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on International Finance |
| By: | John Pippenger (University of California, Santa Barbara) |
| Abstract: | The exchange rate literature contains two inconsistent strands. There is a large theoretical and empirical literature on overshooting. In that literature overshooting is an important explanation for exchange rate volatility. A separate literature says that exchange rates are martingales and that models do not beat a random walk. Both can not be true. I show that the evidence for overshooting is highly suspect while the evidence that flexible exchange rates are approximately martingales is rock solid. Given the strength of the evidence, models that imply overshooting probably should be rejected out of hand. |
| Keywords: | overshooting, exchange rates, volatility, martingales, |
| Date: | 2008–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:cdl:ucsbec:01-08&r=ifn |
| By: | David Cook; Woon Gyu Choi |
| Abstract: | Using the theory of optimal local currency pricing, this paper constructs a structural equation to estimate the rate at which foreign producer prices pass through the local currency prices of imported goods in the U.S. This can be viewed as measuring exchange rate pass-through, in line with price stickiness in the New Keynesian Phillips curve literature. We estimate the structural equation using the generalized methods of moments for consistent estimates of exchange rate pass-through. We find that a model with a mix of local currency pricing and producer currency pricing fits the data best. The estimate of price stickiness in import prices is comparable to existing estimates of domestic price stickiness. |
| Date: | 2008–09–10 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/213&r=ifn |
| By: | Melecky, Ales; Melecky, Martin |
| Abstract: | This paper attempts to estimate possible losses in macroeconomic stabilization due to a move from inflation to exchange rate targeting on an example of the Czech Republic. The authors use an estimated New Keynesian policy model, general inflation and exchange rate targeting rules, and representative central bank loss functions to carry out such estimations. The authors find that for the Czech Republic moving from the historically applied inflation targeting to optimized exchange rate targeting should not involve any significant losses in macroeconomic stabilization. However, the Czech National Bank could improve its stabilization outcomes while remaining an inflation targeter. This requires the Czech National Bank to respond stronger to increasing expected future inflation and be less concerned about an opening output gap when adjusting its policy rate. Moving then from such optimized inflation targeting to optimized exchange rate targeting can result in significant losses in economic stabilization in the magnitude of 0.4 to 2 percentage points of GDP growth. |
| JEL: | E32 E58 E52 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:10844&r=ifn |
| By: | Mario J. Crucini; Mototsugu Shintani; Takayuki Tsuruga |
| Abstract: | Volatile and persistent real exchange rates are observed not only in aggregate series but also in the individual good level data. Kehoe and Midrigan (2007) recently showed that, under a standard assumption on nominal price stickiness, empirical frequencies of micro price adjustment cannot replicate the time-series properties of the law-of-one-price deviations. We extend their sticky price model by combining good specific price adjustment with information stickiness in the sense of Mankiw and Reis (2002). Under a reasonable assumption on the money growth process, we show that the model fully explains both persistence and volatility of the good-level real exchange rates. Furthermore, our framework allows for multiple cities within a country. Using a panel of U.S.-Canadian city pairs, we estimate a dynamic price adjustment process for each 165 individual goods. The empirical result suggests that the dispersion of average time of information update across goods is comparable to that of average time of price adjustment. |
| JEL: | D40 E31 F31 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14381&r=ifn |
| By: | Andrea Cipollini; George Kapetanios |
| Abstract: | In this paper we use principal components analysis to obtain vulnerability indicators able to predict financial turmoil. Probit modelling through principal components and also stochastic simulation of a Dynamic Factor model are used to produce the corresponding probability forecasts regarding the currency crisis events a®ecting a number of East Asian countries during the 1997-1998 period. The principal components model improves upon a number of competing models, in terms of out-of-sample forecasting performance. |
| Keywords: | Financial Contagion, Dynamic Factor Model |
| JEL: | C32 C51 F34 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:014&r=ifn |
| By: | Ayla Ogus (Department of Economics, Izmir University of Economics); Niloufer Sohrabji (Department of Economics, Simmons College) |
