nep-ifn New Economics Papers
on International Finance
Issue of 2008‒08‒31
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Imperfect exchange rate pass-through : the role of distribution services and variable demand elasticity By Philippe Jeanfils
  2. The Euro May over the Next 15 Years Surpass the Dollar as Leading International Currency By Chinn, Menzie; Frankel, Jeffrey
  3. Managing capital flows: The case of India. By Shah, Ajay; Patnaik, Ila
  4. Obstacles To Implementing Lessons from the 1997-1998 East Asian Crises By Jomo Kwame Sundaram
  5. Estimation of De Facto Exchange Rate Regimes: Synthesis of The Techniques for Inferring Flexibility and Basket Weights By Frankel, Jeffrey; Wei, Shang-Jin
  6. Vulnerability of Currency Pegs: Evidence from Brazil By Bernardo Guimaraes
  7. Foreign Currency Exposure and Hedging: Evidence from Foreign Acquisitions By Bartram, Söhnke M.; Burns, Natasha; Helwege, Jean
  8. Can Central Bank Interventions Affect the Exchange Rate Volatility? Multivariate GARCH Approach Using Constrained Nonlinear Programming By Tolga Caskurlu; Mustafa C. Pinar; Aslihan Salih; Ferhan Salman

  1. By: Philippe Jeanfils (National Bank of Belgium, Research Department)
    Abstract: This paper examines which mechanisms are likely to dampen the price pressures in the wake of exchange rate movements. In addition to nominal frictions frequently used in sticky-price models, it jointly introduces two features that have hitherto been considered separately in the existing literature, i.e. a variable demand elasticity à la Kimball (1995) and distribution services in the form of non-traded goods as in Corsetti and Dedola (2005). The paper explores the respective role of each feature and assesses the quantitative importance of these theoretical explanations for the exchange rate pass-through to a broad range of prices as well as for the real exchange rate and for the trade balance. Segmentation of national markets through distribution services and imperfect competition with variable mark-ups are important for accounting for the observed stability of import prices "at the border". Hence, these mechanisms help to explain the observed stability of import prices in local currency with realistic durations of price contracts.
    Keywords: exchange rate pass-through, general equilibrium
    JEL: F3 F4
    Date: 2008–08
  2. By: Chinn, Menzie (U of Wisconsin); Frankel, Jeffrey (Harvard U)
    Abstract: The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2025.
    Date: 2008–03
  3. By: Shah, Ajay (National Institute of Public Finance and Policy); Patnaik, Ila (National Institute of Public Finance and Policy)
    Abstract: From the early 1990s, India embarked on easing capital controls. Liberalization emphasised openness towards equity flows, both FDI and portfolio flows. In particular, there are few barriers in the face of portfolio equity flows. In recent years, a massive increase in the value of foreign ownership of Indian equities has come about, largely reflecting improvements in the size, liquidity and corporate governance of Indian firms. While the system of capital controls appears formidable, the de facto openness on the ground is greater than is apparent, particularly because of the substantial enlargement of the current account. These changes to capital account openness were not accompanied by commensurate monetary policy reform. The monetary policy regime has consisted essentially of a pegged exchange rate to the US dollar throughout. Increasing openness on the capital account, coupled with exchange rate pegging, has led to a substantial loss of monetary policy autonomy. The logical way forward now consists of bringing the de jure capital controls uptodate with the de facto convertibility, and embarking on reforms of the monetary policy framework so as to shift the focus of monetary policy away from the exchange rate to domestic inflation.
    Keywords: International investment ; Long term capital movements ; International lending and debt problems ; Monetary sysytems
    JEL: F21 F34 E42
    Date: 2008–05
  4. By: Jomo Kwame Sundaram
    Abstract: Various different and sometimes contradictory lessons have been drawn from the 1997-1998 East Asian crisis experiences. The ideological implications and political differences involved have complicated the possibility of drawing shared lessons from the crises. The seeming calm and increased growth in most developing countries in the period since 2001 have also undermined the possibility of far-reaching developmental reforms following the experience. Perhaps most importantly, the vested interests supporting existing international financial governance arrangements continue to impede the possibility of implementing lessons drawn from the experience. Such interests are generally supported by conventional wisdom and reinforced by the financial media.
    Keywords: Asian crises, currency crises
    JEL: F32 F34 F53
    Date: 2008–08
  5. By: Frankel, Jeffrey (Harvard U); Wei, Shang-Jin (Columbia U)
    Abstract: The paper offers a new approach to estimate de facto exchange rate regimes, a synthesis of two techniques. One is a technique that the authors have used in the past to estimate implicit de facto weights when the hypothesis is a basket peg with little flexibility. The second is a technique used by others to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency, but with a possibly-substantial degree of flexibility around that anchor. Since many currencies today follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. We try out the technique on twenty-some currencies, over the period 1980-2007. Most are currencies that have officially used baskets as anchors for at least part of this sample period. But a few are known floaters or known simple peggers. In general the synthesis technique seems to work as it should.
    JEL: F31
    Date: 2008–05
  6. By: Bernardo Guimaraes
    Abstract: This paper analyses predictions of a simple model of currency crises in which the peg will beabandoned when the currency overvaluation hits a certain threshold, unknown to the agents.Due to learning about the threshold, some features usually observed in the data and identifiedwith models with multiple equilibria arise in the model. But the model yields distinctivepredictions about the behaviour of the probability and the expected magnitude of a currencydevaluation. The paper identifies the probability and expected magnitude of a devaluation ofBrazilian Real in the period leading up to the end of the Brazilian pegged exchange rateregime, using data on exchange rate options. The empirical results are consistent with modelpredictions.
    Keywords: Currency crises, exchange rate, options, probability of devaluation, devaluationsize
    JEL: F3
    Date: 2008–06
  7. By: Bartram, Söhnke M.; Burns, Natasha; Helwege, Jean
    Abstract: Previous research on the impact of currency risk on stock returns has failed to find a significant role for foreign exchange rates. This paper addresses several explanations of this finding with a unique dataset of U.S. firms that acquire targets in other countries. The dataset allows estimation of the impact of exchange rates using firm-specific bilateral exchange rates and a time period over which underlying exposure is known to significantly change. We also relate the change in exposure from before to after the acquisition to various characteristics of the acquirer, such as its presence in the target country prior to the deal and its hedging activities, and characteristics of the target, such as the exposure of the target prior to the deal. The results suggest that identifying a relevant exchange rate can be an important consideration in studying the impact of exchange rate risk on stock returns, but identifying financial hedging information is not. Further, foreign targets often provide operational hedging benefits to the U.S. acquirers, as exposure estimates are significantly affected by the acquisition.
    Keywords: Exchange rates; exposure; hedging; derivatives; mergers; acquisitions
    JEL: F4 F3 G3
    Date: 2007–04–01
  8. By: Tolga Caskurlu; Mustafa C. Pinar; Aslihan Salih; Ferhan Salman
    Date: 2008

This nep-ifn issue is ©2008 by Yi-Nung Yang. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.