nep-ifn New Economics Papers
on International Finance
Issue of 2008‒06‒21
nine papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. The Rise and Fall of the Dollar, or When did the Dollar Replace Sterling as the Leading Reserve Currency? By Eichengreen, Barry; Flandreau, Marc
  2. The Choice of Monetary and Exchange Rate Arrangements for a Small, Open, Low-Income Economy: The Case of Sao Tome and Principe By Márcio Valério Ronci; Misa Takebe; Nisreen Farhan; Amar Shanghavi; Jian-Ye Wang
  3. Real exchange rate volatility and disconnect: an empirical investigation By Riccardo Cristadoro; Andrea Gerali; Stefano Neri; Massimiliano Pisani
  4. Exchange Rate Regimes and Capital Mobility: How Much of the Swoboda Thesis Survives? By Eichengreen, Barry
  5. The Decline of the Exchange Rate Pass-Through in Brazil: Explaining the ‘Fear of Floating’ By Carlos Eduardo Schönerward da Silva; Matias Vernengo
  6. Estimating Equilibrium Exchange Rates for Armenia and Georgia By Omar AlShehabi; Shuang Ding
  7. An eclectic third generation model of financial and exchange rate crises By Joaquin Novella Izquierdo; Joan Ripoll i Alcon
  8. The evolution of trading activity in Asian foreign exchange markets By Yosuke Tsuyuguchi; Philip D Wooldridge
  9. Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities By Reginaldo P. Nogueira Junior; Miguel Leon-Ledesma

  1. By: Eichengreen, Barry; Flandreau, Marc
    Abstract: We present new evidence on the currency composition of foreign exchange reserves in the 1920s and 1930s. Contrary to the presumption that the pound sterling continued to dominate the U.S. dollar in central bank reserves until after World War II, we show that the dollar first overtook sterling in the mid-1920s. This suggests that the network effects thought to lend inertia to international currency status and to create incumbency advantages for the dominant international currency do not apply in the reserve currency domain. Our new evidence is similarly incompatible with the notion that there is only room in the market for one dominant reserve currency at a point in time. Our findings have important implications for our understanding of interwar monetary history but also for the prospects of the dollar and the euro as reserve currencies.
    Keywords: international currency; international reserves; reserve currency
    JEL: F31 F33
    Date: 2008–06
  2. By: Márcio Valério Ronci; Misa Takebe; Nisreen Farhan; Amar Shanghavi; Jian-Ye Wang
    Abstract: This paper assesses São Tomé and Príncipe's monetary and exchange rate arrangements in light of the country's monetary history and the relevant experience of comparable countries in Africa. The study highlights several structural characteristics of São Tomé and Príncipe including its very small size, high degree of openness, extensive use of foreign currencies, and inflexible product and factor markets in the consideration of an appropriate monetary and exchange regime. Firmly anchored currency arrangements, defined in this paper to include memberships in monetary unions or hard pegs, are found to be preferable to the status quo of a managed float. The paper applies statistical methods and takes into account other factors to identify the appropriate anchor currency. It stresses that fiscal discipline and prudent debt management are the main prerequisites for a firmly anchored currency arrangement.
    Keywords: Working Paper , Exchange rate regimes , São Tomé and Príncipe , Currencies , Monetary systems , Debt management , Fiscal management , Small states ,
    Date: 2008–05–05
  3. By: Riccardo Cristadoro (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Andrea Gerali (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Stefano Neri (Bank of Italy, Economic Outlook and Monetary Policy Research Department); Massimiliano Pisani (Bank of Italy, Economic Outlook and Monetary Policy Research Department)
    Abstract: A two-country model that incorporates many features proposed in the New Open Economy Macroeconomics literature is developed in order to replicate the volatility of the real exchange rate and its disconnect with macroeconomic variables. The model is estimated using data for the euro area and the U.S. and Bayesian methods. The analysis delivers the following results: (a) international price discrimination, home bias and shocks to the uncovered interest rate parity (UIRP) condition are key features to replicate the variance of the real exchange rate; (b) home bias, shocks to the UIRP condition and to production technologies help replicating the disconnect;(c) distribution services intensive in local nontradeables are an important source of international price discrimination.
    Keywords: International business cycle, Exchange rate volatility, Exchange rate pass-through, International transmission.