| Abstract: | We test for sustainability of Turkey’s current account position between 1992 and 2007 using the intertemporal solvency model of Hakkio and Rush (1991) and Husted (1992). This approach examines the relationship between exports and imports+ (which include imports, net interest and unilateral transfer payments). Cointegration between inflows and outflows implies that the intertemporal budget constraint is satisfied. We use the Johansen and the Gregory and Hansen (1996) cointegration tests to determine linkages between exports and imports+ in Turkey. Using the Johansen test we find no cointegration and thus reject intertemporal solvency of the current account for this period. If we allow for a structural break in the cointegrating relation using the Gregory Hansen procedure we do find evidence of cointegration between the two series. This result can be used to estimate the long-run relationship between exports and imports+ using dynamic OLS and test for weak and strong sustainability of the current account position. We find evidence for weak sustainability but reject strong sustainability of the Turkish current account position in recent years. |
| Keywords: | Current account sustainability, intertemporal budget constraint, Turkey, cointegration |
| JEL: | F32 F41 |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:izm:wpaper:0805&r=ifn |
| By: | Roberta Colavecchio; Michael Funke |
| Abstract: | This paper uses multivariate GARCH techniques to study volatility spillovers between the Chinese non-deliverable forward market and seven of its Asia-Pacific counterparts over the period January 1998 to March 2005. To account for the time-variability of conditional correlation, a dynamic correlation structure is included in the volatility model specification. The empirical results demonstrate that the renminbi non-deliverable forward (NDF) has been a driver of various Asian currency markets but that such co-movements exhibit a substantial degree of heterogeneity. As to the determinants of the magnitude of these co-movements, we test the relevance of potential factors and find that it is the degree of real and financial integration, in particular, that exerts the largest influence on volatility transmission. |
| Keywords: | China, renminbi, Asia, forward exchange rates, non-deliverable forward market, multivariate GARCH models |
| JEL: | C22 F31 F36 |
| Date: | 2008–03 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:20803&r=ifn |
| By: | Sanja Kalra |
| Abstract: | During 2001-07, increases in mature market volatility were associated with declines in forex returns for East Asian countries, consistent with an overall "flight to safety" effect. Estimates from GARCH models suggest that a 5 percentage point increase in mature market equity volatility generated an exchange rate depreciation of up to ½ percent. This sensitivity rose during the latter period in the sample, suggesting greater integration of Asian financial markets with global markets. Unconditional standard deviations estimated from these models also provide operational measures of "long-term" and "excess" volatility in forex markets. Long-run forex volatility declined as Asian economies settled down with generally stronger fundamentals in the post-crisis period to more flexible regimes along with a generally lower level of mature market volatility. |
| Keywords: | Foreign exchange , East Asia , Exchange rates , Financial stability , Economic integration , Economic models , Financial crisis , Working Paper , |
| Date: | 2008–09–05 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/208&r=ifn |
| By: | Brahima Coulibaly; Jonathan Millar |
| Abstract: | This study assesses the role of the Asian financial crisis of the late 1990s in the emergence and persistence of the large current account surpluses across non-China emerging Asia, which have been a significant counterpart to the U.S. current account deficit. Using panel data encompassing nearly 3,750 firms, we trace the current account surpluses to a marked and broad-based decline in corporate expenditures on fixed investment in the aftermath of the crisis that cuts across a wide spectrum of countries, industries, and firms. The lower corporate spending in turn depressed aggregate investment rates, widened the saving-investment gap, and allowed the region to turn into a net exporter of capital. We then consider the factors behind this reduction in postcrisis corporate investment. While weaker firm-level fundamentals in the postcrisis period seem to explain part of the drop in investment rates, ongoing re-structuring owing to large debts accumulated and excess investment undertaken in the run-up to the crisis has been the main source of restraint postcrisis corporate investment. The results suggest that even after a decade, the effect of the financial crisis is still affecting corporate investment decisions in emerging Asia, and that as the restructuring completes its course, investment rates will likely rise to contribute to a gradual reduction in the region's current account surpluses. |
| Keywords: | Financial crises - Asia |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedgif:942&r=ifn |
| By: | Marc Gronwald; Michael Funke |
