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on International Finance |
| By: | Auer, Raphael (Swiss National Bank); Chaney, Thomas (Department of Economics University of Chicago) |
| Abstract: | This paper builds up an extension to the Mussa and Rosen (1978) model of quality pricing under perfect competition. Our model incorporates decreasing returns to scale. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test those predictions using highly disaggregated price and quantity US import data. We find that the prices of high quality goods, proxied as high unit price goods, are more sensitive to exchange rate movements. Moreover, we find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods. |
| Keywords: | Pricing-to-Market; Exchange Rate Pass Through; Local Distribution |
| JEL: | F11 F31 F41 |
| Date: | 2008–05–15 |
| URL: | http://d.repec.org/n?u=RePEc:ris:snbwpa:2008_006&r=ifn |
| By: | Tigran Poghosyan; Evzen Kocenda |
| Abstract: | We address the issue of foreign exchange risk and its macroeconomic determinants in several new EU members. The joint distribution of excess returns in the foreign exchange market and the observable macroeconomic factors is modeled using the stochastic discount factor (SDF) approach and a multivariate GARCH-in-mean model. We find that in post-transition economies real factors play a small role in determining foreign exchange risk, while nominal and monetary factors have a significant impact. Therefore, to contribute to the further stability of their domestic currencies, the central banks in the new EU member countries should continue stabilization policies aimed at achieving nominal convergence with the core EU members, as nominal factors play a crucial role in explaining the variability of the risk premium. |
| Keywords: | foreign exchange risk, time-varying risk premium, stochastic discount factor, multivariate GARCH-in-mean, post-transition and emerging markets |
| JEL: | C22 F31 G15 P59 |
| Date: | 2007–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2007-898&r=ifn |
| By: | Neil Dias Karunaratne (School of Economics, The University of Queensland) |
| Abstract: | In this paper the polemics and empirics on the sustainability of Australia’s high current account deficits and foreign debt that prevailed during the period 1959q3-2007q1 is revisited. The paper contends that the forces of globalization brought about a policy regime shift culminating in the floating of the Australian dollar in 1983q4. However, the policymakers failed to abandon the static old paradigm, the Keynesian-Mundell-Fleming model, which had been rendered obsolete by the policy regime shift. The policymakers continued to distill their activist policies to reduce the high current account deficits from an outmoded paradigm. The proponents of the rival new paradigm argued that the current account imbalances were the residual outcome of rational optimizing decisions of private sector agents and therefore the use of activist policies to target the reduction of the current account deficits as proposed by the adherents of the old paradigm were misconceived. The ensuing clash between the proponents of rival paradigms fuelled the policy polemics during almost a decade after the paradigm shift that occurred at the same time as the floating of the exchange rate. The activist policies failed to halt the rise in the current account deficits and foreign debt and the predicted dire economic consequences from the failure to rein in the current account deficit never materialized. Today, the current deficits and the foreign debt are at record high levels by historical standards, but they do not seem to grab the attention of the policymakers or make media headlines as in the past. The empirical results offer qualified support for prevalence of consumption smoothing during both the pre and post-float periods. The finding in favour of consumption-smoothing during the pre-float era is at odds with the findings of other studies. There appears to be evidence supporting the hypothesis that a regime-shift due to globalization and it occurred at the same time as the float and was reflected in an increase in consumption-tilting. Post-float and during the entire study period Australia, appears to have satisfied the intertemporal budget constraint and remained solvent. Furthermore, both over the whole sample period and post float period Australia appears to have engaged in effective consumption-smoothing notwithstanding the polemics and some empirics to the contrary. The solvency and consumption smoothing dynamics observed for Australia during the study period supports the new paradigm’s non-activist policy stance towards high current account deficits. However, it should be noted that this passive policy stance that is intertemporally optimal for achieving current account sustainability in Australia may not be applicable in other countries with high current account deficits because they may idiosyncratic features that differ widely from those prevalent in Australia. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:364&r=ifn |
| By: | James T. E. Chapman |
| Abstract: | Given the increasing interdependence of both financial systems and attendant payment and settlement systems a vital question is what form should optimal policy take when there are two connected payment systems with separate regulators. In this paper I show that two central banks operating in a non-cooperative way will not have an incentive to achieve the optimal allocation of goods. I further show that this non-cooperative outcome will be supported by a zero intraday interest rate and constant fixed exchange rate. This is in contrast to recent research; which has shown that domestically a zero intraday interest rate will achieve a social optimum and that the central bank has an incentive to achieve it. |
