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on International Finance |
| By: | Luciana Juvenal; Mark P. Taylor |
| Abstract: | Using self-exciting threshold autoregressive models, we explore the validity of the law of one price (LOOP) for sixteen sectors in nine European countries. We and strong evidence of nonlinear mean reversion in deviations from the LOOP and highlight the importance of modelling the real exchange rate in a nonlinear fashion in an attempt to measure speeds of real exchange rate adjustment. Using the US dollar as a reference currency, the half-lives of sectoral real exchange rates shocks, calculated by Monte Carlo integration, imply much faster adjustment than the consensus half-life estimates of three to five years. The results also imply that transaction costs vary significantly across sectors and countries. |
| Keywords: | Prices ; Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-027&r=ifn |
| By: | Giri, Rahul |
| Abstract: | Observed trade flows provide one metric to gauge the degree of international goods market segmentation. Deviations from the law of one price provide another. New survey data on retail prices for a broad cross section of goods across 13 EU countries, compiled by Crucini, Telmer and Zachariadis (2005), show that (i) the average dispersion of law of one price deviations across all goods is 28 percent and (ii) the range of that dispersion across goods is large, varying from 2 percent to 83 percent. Quantitative multi-country Ricardian models, a la Eaton and Kortum, use data on bilateral trade volumes to estimate international trade barriers or trade costs. This paper investigates whether the degree of international goods market segmentation implied by these models can account for observed cross-country dispersion in prices. When heterogeneous and asymmetric trade costs are carefully calibrated to match observed bilateral trade volumes, the model can account for 85 percent of the average dispersion of law of one price deviations found in the data. However, it generates only 21 percent of the good by good variation in price dispersion. The model is augmented to permit heterogeneity in local costs of distribution - across goods and countries - and is calibrated to match data on distribution margins. While the augmented model can reproduce 96.5 percent of the average dispersion of law of one price deviations, it can match only 32 percent of the variation in that dispersion. Heterogeneity in trade costs, and in local distribution costs, cannot account for observed heterogeneity in the dispersion of law of one price deviations. |
| Keywords: | Trade; international trade costs; distribution costs; law of one price; price dispersion |
| JEL: | F15 E31 F10 |
| Date: | 2008–08–12 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10257&r=ifn |
| By: | Stephan Schulmeister (WIFO) |
| Abstract: | The study analyses the interaction between the trading behaviour of 1,024 moving average and momentum models and the fluctuations of the yen-dollar exchange rate. I show first that these models would have exploited exchange rate trends quite profitably between 1976 and 2007. I then show that the aggregate transactions and positions of technical models exert an excess demand pressure on currency markets since they are mostly on the same side of the market. When technical models produce trading signals almost all of them are either buying or selling, when they maintain open positions they are either long or short. A strong interaction prevails between exchange rate movements and the transactions triggered by technical models. An initial rise of the exchange rate due to news, e.g., is systematically lengthened through a sequence of technical buy signals. |
| Keywords: | Exchange rate, Technical Trading, Speculation, Heterogeneous Agents |
| Date: | 2008–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2008:i:324&r=ifn |
| By: | Yelena Takhtamanova |
| Abstract: | Recent research suggests that there has been a decline in the extent to which firms “pass through” changes in exchange rates to prices. Beyond providing further evidence in support of this claim, this paper proposes an explanation for the phenomenon. It then presents empirical evidence of a structural break during the 1990s in the relationship between the real exchange rate and CPI inflation for a set of fourteen OECD countries. It is suggested that the recent reduction in the real exchange rate pass-through can be attributed in part to the low-inflation environment of the 1990s. |
| Keywords: | Foreign exchange rates |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedfwp:2008-13&r=ifn |
| By: | Marcel Fratzscher; Luciana Juvenal; Lucio Sarno |
| Abstract: | This paper analyses the role of asset prices in comparison to other factors, in particular exchange rates, as a driver of the US trade balance. It employs a Bayesian structural VAR model that requires imposing only a minimum of economically meaningful sign restrictions. We find that equity market shocks and housing price shocks have been major determinants of the US current account in the past, accounting for up to 32% of the movements of the US trade balance at a horizon of 20 quarters. By contrast, shocks to the real exchange rate have been much less relevant, explaining less than 7% and exerting a more temporary effect on the US trade balance. Our findings suggest that sizeable exchange rate movements may not necessarily be a key element of an adjustment of today's large current account imbalances, and that in particular relative global asset price changes could be a more potent source of adjustment. |
| Keywords: | Asset pricing ; Foreign exchange rates ; Balance of trade |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedlwp:2008-031&r=ifn |
| By: | Stephan Schulmeister (WIFO) |
| Abstract: | The paper investigates the profitability of 1,024 moving average and momentum models and their components in the yen-dollar market. It turns out that all models would have been profitable between 1976 and 2007. The models produce more single losses than single profits. At the same time, the size of the single profits is on average much higher than the size of single losses because profitable positions last two to six times longer than unprofitable positions. Hence, the profitability of technical currency trading is exclusively due to the exploitation of persistent exchange rate trends. These results hold also when technical trading is examined over subperiods. The models which perform best over the most recent subperiod are in most cases significantly profitable also ex ante. However, the profitability of technical currency trading based on daily data has declined since the mid 1990s, and it has disappeared since 2000. |
| Keywords: | Exchange rate, Technical trading, Speculation |
| Date: | 2008–07–10 |
| URL: | http://d.repec.org/n?u=RePEc:wfo:wpaper:y:2008:i:325&r=ifn |