion among financial time series. Our results suggest some evidence of contagion in the Asian currency crises but this crisis contagion is due to previous and stable interdependence.
    Keywords: econophysics; linear co-movements; phase synchronous co-movements; MST; interdependence and contagion
    JEL: F40 C82 F31
    Date: 2008–03–12

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