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on International Finance |
| By: | Menzie D. Chinn; Shang-Jin Wei |
| Abstract: | The assertion that a flexible exchange rate regime would facilitate current account adjustment is often repeated in policy circles. In this paper, we compile a data set encompassing data for over 170 countries are included, over the 1971-2005 period, and examine whether the rate of current account reversion depends upon the de facto degree of exchange rate fixity, as measured by two popular indices. We find that there is no strong, robust, or monotonic relationship between exchange rate regime flexibility and the rate of current account reversion, even after accounting for the degree of economic development, the degree of trade and capital account openness. We also find that the endogenous selection of exchange rate regimes does not explain the observed lack of correlation. |
| JEL: | F3 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14420&r=ifn |
| By: | Patrick A. Imam |
| Abstract: | We describe unique aspects of microstates-they are less diversified, suffer from lumpiness of investment, they are geographically at the periphery and prone to natural disasters, and have less access to capital markets-that may make the current account more vulnerable, penalizing exports and making imports dearer. After reviewing the "old" and "new" view on current account deficits, we attempt to identify policies to help reduce the current account. Probit regressions suggest that microstates are more likely to have large current account adjustments if (i) they are already running large current account deficits; (ii) they run budget surpluses; (iii) the terms of trade improve; (iv) they are less open; and (v) GDP growth declines. Monetary policy, financial development, per capita GDP, and the de jure exchange rate classification matter less. However, changes in the real effective exchange rate do not help drive reductions in the current account deficit in microstates. We explore reasons for this and provide policy implications. |
| Keywords: | Current account , Current account deficits , Investment , Capital markets , Exports , Imports , External shocks , Monetary policy , Development , Gross domestic product , Real effective exchange rates , Economic models , |
| Date: | 2008–10–03 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/233&r=ifn |
| By: | Ramón María-Dolores (Banco de España) |
| Abstract: | This paper studies the pass-through of exchange rate changes into the prices of imports that originated inside the euro area made by some New Member States (NMSs) of the European Union and one candidate country (Turkey). I use data on import unit values for nine different product categories and bilateral imports from the euro area for each country and I estimate industry-specific rates of pass-through across and within countries using two different methodological approaches. The first one is based on Campa and González-Mínguez (2006) which estimates the short- and long-run pass through elasticities, where long-run elasticities are defined as the sum of the pass-through coefficients for the contemporaneous exchange rate and its first four lags. The second one is employed by de Bandt, Banerjee and Kozluk (2007) which suggests a long-run Engle and Granger (1987) cointegrating relationship and the possibility of structural breaks to restore the long-run in the estimation. I did not find evidence either in favour of the hypothesis of Local Currency Pricing (zero pass-through) or the hypothesis of Producer Currency Pricing (complete pass-through) for all the countries except Slovenia and Cyprus in the latter. The exchange rate pass-through ranged from 0.090 to 2.916 in the short-run and from 0.102 to 2.242 in the long-run. With reference to the results by industry the lowest values for exchange rate pass-through are in Manufacturing sectors. However, I did observe a exchange rate pass-through decline through the pricing chain and a large dependence of their economies on imported inputs. |
| Keywords: | exchange rates, pass-through, monetary union, panel cointegration |
| JEL: | F31 F36 F42 C23 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0822&r=ifn |
| By: | Hilde C. Bjørnland (Department of Economics, Norwegian School of Management (BI); Jørn I. Halvorsen (Norwegian School of Economics and Business Administration) |
| Abstract: | This paper analyzes how monetary policy responds to exchange rate movements in open economies, paying particular attention to the two-way interaction between monetary policy and exchange rate movements. We address this issue using a structural VAR model that is identified using a combination of sign and short-term (zero) restrictions. Our suggested identification scheme allows for a imultaneous reaction between the variables that are observed to respond intraday to news (the interest rate and the exchange rate), but maintains the recursive order for the traditional macroeconomic variables (GDP and inflation). Doing so, we find strong interaction between monetary policy and exchange rate variation. Our results suggest more theory consistency in the monetary policy responses than what has previously been reported in the literature. |
