nep-ifn New Economics Papers
on International Finance
Issue of 2008‒03‒25
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Purchasing Power Parity in South Asia: A Panel Data Approach By Noman, Abdullah
  2. Can Exchange Rates Forecast Commodity Prices? By Yu-Chin Chen; Kenneth Rogoff; Barbara Rossi
  3. Increasing Derivatives Market Activity in Emerging Markets and Exchange Rate Exposure By Uluc Aysun; Melanie Guldi
  4. Accounting for Persistence and Volatility of Good-level Real Exchange Rates: The Role of Sticky Information By Mario J. Crucini; Mototsugu Shintani; and Takayuki Tsuruga
  5. The Real Exchange Rate, Mercantilism and the Learning by Doing Externality By Joshua Aizenman; Jaewoo Lee
  6. Charting Technical Trading Rules and the Lottery of Technical Analysis: Empirical Evidence from Foreign Exchange Market By Repkine, Alexandre
  7. International Reserve Trends in the South Caucasus and Central Asia Region By Holger Floerkemeier; Mariusz A. Sumlinski
  8. Defense Policies Against Currency Attacks: on the Possibility of Predictions in a Global Game with Multiple Equilibria By George-Marios Angeletos; Alessandro Pavan; Christian Hellwig
  9. Sterilization, Monetary Policy, and Global Financial Integration By Joshua Aizenman; Reuven Glick
  10. Testing for PPP in the Mean-Group Panel Regression Framework: Further Evidence By Noman, Abdullah
  11. The Landscape of Capital Flows to Low-Income Countries By Sukhwinder Singh; Zuzana Brixiova; Thomas William Dorsey; Helaway Tadesse

  1. By: Noman, Abdullah
    Abstract: The paper tests for PPP by investigating into the real exchange rates of seven South Asian countries. It employs two univariate unit root tests, namely, the ADF and the PP tests and two panel unit root tests, namely, the IPS and the CIPS tests. The univariate tests overwhelmingly fail to reject the unit root null. The IPS test also reinforces this result. The CIPS test that takes into account of cross section dependence produces mixed results. The findings, on the whole, fail to support stationarity of the South Asian real exchange rates and hence, PPP does not seem to be a valid proposition for the region.
    JEL: C23 G15 F31
    Date: 2008–03–17
  2. By: Yu-Chin Chen; Kenneth Rogoff; Barbara Rossi
    Abstract: This paper demonstrates that "commodity currency" exchange rates have remarkably robust power in predicting future global commodity prices, both in-sample and out-of-sample. A critical element of our in-sample approach is to allow for structural breaks, endemic to empirical exchange rate models, by implementing the approach of Rossi (2005b). Aside from its practical implications, our forecasting results provide perhaps the most convincing evidence to date that the exchange rate depends on the present value of identifiable exogenous fundamentals. We also find that the reverse relationship holds; that is, that commodity prices Granger-cause exchange rates. However, consistent with the vast post-Meese-Rogoff (1983a,b) literature on forecasting exchange rates, we find that the reverse forecasting regression does not survive out-of-sample testing. We argue, however, that it is quite plausible that exchange rates will be better predictors of exogenous commodity prices than vice-versa, because the exchange rate is fundamentally forward looking. Therefore, following Campbell and Shiller (1987) and Engel and West (2005), the exchange rate is likely to embody important information about future commodity price movements well beyond what econometricians can capture with simple time series models. In contrast, prices for most commodities are extremely sensitive to small shocks to current demand and supply, and are therefore likely to be less forward looking.
    JEL: C52 C53 F31 F47
    Date: 2008–03
  3. By: Uluc Aysun (University of Connecticut); Melanie Guldi (Mount Holyoke College)
    Abstract: Understanding the effects of off-balance sheet transactions on interest and exchange rate exposures has become more important for emerging market countries that are experiencing remarkable growth in derivatives markets. Using firm level data, we report a significant fall in exposure over the past 10 years and relate this to higher derivatives market participation. Our methodology is composed of a three stage approach: First, we measure foreign exchange exposures using the Adler-Dumas (1984) model. Next, we follow an indirect approach to infer derivatives market participation at the firm level. Finally, we study the relationship between exchange rate exposure and derivatives market participation. Our results show that foreign exchange exposure is negatively related to derivatives market participation, and support the hedging explanation of the exchange rate exposure puzzle. This decline is especially salient in the financial sector, for bigger firms, and over longer time periods. Results are robust to using different exchange rates, a GARCH-SVAR approach to measure exchange rate exposure, and different return horizons.
    Keywords: Exchange rate exposure; derivatives; emerging markets
    JEL: G15 G32 F31
    Date: 2008–03
  4. By: Mario J. Crucini (Department of Economics, Vanderbilt University (E-mail:; Mototsugu Shintani (Department of Economics, Vanderbilt University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:,; and Takayuki Tsuruga (Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law- of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.- Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment.
    Keywords: Good-level Real Exchange Rates, Law of One Price, Sticky Information, Dynamic Panel
    JEL: E31 D40 F31
    Date: 2008–03
  5. By: Joshua Aizenman; Jaewoo Lee
    Abstract: This paper examines the degree to which the learning by doing externality [LBD] calls for an undervalued exchange rate, a policy suggested by recent empirical studies which concluded that mildly undervalued real exchange rate may enhance growth. We obtain mixed results. For an economy where LBD externality operates in the traded sector, real exchange rate undervaluation may be used in order to internalize this externality, if the LBD calls for subsidizing employment in the traded sector. Yet, we also find that these results are not robust to changes in the nature of the LBD externality. If the LBD externality is embodied in aggregate investment, the optimal policy calls for subsidizing the cost of capital in the traded sector, and there is no room for undervalued exchange rate policy. In addition, a deliberate undervaluation by means of hoarding reserves may backfire if the needed sterilization would increase the cost of investment in the traded sector.