| Keywords: | Payment, clearing, and settlement systems; Exchange rate regimes |
| JEL: | E58 E42 F31 F33 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:bca:bocawp:08-17&r=ifn |
| By: | Virginie Coudert; Cecile Couharde |
| Abstract: | Pegged exchange rates are often pointed out as more prone to risk of overvaluation, because their real exchange rates have a tendency to appreciate. We check this assumption empirically over a large sample of emerging and developing countries, by using two databases for de facto classifications by Levy-Yeyati and Sturzenegger (2003) and by Reinhart and Rogoff (2004). We assess currency misalignments by estimating real equilibrium exchange rates taking into account a Balassa effect and the impact of net foreign assets. Pegged currencies are shown to be more overvalued than floating ones. |
| Keywords: | Exchange rate regimes; emerging and developing countries; misalignments |
| JEL: | F31 F33 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-07&r=ifn |
| By: | Agnes Benassy-Quere; Sophie Bereau; Valérie Mignon |
| Abstract: | In this paper, we investigate different views of equilibrium exchange rates within a single, stock-flow adjustment framework. We then compare FEER and BEER estimations of equilibrium exchange rates based on the same, econometric model of the net foreign asset position, with special focus on the euro-dollar rate. These estimations suggest that, although more robust to alternative assumptions, the BEER approach may rely on excessive confidence on past behaviors in terms of portfolio allocation. Symmetrically, FEERs may underestimate the plasticity of international capital markets because they focus on the adjustment of the trade balance. |
| Keywords: | Equilibrium exchange rates; euro-dollar; FEER; BEER; global imbalances |
| JEL: | F31 C23 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-02&r=ifn |
| By: | THORBECKE, Willem |
| Abstract: | East Asia is characterized by intricate production and distribution networks that allow fragmented production blocks to be allocated across countries based on comparative advantage. These networks have produced enormous efficiency gains. Exchange rate volatility, by increasing uncertainty, may reduce the locational benefits of cross-border fragmentation. This paper presents evidence that exchange rate volatility decreases the flow of electronic components within East Asia. Electronic components is by far the largest category of intermediate goods traded within these networks. These results imply that policy makers should consider how to maintain stable exchange rates in the region in order to provide a steady backdrop for East Asian production networks. |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:08016&r=ifn |
| By: | Sfia Daly |
| Abstract: | This paper analysis the choice of exchange regimes of 17 economies in the MENA region for the period 1990-2000. For this purpose we use both de jure and de facto regime classifications and estimate a series of binomial and multinomial probit models. Regressions results highlight the important influence of economic development and international reserve levels on exchange regime selection. |
| Keywords: | Exchange regime choice, MENA countries, probit model |
| JEL: | C25 F33 |
| Date: | 2007–11–01 |
| URL: | http://d.repec.org/n?u=RePEc:wdi:papers:2007-899&r=ifn |
| By: | Agnes Benassy-Quere; Sophie Bereau; Valérie Mignon |
| Abstract: | This paper is concerned with the robustness of equilibrium exchange rate estimations based on the BEER approach for a set of both industrial and emerging countries. The robustness is studied in four directions, successively. First, we investigate the impact of using alternative proxies for relative productivity. Second, we analyze the impact of estimating the equilibrium equation on one single panel covering G20 countries, or separately for G7 and non-G7 countries. Third, we measure the influence of the choice of the numeraire on the derivation of bilateral equilibrium rates. Finally, we study the temporal robustness of the estimations by dropping one or two years from the estimation period. Our main conclusion is that BEER estimations are quite robust to these successive tests, although at one point of time misalignments can differ by several percentage points depending on the methodology. The choice of the productivity proxy is the most sensible one, followed by the country sample. In contrast, the choice of the numeraire and the time sample have a relatively limited impact on estimated misalignments. |
| Keywords: | Equilibrium exchange rates; BEER; productivity; panel cointegration |
| JEL: | F31 C23 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2008-01&r=ifn |
| By: | Jorge Carrera (Banco Central de la Republica Argentina, Buenos Aires and Universidad Nacional de La Plata); Romain Restout (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France) |
| 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 |
| JEL: | C23 F31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0811&r=ifn |
| By: | Michael Bleaney; F. Gulcin Ozkan |
| Abstract: | This paper explores the relationship between the denomination of public debt and the choice of exchange rate regime. Unlike indexed domestic debt, foreign debt is subject to valuation effects from real exchange rate shocks. In a standard set-up, where a peg functions only as a nominal anchor, more foreign debt makes pegging less attractive, because it increases the value of a fexible exchange rate as a shock absorber. This result can be reversed if we incorporate the stylized fact that pegs have lower real exchange rate volatility, and if external shocks are sufficiently large relative to domestic shocks. |
| Keywords: | inflation, output, public debt and exchange rate regimes. |
| JEL: | F33 H63 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:yor:yorken:08/10&r=ifn |