nep-ifn New Economics Papers
on International Finance
Issue of 2008‒05‒24
three papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Crude Oil Prices and the Euro-Dollar Exchange Rate: A Forecasting Exercise By Jesus Crespo Cuaresma; Andreas Breitenfellner
  2. Currency Crises and Monetary Policy in an Economy with Credit Constraints: The No Interest Parity Case By U. Michael Bergman; Shakill Hassan
  3. "A Regime Switching Analysis of Exchange Rate Pass-through" By Kólver Hernández; Asli Leblebicioglu

  1. By: Jesus Crespo Cuaresma; Andreas Breitenfellner
    Abstract: If oil exporters stabilize the purchasing power of their export revenues in terms of imports, exchange rate developments (and particularly, developments in the US dollar/euro exchange rate) may contain information about oil price changes. This hypothesis depends on three conditions: (a) OPEC has price setting capacity, (b) a high share of OPEC imports comes from the euro area and (c) alternatives to oil invoicing in US dollar are costly. We give evidence that using information on the US dollar/euro exchange rate (and its determinants) improves oil price forecasts significantly. We discuss possible implications that these results might suggest with regard to the stabilization of oil prices or the adjustment of global imbalances.
    Keywords: oil price, exchange rate, forecasting, multivariate time series models.
    JEL: Q43 F31 C53
  2. By: U. Michael Bergman (Department of Economics, University of Copenhagen); Shakill Hassan (University of South Africa)
    Abstract: This paper revisits the currency crises model of Aghion, Bacchetta and Banerjee (2000, 2001, 2004), who show that if there exist nominal price rigidities and private sector credit constraints, and the credit multiplier depends on real interest rates, then the optimal monetary policy response to the threat of a currency crisis is restrictive. We demonstrate that this result is primarily due to the uncovered interest parity assumption. Assuming that the exchange rate is a martingale restores the case for expansionary reaction - even with foreign-currency debt in firms' balance sheets. The effect of lower interest rates on output can help restore the value of the currency due to increased money demand.
    Keywords: currency crises; foreign–currency debt; balance sheets; interest parity; monetary policy
    JEL: E51 F30 O11
    Date: 2008–05
  3. By: Kólver Hernández (Department of Economics,University of Delaware and CIDE); Asli Leblebicioglu (North Carolina State University)
    Abstract: We investigate changes in the pricing policies of exporters, including changes in the exchange rate pass-through elasticity, and changes in the elasticities of variables that affect the firm’s markup. We set up a theoretical model of optimal export pricing in order to illustrate how changes in the pass-through elasticity can emerge together with changes in other elasticities in the pricing policy. Based on our theoretical formulation, we empirically study changes in all the elasticities that define the pricing policy as opposed to focusing only on the exchange rate pass-through. In the empirical model, we assume that in every period exporters get to set prices by following either a “high pass-through” or a “low passthrough” pricing policy. The transition from one policy to the other is governed by a Markov process whose transition probabilities depend on economic fundamentals. We estimate the model using data we have collected on 35 lines of imported cars to the US, from seven exporting countries, for the 1980-2004 period. We find that the “low pass-through” regime is characterized by: a low exchange rate pass-through; a low response to misalignments in the firm’s relative price; a low volatility of technology and preference shocks; and a higher duration than the high pass-through regime. Monetary stability and the market structure are significant factors behind the switching of pricing policies. Ceteris paribus, monetary stability measured as the cross-country inflation differential explains abut 22% of the year-to-year variation in the exchange rate pass-through coefficient; when measured by the volatility of the exchange rate, it explains 37%. Market concentration measured by the Herfindahl index explains about 40%.
    Keywords: Exchange Rate Pass-through; Markov Regime Switching; Export Pricing
    JEL: E31 F31 F41

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