nep-ifn New Economics Papers
on International Finance
Issue of 2008‒12‒21
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings By Roman Frydman; Michael D. Goldberg; Søren Johansen; Katarina Juselius
  2. Optimal Simple Monetary Policy Rules in a Small Open Economy with Exchange Rate Imperfections By Deming Luo; Stephen Ferris
  3. Exchange Market Pressure in Central European Countries from the Eurozone Membership Perspective By Stavarek, Daniel
  4. Dollarization in Transition Economies: New Evidence from Georgia By Olga Aslanidi
  5. Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances? By Alejandro Justiniano; Bruce Preston
  6. Why the Euro Will Rival the Dollar By Menzie Chinn; Jeffrey Frankel

  1. By: Roman Frydman (New York University); Michael D. Goldberg (University of New Hampshire); Søren Johansen (Department of Economics, University of Copenhagen); Katarina Juselius (Department of Economics, University of Copenhagen)
    Abstract: Asset prices undergo long swings that revolve around benchmark levels. In currency markets, fluctuations involve real exchange rates that are highly persistent and that move in near-parallel fashion with nominal rates. The inability to explain these two regularities with one model has been called the "Purchasing Power Parity puzzle". In this paper, we trace the puzzle to exchange rate modelers' use of the "Rational Expectations Hypothesis". We show that once imperfect knowledge is recognized, a monetary model is able to account for the puzzle, as well as other salient features of the data, including the long-swings behavior of exchange rates.
    Keywords: PPP puzzle; long swings; imperfect knowledge; rational expectations hypothesis
    JEL: F31 F41 G15
    Date: 2008–12
  2. By: Deming Luo (Department of Economics, Carleton University); Stephen Ferris (Department of Economics, Carleton University)
    Abstract: The paper addresses whether or not the exchange rate or some other dimension of the external side of the economy should form an integral part of the monetary rule for a small open economy (SOE) in which the central bank faces data deficiencies. Under a number of information scenarios, the model’s simulations suggest that some reflection of the external environment facing the SOE—either the real exchange rate gap and/or the law of one price gap—is needed to improve monetary policy performance. When the money rule includes both interest rate smoothing and the real exchange rate (or law of one price gap), the relative welfare gain from their inclusion increases as the monetary authorities loses access to more current and reliable information.
    Keywords: New Keynesian small open economy model, exchange rate pass through, optimal simple money rules, stochastic general equilibrium model.
    Date: 2008–08–01
  3. By: Stavarek, Daniel
    Abstract: This paper estimates the exchange market pressure (EMP) in four Central European countries (Czech Republic, Hungary, Poland, Slovakia) over the period 1993-2006. Therefore, it is one of very few studies focused on this region and the very first paper applying concurrently model-dependent as well as model-independent approach to the EMP estimation on these countries. The results obtained suggest that the approaches lead to inconsistent findings. They often differ in identification of the principal development trends as well as magnitude and direction of the pressure. The paper provides evidence that a shift in the exchange rate regime towards the quasi-fixed ERM II should not stimulate EMP to grow. However, it is highly probable that some episodes of the excessive EMP will make the fulfillment of the exchange rate stability criterion more difficult in all countries analyzed.
    Keywords: Exchange Market Pressure; Model-dependent Approach; Model-independent Approach; European Union; Euro-candidate Countries
    JEL: C32 E42 F31 F36
    Date: 2008–11–10
  4. By: Olga Aslanidi
    Abstract: This paper provides new evidence for dollarization in Georgia during the period from 1996 to 2007 using implications of dynamic money-in-utility-function models. Partial effects of foreign and domestic inflation, exchange rate, and foreign and domestic currency deposits’ interest rates on dollarization are considered. The US dollar is a strong substitute for domestic currency and has a significant share in producing domestic liquidity services. The actual dollarization in Georgia is persistent and larger than partial effects models predict.
    Keywords: Dollarization, Georgia, Money-in-utility-function
    JEL: C51 E41 F31
    Date: 2008–09
  5. By: Alejandro Justiniano; Bruce Preston
    Abstract: This paper demonstrates that an estimated, structural, small open economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence.
    JEL: F41
    Date: 2008–12
  6. By: Menzie Chinn (Wisconsin University); Jeffrey Frankel (Harvard University)
    Abstract: Evro je izrastao u kredibilnog potencijalnog konkurenta dolaru kao vodećoj međunarodnoj valuti, baš kao što je dolar pretekao britansku funtu pre 70 godina. Ovaj rad koristi ekonometrijski ocenjene determinante udela najvažnijih valuta u deviznim rezervama svetskih banaka širom sveta. Značajni faktori su: veličina zemlje, stopa prinosa, i likvidnost relevantnog domaćeg finansijskog centra (merena obrtom na deviznom tržištu). Postoji prelomni trenutak, ali promene se osećaju tek znatno kasnije (ocena pondera na prošlogodišnji valutni udeo je otprilike 0.9). Van uzorka, naš model je precizno predvideo smanjenje jaza između dolara i evra u periodu od 1999. do 2007. godine. Rad ažurira ove kalkulacije u pogledu budućih scenarija. Isključujemo scenario po kom se Velika Britanija priključuje evrozoni. Međutim, uzimamo u obzir da je London ipak postao de facto finansijski centar evra, više nego Frankfurt. Takođe uzimamo za pretpostavku da dolar nastavlja depresijaciju po trend stopi koju je u proseku pokazao u poslednjih 20 godina.
    Keywords: Devizno tržište, Evro, Dolar, Rezervna valuta
    JEL: E32 R10
    Date: 2008–07

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