nep-ifn New Economics Papers
on International Finance
Issue of 2008‒05‒10
five papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Non-linear adjustment in law of one price deviations and physical characteristics of goods By Berka, Martin
  2. Nonlinearities in Exchange rates: Double EGARCH Threshold Models for Forecasting Volatility By Sitzia, Bruno; Iovino, Doriana
  3. Issues on the choice of Exchange Rate Regimes and Currency Boards – An Analytical Survey By Moheeput, Ashwin
  4. Long Run Determinants of Real Exchange Rates in Latin America By Jorge Carrera; Romain Restout
  5. The Monetary Model Strikes Back: Evidence from the World By Valerie Cerra; Sweta Chaman Saxena

  1. By: Berka, Martin
    Abstract: At a level of individual goods, heterogeneity of marginal transaction costs, proxied by price-to-weight ratios and stowage factors, explains a large part of the variation in thresholds of no-adjustment and conditional half-lives of law of one price deviations. Prices of heavier more voluminous) goods deviate further before becoming mean-reverting. Moreover, after becoming mean-reverting, prices of heavier goods converge more slowly. Together with measures of pricing power, market size, distance and exchange rate volatility, these factors explain up to 43% of variation in no-adjustment threshold estimates across 52 goods in US-Canada post Bretton Woods monthly CPI data and are robust in a broader 5-country dataset. They open two avenues for the importance of marginal transaction costs in accounting for real exchange rate persistence: through (a) generating persistence in individual real exchange rate components, and (b) accentuating it by the process of aggregation of heterogeneous components (”aggregation bias” of Imbs, et al. 2005).
    Keywords: Law of One Price Deviations; Real Exchange Rate Persistence; Non-Linearities; transaction costs; Physical Weight; Physical Volume; Threshold Autregres-sive Models
    JEL: F36 F31
    Date: 2006–11
  2. By: Sitzia, Bruno; Iovino, Doriana
    Abstract: This paper illustrates how to specify and test a Double Threshold EGARCH Model for some important exchange rates. The analysis is monthly and refers to the period 1990.01-2007.06. The procedure involves testing for Threshold effects the residuals of a linear autoregressive model of the exchange rate that is taken as the starting point. If this preliminary testing is favourable to the hypothesis off nonlinearity one then specifies and estimates a threshold model using Tong (1983,1990) algorithm, Tong algorithm allows to specify separately two AR regimes and helps locating both the delay and the parameters of the regimes using a search procedure based on the AIC. Residual for the SETAR model are then further tested for conditional heteroskedasticity. If it is present then a Double symmetric EGARCH is fitted to the data by maximum likelihood. The result is compared with an AR GARCH model both in sample and out of sample to asses whether there is any forecasting superiority of the more complex model. Reported results favour this outcome. In the text of the paper we report explicitly the results for the Japanese yen and the British pound exchange rates vis a vis the US dollar, but the same procedure has been applied to many other exchange rate series with results favourable to the double variance model in more than 50% of the cases. We report the complete results in the appendix. We conclude that the proposed model is both feasible and of wide applicability to the analysis of volatility of exchange rates. We add two provisos: data are monthly and the period of estimation reflects only the most recent experience.
    Keywords: non linearity; forecasting volatility; exchange rates
    JEL: C22
    Date: 2008–01–18
  3. By: Moheeput, Ashwin (Department of Economics, University of Warwick)
    Abstract: Currency boards have often been at the heart of monetary reforms proposed by the International Monetary Fund (IMF) : they have been instrumental either as a short term crisis management strategy that successfully restores financial order for many countries seeking stabilization in the aftermath of prolonged economic crisis or as a way of importing monetary credibility as part of a medium / long term strategy for conducting monetary policy. As backbone of a credible exchange-rate based stabilisation programme, they have also been the linchpin of several heterodox or orthodox programmes aimed at mitigating hyperinflation. This paper attempts to synthetize our thinking about currency boards by reviewing their strengths and weaknesses and endeavours to seek real world examples to rationalise their applicability as opposed to alternative exchange rate regimes. Architects of international financial stability at the IMF or at central banks often ponder about the prerequisites for such programme to work well. These are also reviewed using appropriate economic theory where necessary. Finally, this paper sheds light on the best exchange rate regime that may be adopted in the intermediate term by those countries wishing to adopt a currency board, not as a quick fix solution to end an economic chaos but rather, as integral part of a long term monetary strategy.
    Keywords: Currency Boards ; IMF ; Crisis Management ; Monetary Credibility ; Heterodox / Orthodox Programs ; Hyperinflation ; Exchange Rate Regimes
    Date: 2008
  4. By: Jorge Carrera (Universidad Nacional de la Plata - Universidad Nacional de la Plata); Romain Restout (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines)
    Abstract: This paper investigates the long run behavior of real exchange rates in nineteen countries of Latin America over the period 1970 - 2006. Our data does not support the Purchasing Power Parity (PPP) hypothesis, implying that real shocks tend to have permanent effects on Latin America’s real exchange rates. By exploiting the advantage of non stationary panel econometrics, we are able to determinate factors that drive real exchanges rate in the long run : the Balassa-Samuelson effect, government spending, the terms of trade, the openness degree, foreign capital flows and the de facto nominal exchange regime. The latter effect has policy implications since we find that a fixed regime tends to appreciate the real exchange rate. This finding shows the non neutrality of exchange rate regime regarding its effects on real exchange rates. We also run estimations for country subgroups (South America versus Caribbean and Central America). Regional results highlight that several real exchange rates determinants are specific to one geographic zone. Finally, we compute equilibrium real exchange rate estimations. Two main results are derived from the investigation of misalignments, [i ] eight real exchange rates are quite close to their equilibrium level in 2006, and [ii ] our model shows that a part of currencies crises that arose in Latin America was preceded by a real exchange rate overvaluation.
    Keywords: equilibrium real exchange rate ; panel cointegration. ; panel unit roots
    Date: 2008
  5. By: Valerie Cerra; Sweta Chaman Saxena
    Abstract: We revisit the dramatic failure of monetary models in explaining exchange rate movements. Using the information content from 98 countries, we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals. We also find fundamentalsbased models very successful in beating a random walk in out-of-sample prediction.
    Keywords: Exchange rates , Forecasting models ,
    Date: 2008–03–28

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