    JEL: F32 F33 F41 C11
    Date: 2008–04
  4. By: Eichengreen, Barry
    Abstract: Alexander Swoboda is one of the originators of the bipolar view that capital mobility creates pressure for countries to abandon intermediate exchange rate arrangements in favor of greater flexibility and harder pegs. This paper takes another look at the evidence for this hypothesis using two popular de facto classifications of exchange rate regimes. That evidence supports the bipolar view for the advanced countries, the sample for which it was originally developed, but not obviously for emerging markets and other developing countries. One interpretation of the contrast is that there is a tendency to move away from intermediate regimes in the course of economic and financial development, implying that emerging markets and other developing countries will eventually abandon intermediate regimes as well. Another interpretation is that the advanced countries have been faster to abandon soft pegs because they have been faster to develop attractive alternatives, notably Europe’s monetary union. In this view, other countries are unlikely to abandon soft pegs because of the absence of the distinctive political conditions that have made the European alternative feasible. A final interpretation is that the advanced countries have been able to abandon soft peg because of their success in substituting inflation targeting for exchange rate targeting as the anchor for monetary policy. The paper presents some evidence for this view, which suggests the feasibility of further movement by emerging markets and developing countries in the direct of greater exchange rate flexibility.
    Keywords: exchange rate regimes; exchange rates
    JEL: F30 F31
    Date: 2008–06
  5. By: Carlos Eduardo Schönerward da Silva; Matias Vernengo
    Abstract: This paper argues that the pass-through in Brazil has fallen compared with estimates in other studies on earlier time periods, and remains low. Whereas pass-through effects where high and close to 1 in the high-inflation period, they seem to have fallen to around 0.2 after the Real Plan stabilization, a number that is similar to the Import Substitution Industrialization (ISI) period of the 1950s and 1960s. Conventional results suggests that low and stable inflation environments lead to low levels of exchange rate pass-through and thus contribute to weakening the ‘fear of floating’ phenomenon experienced by some developing countries. In spite of lower pass-through effects the Brazilian Central Bank has maintained high interest rates in order to control the exchange rate. This paper suggests that ‘fear of inflation’ provides justification for the central bank’s persistent ‘fear of floating.’
    Keywords: Pass-Through, Inflation, Brazil
    JEL: E58 F41 O54
    Date: 2008–11
  6. By: Omar AlShehabi; Shuang Ding
    Abstract: The significant real exchange rate appreciation in Armenia and Georgia since 2003, coupled with persistent current account deficits, raises the question of whether real exchange rates have become overvalued. This paper seeks to identify possible exchange rate misalignment by applying the behavioral equilibrium exchange rate approach, complemented by an analysis of the traditional competitiveness indicators. The results indicate an undervaluation of the Armenian dram and no significant misalignment of the Georgian lari in 2006.
    Keywords: Working Paper , Armenia , Georgia , Exchange rate appreciation , Current account deficits ,
    Date: 2008–05–01
  7. By: Joaquin Novella Izquierdo; Joan Ripoll i Alcon (Universitat de Barcelona)
    Abstract: This paper presents an eclectic model that systematizes the dynamics of self-fulfilling crises, using the main aspects of the three typologies of third generation models, to describe the stylized facts that hasten the withdrawal of a pegged exchange rate system. The most striking contributions are the implications for economic policy as well the vanishing role of exchange rate as an instrument of macroeconomic adjustment, when balance-sheet effects are a real possibility.
    Keywords: speculative attack, financial liberalization, financial panic, financial and exchange rate crisis
    JEL: F41 F43 E44 F31 F32 F34 F36 E52
    Date: 2008
  8. By: Yosuke Tsuyuguchi; Philip D Wooldridge
    Abstract: The development of Asian foreign exchange markets has progressed appreciably in recent years. Data from the BIS Triennial Central Bank Survey indicate that the turnover of Asian currencies rose sharply between 2004 and 2007, financial institutions became more important customers, and the participation of non-residents increased. Notwithstanding this progress, the liquidity of Asian foreign exchange markets continues to be undermined by foreign exchange controls. For Asian currencies other than HKD and SGD, non-residents account for a relatively small share of activity and FX swap markets are still in their infancy. Offshore non-deliverable markets have developed in response to controls, causing trading activity to fragment. Furthermore, Herstatt risk remains high in Asian foreign exchange markets. Almost all transactions between Asian currencies are executed via the US dollar so, for those trades not cleared through CLS Bank, each leg is settled at significantly different times.
    Keywords: foreign exchange, trading volume, currency controls
    Date: 2008–05
  9. By: Reginaldo P. Nogueira Junior; Miguel Leon-Ledesma
    Abstract: This paper investigates the empirical evidence on exchange rate pass through (ERPT) into CPI inflation for a set of emerging and developed countries. We argue that, theoretically, ERPT may be nonlinear in contrast to standard linear estimates in the literature. We use smooth transition models to investigate several possible sources of these nonlinearities. The results suggest that, although the sources of nonlinearities vary considerably across countries, they appear to be important. We find that for four countries ERPT responds nonlinearly to inflation and for three of them it responds nonlinearly to the output gap. We also find an asymmetric response of ERPT with respect to the magnitude of exchange rate changes for only two out of six countries. Finally, for some emerging markets, ERPT seems to be affected nonlinearly by measures of macroeconomic instability.
    Keywords: Exchange rate pass-through; smooth transition regression models
    JEL: E31 E52 F41
    Date: 2008–01

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