nep-ifn New Economics Papers
on International Finance
Issue of 2009‒03‒28
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective and Through Which Channel Does It Work? By Rasmus Fatum
  2. Capital Inflows and the Real Exchange Rate: Can Financial Development Cure the DutchDisease? By Christian Saborowski
  3. Foreign exchange rate risk in a small open economy By De Paoli, Bianca; Sondergaard, Jens
  4. Evaluating Historical CGER Assessments:How Well Have They Predicted Subsequent Exchange Rate Movements? By Abdul Abiad; Prakash Kannan; Jungjin Lee
  5. Drivers of Exchange Rate Dynamics in Selected CIS Countries : Evidence from a FAVAR Analysis By Christian Dreger; Jarko Fidrmuc
  6. Australia and New Zealand Exchange Rates: A Quantitative Assessment By Hali J. Edison; Hali J. Edison; Francis Vitek; Francis Vitek
  7. Going Multinational under Exchange Rate Uncertainty By Henry Aray; Javier Gardeazabal
  8. The International Diversification Puzzle when Goods Prices are Sticky: It's Really about Exchange-Rate Hedging, not Equity Portfolios By Charles Engel; Akito Matsumoto

  1. By: Rasmus Fatum (University of Alberta (4-30H Business Building, University of Alberta, Edmonton AB, T6G 2R6 Canada. Telephone: 1-780-492- 3951, fax: 1-780-492-3325, email:
    Abstract: This paper investigates whether official Japanese intervention in the JPY/USD exchange rate over the January 1999 to March 2004 time period is effective. By integrating the official intervention data with a comprehensive set of newswire reports capturing days on which there is a rumor or speculation of intervention, the paper also attempts to shed some light on through which of the two channels, the signaling channel in a broad sense or the portfolio balance channel, effective Japanese intervention works. The results suggest that Japanese intervention is effective during the first 5 years of the sample and ineffective during the last 3 months of the sample, thereby providing an ex-post rationale for why Japan intervened as well as for why the interventions stopped. Moreover, the results suggest that when Japanese intervention is effective, it works through a portfolio-balance channel. The results do not rule out that effective intervention also works through signaling.
    Keywords: Exchange Rates, Foreign Exchange Market Intervention, Channels of Transmission
    JEL: E52 F31 G14
    Date: 2009–03
  2. By: Christian Saborowski
    Abstract: This paper argues that, in improving the efficient allocation of resources, financial sector development could dampen the appreciation effect of capital inflows. Using dynamic panel data techniques, the paper finds that the exchange rate appreciation effect of FDI inflows is indeed attenuated when financial and capital markets are larger and more active. The main implication of these results is that one of the main dangers associated with large capital inflows in emerging markets-the destabilization of macroeconomic management due to a sizeable appreciation of the real exchange rate-can be mitigated partly by developing a deep financial sector.
    Keywords: Capital inflows , Real effective exchange rates , Capital markets , Emerging markets , Financial sector , Economic models , Cross country analysis , Statistical annexes ,
    Date: 2009–01–29
  3. By: De Paoli, Bianca (Bank of England); Sondergaard, Jens (Bank of England)
    Abstract: Resolving the forward premium puzzle requires a volatile foreign exchange rate risk premium that covaries negatively with the expected depreciation rate. Earlier work has shown how models featuring consumption habits can generate such premia when either trade costs or 'deep habits' are assumed. We show that as long as consumption habits are slow-moving and shocks are highly persistent, a standard small open endowment economy - without any additional features - can address the puzzle. Moreover endogenising the labour supply decision in the small open economy can improve the model's ability to match risk premia observations so long as it makes business cycles less synchronised.
    Date: 2009–03–20
  4. By: Abdul Abiad; Prakash Kannan; Jungjin Lee
    Abstract: The IMF's Consultative Group on Exchange Rate issues (CGER) has been conducting exchange rate assessments as part of the surveillance process since 1997. This paper evaluates CGER assessments from 1997 to 2006, by comparing these to subsequent movements in real effective exchange rates (REER). We find that CGER's estimated misalignments have predictive power over future REER movements, especially over longer horizons and after changes in fundamentals are accounted for. But while CGER misalignments frequently predict the direction of currency movements correctly, misalignments have tended to be persistent, resulting in systematic errors-overprediction for undervalued currencies and underprediction for overvalued currencies.
    Keywords: Exchange rate assessments , Developed countries , Emerging markets , Exchange rate policy surveillance , Real effective exchange rates , Current account balances , Economic models , Cross country analysis ,
    Date: 2009–03–10
  5. By: Christian Dreger; Jarko Fidrmuc
    Abstract: We investigate the likely sources of exchange rate dynamics in selected CIS countries (Russia, Kazakhstan, Ukraine, Kyrgyzstan, Azerbaijan, and Moldova) over the past decade (1999-2008). The analysis is based on country VAR models augmented by a regional common factor structure (FAVAR model). The models include nominal exchange rates, the common factor of exchange rates in the CIS countries, and global drivers such as gold, oil and share prices. Global, regional and idiosyncratic shocks are identified in a standard Cholesky fashion. Based on the decomposition of the variance of forecast errors, their relevance for exchange rates is explored. As a quite robust finding, CIS exchange rates have become more vulnerable to global shocks towards the end of the sample.
    Keywords: Exchange rates, CIS countries, financial crisis, FAVAR models
    JEL: F31 C22 G15
    Date: 2009
  6. By: Hali J. Edison; Hali J. Edison; Francis Vitek; Francis Vitek
    Abstract: The paper describes three empirical models commonly used to conduct exchange rate assessments and applies them to data for Australia and New Zealand. The baseline results using data and mediumterm projections available as of October 2008, suggest that the Australian and New Zealand dollars were broadly in line with fundamentals, but with a wide variation across models. A battery of sensitivity tests illustrate that altering the underlying assumptions can yield substantially different assessments. The results are particularly sensitive to the choice of assessment horizon, the set of economies included in the sample, medium-term forecasts, and the exchange rate reference period.
    Keywords: Australia , New Zealand , Exchange rate assessments , Real effective exchange rates , Fiscal sustainability , Forecasting models ,
    Date: 2009–01–21
  7. By: Henry Aray (Department of Economic Theory and Economic History, University of Granada.); Javier Gardeazabal (DFAEII - The University of the Basque Country)
    Keywords: Foreign Direct Investment, Oligopoly, Real Option, Dumping.
    JEL: F23 L13
    Date: 2008–12–31
  8. By: Charles Engel; Akito Matsumoto
    Abstract: This paper develops a two-country monetary DSGE model in which households choose a portfolio of home and foreign equities, and a forward position in foreign exchange. Some nominal goods prices are sticky. Trade in these assets achieves the same allocations as trade in a complete set of nominal state-contingent claims in our linearized model. When there is a high degree of price stickiness, we show that not much equity diversification is required to replicate the complete-markets equilibrium when agents are able to hedge foreign exchange risk sufficiently. Moreover, temporarily sticky nominal goods prices can have large effects on equity portfolios even when dividend processes are very persistent.
    Keywords: Private investment , Foreign exchange , Commodity prices , Capital markets , Asset management , Economic models ,
    Date: 2009–01–23

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