nep-ifn New Economics Papers
on International Finance
Issue of 2009‒04‒25
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Covered Interest Rate Parity: The Case of the Czech Republic By Bednarik, Radek
  2. Uncovered Interest Parity in a Partially Dollarized Developing Country: Does UIP Hold in Bolivia? (And If Not, Why Not?) By Melander, Ola
  3. A Faith-based Initiative: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment? By Menzie D. Chinn; Shang-Jin Wei
  4. Volatility Dependence across Asia-Pacific Onshore and Offshore Currency Forwards Markets By Roberta Colavecchio; Michael Funke
  5. The Evolution of the Hong Kong Currency Board During Global Exchange Rate Instability: Evidence from the Exchange Fund Advisory Committee 1967-1973 By Catherine R. Schenk
  6. The single global currency - common cents for the world (2008 Edition) By Bonpasse, Morrison
  7. Does higher openness cause more real exchange rate volatility ? By Calderon, Cesar; Kubota, Megumi
  8. The Effects of Real Exchange Rate Shocks in an Economy with Extreme Liability Dollarization By Melander, Ola

  1. By: Bednarik, Radek
    Abstract: This paper tries to find out, whether the Covered Interest Rate Parity (CIRP) theory was valid for exchange rate CZK/EUR during the period ranging from May 2001 to November 2007. As a main tool, a common OLS regression was chosen. It was augmented by MA(1) process of residuals and by ARCH (6) model of residuals’ variance. The results show, that the CIRP theory was not valid during selected period. However, it seems apparent, that the main factors for 3-month forward exchange rate CZK/EUR determination were an interest rate differential and a nominal spot exchange rate. This is fully consistent with the CIRP theory.
    Keywords: Covered interest rate parity; exchange rate; interest rate; foreign exchange markets
    JEL: E43 F31
    Date: 2008–01–05
  2. By: Melander, Ola (Dept. of Economics, Stockholm School of Economics)
    Abstract: According to the Uncovered Interest Parity (UIP) condition, interest rate differentials compensate for expected exchange rate changes, equalizing the expected returns from holding assets which only differ in terms of currency denomination. In the previous literature, there are many tests of UIP for industrialized countries, and, more recently, some tests for emerging economies. However, due to data availability problems, poorer developing countries have not been studied. This paper tests UIP in a partially dollarized economy, Bolivia, where bank accounts only differ in terms of currency denomination (U.S. dollars or bolivianos). I find that UIP does not hold in Bolivia, but that the deviations are smaller than in most other studies of developed and emerging economies. Moreover, several factors seem to contribute to the deviations from UIP. The so-called peso problem could possibly account for the observed data, but there is also evidence of a time-varying risk premium, as well as deviations from rational expectations.
    Keywords: Uncovered interest parity; UIP; partial dollarization; time-varying risk premia; peso problems; rational expectations
    JEL: E43 F31 G15
    Date: 2009–04–17
  3. By: Menzie D. Chinn (University of Wisconsin, Madison); Shang-Jin Wei (Columbia University)
    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: Floating Exchange Rate, Fixed Exchange Rate, Current Account Imbalances, Real Exchange Rates
    JEL: F3
    Date: 2009–03
  4. By: Roberta Colavecchio (Hamburg University); Michael Funke (Hamburg University)
    Abstract: This paper estimates switching autoregressive conditional heteroskedasticity (SWARCH) time series models for weekly returns of nine Asian forward exchange rates. We find two regimes with different volatility levels, whereby each regime displays considerable persistence. Our analysis provides evidence that the knock-on effects from China¡¦s currency forwards markets upon other Asian countries have been modest, in that little evidence exists for co-dependence of volatility regimes.
