nep-ifn New Economics Papers
on International Finance
Issue of 2009‒02‒28
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? By Chinn, Menzie David; Wei, Shang-Jin
  2. Fundamentals at Odds? The US Current Account Deficit and The Dollar By Milesi-Ferretti, Gian Maria
  3. Country-Specific Risk Premium, Taylor Rules, and Exchange Rates By Annicchiarico , Barbara; Piergallini, Alessandro
  4. A New Method for Identifying the Effects of Foreign Exchange Interventions By Chih-nan Chen; Tsutomu Watanabe; Tomoyoshi Yabu
  5. Ten Years of EMU: convergence, divergence and new policy priorities By Nikos Christodoulakis
  6. A Further Look at the 2004 Reform of the Operational Framework of the ECB By Marzo, Massimiliano; Zagaglia, Paolo

  1. By: Chinn, Menzie David; Wei, Shang-Jin
    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 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.
    Keywords: current account imbalances; fixed exchange rate; floating exchange rate; real exchange rate
    JEL: F3
    Date: 2008–12
  2. By: Milesi-Ferretti, Gian Maria
    Abstract: In mid-2008, the real effective exchange rate of the dollar was close to its minimum level for the past 4 decades. At the same time, however, the U.S. trade and current account deficits remain large and, absent a significant correction in coming years, would contribute to a further accumulation of U.S. external liabilities. The paper discusses the tension between these two aspects of the dollar assessment, and what factors can help reconcile them. It focuses in particular on the terms of trade, adjustment lags, and measurement issues related to both the real effective exchange rate and the current account balance.
    Keywords: current account; real exchange rate; terms of trade
    JEL: F31 F32 F41
    Date: 2008–11
  3. By: Annicchiarico , Barbara; Piergallini, Alessandro
    Abstract: The adoption of a Taylor-type monetary policy rule and an inflation target for emerging market economies that choose a flexible exchange rate regime is often advocated. This paper investigates the issue of exchange rate determination when interest-rate feedback rules are implemented in a continuous-time optimizing model of a small open economy facing an imperfect global capital market. It is demonstrated that when a risk premium on external debt affects the monetary policy transmission mechanism, the Taylor principle is not a necessary condition for determinacy of equilibrium. On the other hand, it is shown that exchange rate dynamics critically depends on whether monetary policy is active or passive.
    Keywords: Risk Premium on Foreign Debt; Taylor Rules; Exchange Rate Dynamics.
    JEL: F32 E52 F31
    Date: 2009
  4. By: Chih-nan Chen (Research Analyst, Center for Multicultural Mental Health Research, Harvard University (; Tsutomu Watanabe (Institute of Economic Research and Research Center for Price Dynamics, Hitotsubashi University (E-mail:; Tomoyoshi Yabu (Assistant Graduate School of Systems and Information Engineering, University of Tsukuba, and Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: The monetary authorities react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We propose a new method based on Markov Chain Monte Carlo simulations to cope with this endogeneity problem: We use "data augmentation" to obtain intraday intervention amounts and then estimate the efficacy of interventions using the augmented data. Applying this method to Japanese data, we find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as large as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation.
    Keywords: Foreign exchange intervention, Intraday data, Markov-chain Monte Carlo method, Endogeneity problem, Temporal aggregation
    JEL: C11 C22 F31 F37
    Date: 2009–02
  5. By: Nikos Christodoulakis
    Abstract: As the tenth anniversary of EMU is approaching, a debate is underway as to whether the single currency has promoted or hindered convergence among the countries of the Eurozone. On the one hand, there is wide agreement on the fact that asymmetric shocks have subsided after the creation of the single currency and that FDI has been substantially promoted both in and outside of EMU as a result of reduced exchange rate volatility, more integration and better institutional functioning. But if one moves to examine the catching-up process between the less and more-affluent countries of the Eurozone, the evidence in support for convergence is fading away after the EMU was initiated in 1999. A process of divergence in per capita GDP is underway, in contrast with the substantial progress that has taken place during the nineties. Regional convergence is also found to wane, though the evidence is not as conclusive. Moreover, post-EMU divergence in per capita GDP appears to be far more pronounced than that of per capita GNI, due to the risk-sharing strategies implemented after the EMU to face asymmetric shocks and the resulted relocation of capital. Another worrying development in the Eurozone is the emergence of unprecedented CA deficits in the Southern Eurozone countries, while the Northern Eurozone group enjoys substantial surpluses. Although both groups of countries have attracted increased FDI flows after EMU, there seems to be a sharp differentiation regarding size and composition. In the Southern countries, the housing sector has attracted relatively more investment than the production sector, while the reverse seems to be the case in the Northern group. Thus, investment in the Northern (Southern) Eurozone countries increased the traded (non-traded) output and caused an improvement (deterioration) in the trade balance. To face such imbalances, new policy priorities are required in the Eurozone that put more emphasis on convergence and competitiveness.
    Keywords: Eurozone; economic integration; convergence; business cycles.
    Date: 2009–01
  6. By: Marzo, Massimiliano (Università di Bologna); Zagaglia, Paolo (Dept. of Economics, Stockholm University)
    Abstract: This note reconsiders the impact of the reform of the operational framework of the European Central Bank that took place in March 2004. We estimate a bivariate GARCH model with the overnight rate and 1-year swap rate, where identifying restrictions are imposed on the conditional variance. Differently from previous studies, we use a measure of structural correlation to show that the 1-year swap segment has decoupled from the overnight rate as the two rates do not co-vary any longer.
    Keywords: Money Market; Multivariate GARCH; Structural Identification
    JEL: C22 E58
    Date: 2009–02–15

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