nep-ifn New Economics Papers
on International Finance
Issue of 2008‒08‒21
five papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Cointegration Tests of Purchasing Power Parity By Wallace, Frederick; Lozano Cortés, René; Cabrera-Castellanos, Luis F.
  2. Do Central Banks Respond to Exchange Rate Movements? Some New Evidence from Structural Estimation By Wei Dong
  3. Nonlinearity as an Explanation of the Forward Exchange Rate Anomaly By Derek Bond; Niall Hession; Michael J Harrison; Edward J O’Brien
  4. Risk-Premia, Carry-Trade Dynamics, and Speculative Efficiency of Currency Markets By Christian Wagner
  5. Prices and Exchange Rates: A Theory of Disconnection By Jose Antonio Rodriguez Lopez

  1. By: Wallace, Frederick; Lozano Cortés, René; Cabrera-Castellanos, Luis F.
    Abstract: Three well-known single equation cointegration tests are employed to test for purchasing power parity (PPP) in updated version of the data set developed by Taylor (2002). Results of the tests differ somewhat. The Engle-Granger two-step procedure indicates substantial support for PPP with respect to the US dollar while the evidence in favor is much weaker from error correction and autoregressive distributed lag models.
    Keywords: Cointegration; purchasing power parity
    JEL: C22 F31
    Date: 2008–07–25
  2. By: Wei Dong
    Abstract: This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand and the United Kingdom. We develop and estimate a structural general equilibrium two-sector model with sticky prices and wages and limited exchange rate pass-through. Different specifications for the monetary policy rule and the real exchange rate process are examined. The results indicate that the Reserve Bank of Australia, the Bank of Canada and the Bank of England paid close attention to real exchange rate movements, whereas the Reserve Bank of New Zealand did not seem to incorporate exchange rate movements explicitly into their policy rule. With a higher degree of intrinsic inflation persistence, the central bank of New Zealand seems less concerned about future inflation pressure induced by current exchange rate movements. In addition, the structure of the shocks driving inflation and output variations in New Zealand is such that it may be sufficient for the Reserve Bank of New Zealand to only respond to exchange rate movements indirectly through stabilizing inflation and output.
    Keywords: Exchange rates; Monetary policy framework; International topics
    JEL: F3 F4
    Date: 2008
  3. By: Derek Bond (University of Ulster); Niall Hession (University of Ulster); Michael J Harrison (University College Dublin); Edward J O’Brien (European Central Bank)
    Abstract: This paper shows that nonlinearity can provide an explanation for the forward exchange rate anomaly (Fama, 1984). Using sterling-Canadian dollar data, and modelling nonlinearity of unspecified form by means of a random field, we find strong evidence of time-wise nonlinearity and, significantly, obtain parameter estimates that conform with theory to a high degree of precision: the anomaly disappears.
    Keywords: Forward exchange rate anomaly; nonlinearity; random field regression
    JEL: C22 F31
    Date: 2007–12–30
  4. By: Christian Wagner (Oesterreichische Nationalbank and Vienna University of Economics and Business Administration,)
    Abstract: Foreign exchange market efficiency is commonly investigated by Fama-regression tests of uncovered interest parity (UIP). In this paper, we conjecture a speculative UIP relationship which implies that exchange rate changes comprise a time-varying risk component in addition to the forward premium.This suggests that the forward premium anomaly reported in previous research potentially stems from omitting this component in UIP tests and that the popular carry-trade strategy can be rationalized to some extent. Moreover, while related work focuses on the Fama-regression slope coefficient, we show that also the intercept is important for judging the economic significance of currency speculation. Empirically, we find support for speculative UIP and the existence of a risk-premium. Furthermore, although carry-traders are able to collect some risk-premia, currency speculation does not yield economically significant excess returns, which suggests that foreign exchange markets are speculatively efficient. Disregarding the Fama-regression constant, however, leads to distortions in the assessment of economic significance and induces spurious rejection of speculative efficiency.
    Keywords: Exchange rates; Uncovered interest parity; Speculative efficiency; Risk-premia; Carry-trade.
    JEL: F31
    Date: 2008–05–15
  5. By: Jose Antonio Rodriguez Lopez (Department of Economics, University of California-Irvine)
    Abstract: I present partial and general equilibrium versions of a sticky-wage model of exchange rate pass-through with heterogeneous producers and endogenous markups. The model's results are consistent with a story of substantial expenditure-switching effects of exchange rate changes in the presence of low levels of exchange rate pass-through to firm-level and aggregate import prices. After an exchange rate shock, aggregate import prices are subject to a survivorship bias due to changes in the extensive margin of trade. At the firm level, each producer adjusts its markups depending on its own productivity and the change in the competition environment generated by the exchange rate movement. Firm-level price responses are asymmetric -- different for appreciations and depreciations -- and adjustments in the intensive margin of trade are substantial. The general equilibrium model, solved with a second-order solution method, preserves the partial equilibrium results and shows how firm relocations increase the persistence of exogenous shocks.
    Keywords: Exchange rate pass-through; Heterogeneous firms; Endogenous markups
    JEL: F12 F41
    Date: 2008–07

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