nep-ifn New Economics Papers
on International Finance
Issue of 2008‒11‒04
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Exchange rates and fundamentals: a generalization By James M. Nason; John H. Rogers
  2. Exchange rate pass-through and volatility: Impacts on domestic prices in four Asian countries By Sek, Siok Kun; Kapsalyamova, Zhanna
  3. Foreign-currency bonds - currency choice and the role of uncovered and covered interest parity By Maurizio Michael Habib; Mark Joy
  4. Exchange rate pass-through in the global economy - the role of emerging market economies. By Matthieu Bussière; Tuomas Peltonen
  5. How successful is the G7 in managing exchange rates? By Marcel Fratzscher
  6. Sudden stops, sectoral reallocations, and the real exchange rate By Timothy J. Kehoe; Kim J. Ruhl
  7. Prices and output co-movements : an empirical investigation for the CEECs By Iuliana Matei

  1. By: James M. Nason; John H. Rogers
    Abstract: Exchange rates have raised the ire of economists for more than 20 years. The problem is that few, if any, exchange rate models are known to systematically beat a naive random walk in out of sample forecasts. Engel and West (2005) show that these failures can be explained by the standard-present value model (PVM) because it predicts random walk exchange rate dynamics if the discount factor approaches one and fundamentals have a unit root. This paper generalizes the Engel and West (EW) hypothesis to the larger class of open economy dynamic stochastic general equilibrium (DSGE) models. The EW hypothesis is shown to hold for a canonical open economy DSGE model. We show that all the predictions of the standard-PVM carry over to the DSGE-PVM. The DSGE-PVM also yields an unobserved components (UC) models that we estimate using Bayesian methods and a quarterly Canadian-U.S. sample. Bayesian model evaluation reveals that the data support a UC model that calibrates the discount factor to one implying the Canadian dollar-U.S. dollar exchange rate is a random walk dominated by permanent cross-country monetary and productivity shocks.
    Keywords: Foreign exchange rates
    Date: 2008
  2. By: Sek, Siok Kun; Kapsalyamova, Zhanna
    Abstract: The paper undertakes a comparative empirical analysis on the effects of shocks on domestic prices in four Asian countries before and after the financial crisis of 1997. We apply two different estimation methodologies, namely a structural VAR and a single equation approach. The results of the two methods are consistent, although the magnitude of the elasticities of the exchange rate pass-through are different due to the inclusion of different variables, lag terms and different assumptions made in both methods. The results show that the degrees of the exchange rate pass-through are different across countries and over time. In most cases, the pass-through rates are incomplete. The degree of the exchange rate pass-through is the highest on import prices, moderate on PPI and is the lowest on CPI. In some cases, the pass-through rates on CPI are even negative. The effect of the import price shock is stronger as compared to that of the exchange rate shock in determining the movement of the domestic prices in these countries. Trade openness has a weak correlation with the degree of the exchange rate pass-through.
    Keywords: domestic prices; exchange rate pass-through; SVAR; single equation approach
    JEL: C32 F41 C22
    Date: 2008–08–01
  3. By: Maurizio Michael Habib (European Central Bank, Directorate General International and European Relations, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Mark Joy (University of Glasgow, Department of Economics, Adam Smith Building, Glasgow, United Kingdom;.)
    Abstract: Using count-data techniques, this paper studies the determinants of currency choice in the issuance of foreign-currency-denominated bonds. In particular, we investigate whether bond issuers choose their issuance currency in order to exploit the borrowing-cost savings associated with deviations from uncovered and covered interest parity. Our sample includes issuers from both the public sector and private sector. Our findings show that the choice of issuance currency is sensitive to deviations from uncovered interest parity but insensitive, in general, to deviations from covered interest parity. Furthermore, the influence of deviations from uncovered interest parity is stronger for financial issuers than for nonfinancial issuers. JEL Classification: F31, F36, G14, G15, G32.
    Keywords: Foreign exchange, currency choice, international debt securities, bonds, interest-rate parity.
    Date: 2008–10
  4. By: Matthieu Bussière (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Tuomas Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: This paper estimates export and import price equations for 41 countries –including 28 emerging market economies. Further, it relates the estimated elasticities to structural factors and tests for statistical breaks in the relation between trade prices and exchange rates. Results indicate that (i) the elasticity of trade prices in emerging markets is sizeable, but not significantly higher than in advanced economies; (ii) such elasticity is primarily influenced by macroeconomic factors such as the exchange rate regime and the inflationary environment, although microeconomic factors such as product differentiation also play a role; (iii) export and import price elasticities tend to be strongly correlated across countries; (iv) pass-through to import prices has declined in some advanced economies, noticeably the United States; this is consistent with a rise in pricing-to-market in several EMEs and especially with a change in the geographical composition of U.S. imports. JEL Classification: F10, F30, F41.
    Keywords: emerging market economies, exchange rate pass-through, pricing-to-market, local and producer currency pricing, exchange rate regime.
    Date: 2008–10
  5. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: The paper assesses the extent to which the Group of Seven (G7) has been successful in its management of major currencies since the 1970s. Using an event-study approach, the paper finds evidence that the G7 has been overall effective in moving the US dollar, yen and euro in the intended direction at horizons of up to three months after G7 meetings, but not at longer horizons. While the success of the G7 is partly dependent on the market environment, it is also to a significant degree endogenous to the policy process itself. The findings indicate that the reputation and credibility of the G7, as well as its ability to form and communicate a consensus among individual G7 members, are important determinants for the G7’s ability to manage major currencies. The paper concludes by analyzing the factors that help the G7 build reputation and consensus, and by discussing the implications for global economic governance. JEL Classification: F31, F33, F50.
    Keywords: Group of Seven, G7, exchange rate, communication, policy, adjustment, success, event-study methodology, US dollar, yen, euro.
    Date: 2008–10
  6. By: Timothy J. Kehoe; Kim J. Ruhl
    Abstract: A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994?95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the decreases in GDP and TFP. Extending the model to include labor frictions and variable capital utilization, we still find that it cannot quantitatively account for the dynamics of output and productivity without losing the ability to account for the movements of other variables.
    Keywords: Financial crises
    Date: 2008
  7. By: Iuliana Matei (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: This article studies the features of co-movements of prices and production between six CEECs recently joined the EU and the euro zone. More precisely, based partially on the methodology suggested by Alesina, Barro and Tenreyro [2002], we evaluate the size and the persistence of prices and outputs shocks between each CEECs and euro zone. Results will contribute to the debate around the participation of the new members to the EMU.
    Keywords: European monetary integration, co-movements, AR models, CEECs.
    Date: 2008–10

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