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on International Finance |
| By: | Metodij Hadzi-Vaskov |
| Abstract: | The negative correlation between relative consumption growth and real exchange rate changes is a recurrent puzzle in international macroeconomics (Backus and Smith, 1993). Using panel dataset with quarterly observations for all 12 countries from the Eurozone after the introduction of the common currency (1999-2006), this paper demonstrates that the nominal exchange rate is the main source of the puzzle. When nominal exchange rates fluctuations are eliminated, relative consumption growth is positively correlated with the change in the real exchange rate. Moreover, this result is contrasted with alternative samples of (relatively) flexible exchange rate: while the inflation differential is still positively correlated, the nominal exchange rate is negatively correlated with the relative consumption growth. These findings are robust to alternative regression specifications, estimation methods, and data samples. |
| Keywords: | International Risk-Sharing, Exchange Rates, Backus-Smith Puzzle |
| JEL: | F31 F33 F41 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0732&r=ifn |
| By: | Lorenzo Cappiello (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Gianluigi Ferrucci (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper deals with two related issues: the sustainability of China’s exchange rate regime and the opening up of its capital account. The exchange rate discussion deliberately passes over the issue of the “equilibrium” value of the renminbi and its alleged undervaluation – typically at the heart of the current policy debate – and focuses instead on the domestic costs of the current regime and the potential risks to domestic financial stability in the long run. The paper argues that the renminbi exchange rate should be increasingly determined by market forces and that administrative controls should be progressively relinquished. The exchange rate is obviously linked to well-functioning and efficient capital markets, which require no barriers to capital flows. Thus, exchange rate reform has to be correctly sequenced with reform of the capital account to avoid disruptive capital flows. The paper discusses China’s twin surpluses of the current and capital accounts and attempts to identify the drivers of this “anomalous” external position. The pragmatic strategy pursued by the Chinese authorities in the aftermath of the Asian crisis encouraged FDI inflows and favoured the accumulation of a large stock of foreign exchange reserves. Combined with a relatively weak institutional setting, these factors have been important determinants of the pattern and composition of the country’s capital flows and international investment position. Finally, the paper speculates on the outlook for Chinese capital flows should barriers to capital movements be lifted. It argues that whether China continues to supply capital to the rest of the world or eventually becomes a net borrower in international capital markets – as was the case for most of its recent history – will depend on the evolution of its institutions. JEL Classification: F10, F21, F31, F32, P48. |
| Keywords: | China, exchange rate policy, international investment position, capital account liberalisation, institutions. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080082&r=ifn |
| By: | Frank Smets (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Matthieu Darracq Pariès (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Stéphane Adjemian (Université du Maine, Avenue Olivier Messiaen, 72085 Le Mans Cedex 9, France.) |
| Abstract: | The objective of this paper is to examine the main features of optimal monetary policy cooperation within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a two-country dynamic stochastic general equilibrium (DSGE) model for the United States (US) and the euro area (EA). The main features of the new open economy macroeconomics (NOEM) are embodied in our framework: in particular, imperfect exchange rate pass-through and incomplete financial markets internationally. Each country model incorporates the wide range of nominal and real frictions found in the closed-economy literature: staggered price and wage settings, variable capital utilization and fixed costs in production. Then, using the estimated parameters and disturbances, we study the properties of the optimal monetary policy cooperation through welfare analysis, impulse responses and variance decompositions. JEL Classification: E4, E5, F4. |
| Keywords: | DSGE models, Optimal monetary policy, New open economy macroeconomics, Bayesian estimation. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080884&r=ifn |
| By: | Jurgen Von Hagen (University of Bonn); Iulia Siedschlag (Economic and Social Research Institute (ESRI)) |
| Abstract: | The countries of Central and Eastern Europe went from being largely closed to being largely open to international capital flows. This paper discusses their experience with capital account liberalization and coping with large capital inflows. We start with a discussion of basic economic characteristics and the real convergence achieved so far, and then discuss the pace and sequencing of capital account liberalization and the degree of international financial integration over the past decade. We then analyze trends and patterns of capital inflows in these countries in recent years. These stylized facts are useful for understanding the macroeconomic implications and policy challenges of coping with large capital inflows, which we discuss next. Finally we conclude with policy implications for emerging Asian economies. |
| Keywords: | International financial integration, Macroeconomic policy, Central and Eastern Europe, Emerging Asian economies |
| JEL: | E44 F36 F41 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:esr:wpaper:wp234&r=ifn |
| By: | Metodij Hadzi-Vaskov; Clemens J.M. Kool |
| Abstract: | This paper presents evidence of the stochastic discount factor approach to international risk-sharing applied to fixed exchange rate regimes. We calculate risk-sharing indices for two episodes of fixed or very rigid exchange rates: the Eurozone before and after the introduction of the Euro, and several emerging economies in the period 1993-2005. This approach suggests almost perfect bilateral risk-sharing among all countries from the Eurozone. Moreover, it implies that emerging markets with fixed/rigid nominal exchange rates against the US dollar in the period achieved almost perfect risk-sharing with the US. We conclude that risk-sharing measures crucially depend on the behavior of the nominal exchange rate, implying almost perfect risk-sharing among countries with fixed/rigid nominal exchange rates. Second, a counterintuitive ranking of the risk-sharing levels under different nominal exchange rate regimes suggests a limited use of this approach for cross-country risk-sharing comparisons. Real exchange rates might be very smooth, but risk-sharing across countries is not necessarily perfect. |
| Keywords: | International Risk-Sharing, Stochastic Discount Factor, Fixed Exchange Rates, Exchange Rate Regimes |
| JEL: | F31 F33 G12 G15 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:use:tkiwps:0733&r=ifn |
| By: | Roberto A. De Santis (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Lucio Sarno (Finance Group, Warwick Business School, University of Warwick, Coventry CV4 7AL, UK.) |
| Abstract: | This paper considers a stylized asset pricing model where the returns from exchange rates, stocks and bonds are linked by basic risk-arbitrage relationships. Employing GMM estimation and monthly data for 18 economies and the US (treated as the domestic country), we identify through a simple test the countries whose assets strongly comove with US assets and the countries whose assets might offer larger diversification benefits. We also show that the strengthening of the comovement of returns across countries is neither a gradual process nor a global phenomenon, reinforcing the case for international diversi.cation. However, our results suggest that fund managers are better of constructing portfolios selecting assets from a subset of countries than relying on either fully internationally diversified or purely domestic portfolios. JEL Classification: F31, G10. |
| Keywords: | Asset pricing, exchange rates, international parity conditions, market integration, stochastic discount factor. |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080883&r=ifn |
| By: | Wong, Woon K (Cardiff Business School); Tan, Dijun; Tian, Yixiang |
| Abstract: | Dufour and Engle (J. Finance (2000) 2467) find evidence of an increased presence of informed traders when the NYSE markets are most active. No such evidence, however, can be found by Manganelli (J. Financial Markets (2005) 377) for the infrequently traded stocks. In this paper, we fit a nonlinear log-ACD model to stocks listed on Shanghai Stock Exchange. When trading volume is high, empirical findings suggest presence of informed trading in both liquid and illiquid stocks. When volume is low, market activity is likely due to liquidity trading. Finally, for the actively traded stocks, our results support the price formation model of Foster and Viswanathan (Rev. Financial Studies (1990) 593). |
| Keywords: | Informed trading; Liquidity trading; Duration; Volume; Volatility |
| JEL: | G11 G14 G15 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cdf:wpaper:2008/8&r=ifn |