| Keywords: | Exchange rate, monetary policy, SVAR, Bayesian estimation, sign restrictions |
| JEL: | C32 E52 F31 F41 |
| Date: | 2008–10–22 |
| URL: | http://d.repec.org/n?u=RePEc:bno:worpap:2008_15&r=ifn |
| By: | Gordon Menzies; Daniel Zizzo |
| Abstract: | We consider an experimental setting where traders in stock markets or exchange rate markets receive one stylized piece of information at a time about the value of an asset. We find that having limited knowledge about the prior distribution of true asset values does not hamper the decision making by traders and markets. There is empirical support for the common modeling assumption of simplifying agent heterogeneity into two types, a rational one and a less rational one. A correspondence exists between the average degree of belief conservatism found with individual buying and selling prices and that observed with market prices. |
| JEL: | C91 D83 D84 F31 G12 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:acb:camaaa:2008-34&r=ifn |
| By: | Andrea Carriero (Queen Mary, University of London); George Kapetanios (Queen Mary, University of London); Massimiliano Marcellino (European University Institute and Bocconi University) |
| Abstract: | Models based on economic theory have serious problems at forecasting exchange rates better than simple univariate driftless random walk models, especially at short horizons. Multivariate time series models suffer from the same problem. In this paper, we propose to forecast exchange rates with a large Bayesian VAR (BVAR), using a panel of 33 exchange rates vis-a-vis the US Dollar. Since exchange rates tend to co-move, the use of a large set of them can contain useful information for forecasting. In addition, we adopt a driftless random walk prior, so that cross-dynamics matter for forecasting only if there is strong evidence of them in the data. We produce forecasts for all the 33 exchange rates in the panel, and show that our model produces systematically better forecasts than a random walk for most of the countries, and at any forecast horizon, including at 1-step ahead. |
| Keywords: | Exchange rates, Forecasting, Bayesian VAR |
| JEL: | C53 C11 F31 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp634&r=ifn |
| By: | Caroline M. Betts; Timothy J. Kehoe |
| Abstract: | We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak. |
| JEL: | F31 F41 |
| Date: | 2008–10 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14437&r=ifn |
| By: | Jean-Pierre Allégret (GATE, University of Lyon, CNRS, ENS-LSH, Centre Léon Bérard, France); Mohamed Ayadi (Université de Tunis, Institut supérieur de gestion (ISG)); Leila Haouaoui Khouni (Université de Tunis, Institut supérieur de gestion (ISG)) |
| Abstract: | This paper studies the choice of the exchange rate regime in emerging and developing countries. The literature on exchange rate regimes is often based either on theoretical models or on empirical analysis. Our paper presents a different perspective by developing a theoretical model which is tested empirically. We consider the main determinants of the exchange rate regime: the pass-through, the relative volatility of nominal and real shocks, the discretionary bias, the credit channel and the balance-sheet effect. The model is tested with a logit multinomial approach on a sample of 43 emerging and developing countries. We determine the probability of occurrence of a given exchange rate regime in taking into account the preceding determinants identified with the theoretical model. Overall, our results suggest that intermediate regimes are the regimes the best adapted to developing and emerging countries. |
| Keywords: | Exchange rate regimes; Emerging countries; Developing countries; Logit multinomial model |
| JEL: | F33 F41 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:gat:wpaper:0819&r=ifn |
| By: | Andreas Billmeier; Dalia Hakura |
| Abstract: | The analysis in this paper suggests that import and export volume elasticities are markedly lower in oil-exporting Middle East and Central Asian countries than in non-oil countries in the region. A key implication of this finding is that a real appreciation of the exchange rate in oil-exporting countries would achieve little in terms of expenditure switching: an appreciation does not boost imports and non-oil exports constitute only a small share of GDP and total trade in these countries. Therefore, while a real appreciation lowers the current account surplus of oil-exporting countries through valuation effects, the contribution to lowering global imbalances may be more limited. |
| Keywords: | Middle East and Central Asia , Trade policy , Imports , Exports , Oil exporting countries , Exchange rate appreciation , Current account surpluses , Economic integration , Real effective exchange rates , Economic models , Working Paper , |
| Date: | 2008–09–15 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:08/216&r=ifn |