| Abstract: | On 21 July 2005 China adopted an undisclosed basket exchange rate regime. We formally assess and envisage the gradual evolution of the renminbi over time. We utilize nonlinear dependencies in the renminbi exchange rate and describe the smooth transition of the renminbi/U.S. dollar (RMB/USD) exchange rate using the family of time-varying autoregressive (TV-AR) models. Specifically, the nonlinear models allow for a smooth transition from one optimal level to another. Our estimation results imply that the RMB/USD exchange rate will likely be about 7.10 RMB/USD in summer/autumn 2009. |
| Keywords: | China, renminbi, de facto exchange rate regime, TV-AR model, TV-AR-GARCH model |
| JEL: | C22 F31 F37 |
| Date: | 2008–04 |
| URL: | http://d.repec.org/n?u=RePEc:ham:qmwops:20804&r=ifn |
| By: | Masahiro Hori; Yu Ching Wong |
| Abstract: | Myanmar's multiple exchange rate system creates various economic distortions. This paper describes the exchange rate practices in Myanmar, develops a model of foreign exchange markets, and presents the efficiency costs imposed by quasi-fiscal operation under the current exchange rate regime. The results of our model-based analyses indicate that the equilibrium exchange rate under the unified market could be at around K 400-500 per U.S. dollar, and using the equilibrium exchange rate (instead of the official exchange rate) as the accounting rate increases trade openness to more than 20 percent from less than 1 percent measured by official statistics. The total efficiency loss caused by the current multiple exchange rate regime is estimated at about 14-17 percent of GDP in 2006/07. |
| Keywords: | Exchange rate regimes , Myanmar , Multiple exchange rates , Exchange markets , Economic models , Trade models , National accounts , Gross domestic product , Exports , Imports , Working Paper , |
| Date: | 2008–08–20 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/199&r=ifn |
| By: | Emre Ozsoz (Fordham University, Department of Economics); Erick W. Rengifo (Fordham University, Department of Economics); Dominick Salvatore (Fordham University, Department of Economics) |
| Abstract: | In dollarized financial systems, there exists a currency mismatch risk that could lead to financial crises. Central Banks in such economies have to adjust their foreign currency policies accordingly. This paper estimates the probability of Central Bankers' intervention in the foreign currency markets in dollarized economies as explained by the volatility measures of the local exchange rate. By employing data from five countries, we show that in controlled inflation environments, not only Central Banks' interventions but also the direction of the interventions can be predicted to a good degree while under high inflation our model fails to provide healthy results. |
| Keywords: | Central Bank Intervention, Foreign Exchange Rates, Dollarization, Ordered Probit |
| JEL: | F31 E58 G15 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:frd:wpaper:dp2008-16&r=ifn |
| By: | Olga Arratibel (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Reiner Martin (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Davide Furceri (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper analyzes the relation between exchange rate volatility and several macroeconomic variables, namely real per capita output growth, the credit cycle, the stock of inward foreign direct investment (FDI) and the current account balance, in the Central and Eastern European EU Member States. Using panel estimations for the period between 1995 and 2006, we find that lower exchange rate volatility is associated with higher growth (for relatively less financially developed economies), higher stocks of FDI (for relatively more open economies), higher current account deficits, and a more volatile development of the credit to GDP ratio. JEL Classification: F3, F4, F5. |
| Keywords: | EU, Exchange Rate Volatility, Growth, FDI, Credit, Current Account, Catching-up, Convergence. |
| Date: | 2008–09 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080929&r=ifn |
| By: | Maher Hasan; Jemma Dridi |
| Abstract: | This paper examines the impact of oil-related income, among other fundamentals, on the equilibrium real effective exchange rate (ERER) in Syria. After reviewing the evolution of the Syrian multiple exchange rate regime since 1960 and assessing alternative measures for the exchange rate, the paper analyzes the impact of oil-related income on the ERER in the context of a behavioral equilibrium exchange rate model. The analysis concludes that ERER appreciates with higher oil-related income, productivity and net foreign assets, but, at odds with the conventional wisdom, depreciates with higher government expenditures given that an increase in expenditures usually translates into higher imports and weaker current account position. In light of the projected real shocks associated with the depletion of oil and the change in other fundamentals in the context of the ongoing transition to a market economy, a more flexible regime would serve Syria better in the future. |
| Keywords: | Syrian Arab Republic , Real effective exchange rates , Oil production , Oil revenues , Productivity , Government expenditures , Imports , Current account balances , External shocks , Exchange systems , Working Paper , |
| Date: | 2008–08–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/196&r=ifn |