    JEL: F13 F15 F31 F43
    Date: 2008–03
  6. By: Repkine, Alexandre
    Abstract: We use trend-following, trend continuation and trend reversal pattern recognition techniques to apply technical charting rules to trading seven major currency pairs for the period of 1999 through early 2007. Our results suggest that the persistent popularity of technical analysis among practicing traders may be the result of a “lottery” wherein most of the participants end up with zero profits. However, the rest of the participants are much more likely to end up winning rather than losing. In this way, the popularity of technical trading rules may co-exist with the validity of market efficiency hypothesis.
    Keywords: market efficiency; technical analysis; forecasting; foreign exchange markets
    JEL: G14 G11
    Date: 2008–02
  7. By: Holger Floerkemeier; Mariusz A. Sumlinski
    Abstract: In recent years, the South Caucasus and Central Asia countries (CCA-6) have received significant foreign exchange inflows. While a healthy reserve buffer is desirable to selfinsure against external crises, holding international reserves also involves costs. We analyze the adequacy of CCA-6 reserves using widely recognized rules of thumb, and simulate optimal reserve levels applying the Jeanne (2007) model. Both the adequacy measures and the model-based simulations indicate that, with the exception of Tajikistan, CCA-6 reserves had increased to broadly comfortable levels by 2006. More recently, reserve adequacy has been tested in Kazakhstan, which has been affected by the 2007 global liquidity crunch.
    Date: 2008–02–19
  8. By: George-Marios Angeletos; Alessandro Pavan; Christian Hellwig
    Abstract: This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenses by raising domestic interest rates, or otherwise raising the cost of speculation, only when the value it assigns to defending the peg - its "type" - is intermediate. (ii) Devaluation occurs only for low types. (iii) the set of types who intervene shrinks with the precision of market information. (iv) A unique equilibrium policy survives in the limit as the noise in market information vanishes, whereas the devaluation outcome remains indeterminate. (v) The payoff of the central bank is monotonic in its type. (vi) The option to intervene can be harmful only for sufficiently strong types; and when this happens, weak types are necessarily better off. While these predictions seem reasonable, none of them would have been possible in the common-knowledge version of the model. Combined, these results illustrate the broader methodological point of the paper: global games can retain significant selection power and deliver useful predictions even when the endogeneity of information sustains multiple equilibria.
    Keywords: global games, robust predictions, signaling, currency crises, regime change, multiple equilibria.
    JEL: C7 D8 E5 E6 F3
    Date: 2007–08
  9. By: Joshua Aizenman; Reuven Glick
    Abstract: This paper investigates the changing patterns and efficacy of sterilization within emerging market countries as they liberalize markets and integrate with the world economy. We estimate the marginal propensity to sterilize foreign asset accumulation associated with net exports and various forms of capital flows, across countries and over time. We find that the extent of sterilization of foreign reserve inflows has risen in recent years to varying degrees in Asia as well as in Latin America, consistent with greater concerns about the potential inflationary impact of reserve inflows. We also find that sterilization depends on the composition of balance of payments inflows.
    JEL: F15 F21 F31
    Date: 2008–03
  10. By: Noman, Abdullah
    Abstract: The paper investigates the validity of PPP by using 15 OECD countries data of monthly frequency from 1980:01 to 2005:12 and tests for the symmetry and proportionality hypotheses. The test for PPP is conducted in the framework of the General Relative PPP (RPPP) as proposed by Coakley et al. (2005) using the Mean-Group (MG) estimators of Pesaran and Smith (1995). We apply two variants of the MG estimators, namely MG and CMG, where the latter takes into account the problem of cross-sectional dependence (CSD). The symmetry null is unequivocally accepted for both estimators in CPI as well as PPI panels. The proportionality null, however, is rejected in the CPI panel with MG procedure but accepted with CMG. In the PPI panel, the MG estimate cannot reject the null while the CMG estimate marginally rejects it. Our findings are only partially supportive of the general RPPP.
    Keywords: Purchasing Power Parity, Mean-Group Regression, Symmetry and Proportionality, OECD, General Relative PPP
    JEL: C23 F31
    Date: 2008–03–17
  11. By: Sukhwinder Singh; Zuzana Brixiova; Thomas William Dorsey; Helaway Tadesse
    Abstract: This paper reviews trends in capital flows and capital-like flows such as official grants and remittances to low-income countries over the period 1981-2006. The survey reveals a broadbased increase in such flows as a share of low-income country GDP across major regions, countries with differing commodity export composition, and countries with differing debt relief status. The increase in inflows is dominated by an increase in private sector inflows, mostly in the form of private transfers and foreign direct investment. Official sector inflows have remained comparatively constant as a share of low-income country GDP and even declined in the most recent years. The paper concludes with some tentative policy conclusions and has a discussion of data issues in the annexes.
    Keywords: Capital flows , Low-income developing countries , Foreign direct investment , Debt relief , Capital account liberalization , Current account deficits ,
    Date: 2008–02–29

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