    Keywords: China, Renminbi, Asia, Forward Exchange Rates, Non-Deliverable Forward Market, SWARCH Models
    JEL: C22 F31 F36
    Date: 2009–02
  5. By: Catherine R. Schenk (University of Glasgow)
    Abstract: Hong Kong is one of a few economies that operate a variation of a currency board as the basis of their monetary system. This system has persisted despite dramatic changes in the way that the international monetary system operates and despite changes in Hong Kong's political status. The currency board now faces new challenges with the greater flexibility in the RMB exchange rate and the recent depreciation of the USD that has been dramatically reversed as part of the global financial crisis of 2008. This paper examines how the operations of the Exchange Fund were adapted to react to an earlier period of international monetary disorder when the pegged exchange rate system of the 1950s and 1960s collapsed. Based on archival evidence from the HSBC Group Archive, the HSBC Asia Pacific Archive, the Bank of England, UK Treasury and UK Foreign Office, this paper examines how the core rule of issuing currency only against foreign exchange assets was abandoned in 1972. It presents new data on the accounts of the Exchange Fund for this period and describes minutes of the meetings of the Exchange Fund Advisory Committee. The evidence explores the 1972 decision in its longer term policy context and argues that it was the culmination of a series of alterations to the operation of the Exchange Fund during the collapse of the pegged exchange rate system from 1967 onward. The main argument is that the Hong Kong government's response to the crumbling of the international monetary system was to make the Exchange Fund operate as much more than a currency board well before 1972. In particular, it was used to provide forward cover for commercial banks but this proved especially costly in the volatile environment of the end of the global pegged exchange rate system, so that in 1974 the assets of the Exchange Fund fell to 77% of the note issue.
    Date: 2009–01
  6. By: Bonpasse, Morrison
    Abstract: Abstract This is the 2008 Edition of one of only two book in print in the world about the Single Global Currency, and is the only book in the world priced in 141 currencies (down from 147 in the 2006 edition.).This number is significant, as it's the number of currencies required among the 192 U.N. members to conduct local business, including the payment of taxes. The book describes the origins of the current worldwide foreign exchange system, and tells how to change it; and save the world - trillions. The multicurrency foreign exchange trading system was developed about 2,500 years ago to enable people of different currency areas to trade. That system has become far more sophisticated in the meantime and handles $3.8 trillion per day; but it is very expensive and risky. It is now time to replace that system with a single global currency. In a 3-G world with a Single Global Currency managed by a Global Central Bank within a Global Monetary Union: - Annual transaction costs of $400 billion will be eliminated. - Worldwide asset values will increase by about $36 trillion. - Worldwide GDP will increase by about $9 trillion. - Global currency imbalances will be eliminated. - All Balance of Payments problems will be eliminated. - Currency crises will be prevented. - Currency speculation will be eliminated. - The need for foreign exchange reserves, with a current annual opportunity cost of approximately $470 billion, will be eliminated. - Worldwide interest rates will be lower than the current average due to the elimination of currency risk. Such gains are realistic and attainable if the world decides to pursue them. The monetary unions of Europe, the Caribbean, Africa and Brunei/Singapore have shown the way. What the people of the world want is sound, stable money and the end to the obsolete multicurrency foreign exchange system. A Single Global Currency is no longer a utopian dream, but a realistic projection of what has been learned from current monetary unions, especially the euro. Each successive annual edition of this book will be priced in the remaining number of currencies until we reach, in the words of Nobel Prize winner, Robert Mundell, that odd number, preferably less than three: one The world needs to set the goal of a Single Global Currency, to be managed by a Global Central Bank, within a Global Monetary Union, and begin planning - now.
    Keywords: single global currency; money; currency; monetary union; currency union; global monetary union; global central bank; global imbalances; current account; balance of payments; transaction charges; transaction costs; foreign exchange derivatives; foreign exchange; foreign exchange reserves; monetary reserves; gold; international monetary fund; SDR; special drawing rights; optimal currency area; OCA; Robert Mundell; John Stuart Mill; dollar; U.S. Dollar; USD; European Monetary Union; euro; European Central Bank; Single Global Currency Association; Bretton Woods; John Maynard Keynes; bancor; DEY; Geo; globo; eartha; dollarization; euroization; exchange rate; exchange rate regime; peg; float; James Tobin; currency crisis; International Monetary Fund; World Bank; Eastern Caribbean Monetary Union; West African Monetary Union; Central African Monetary Union; accession countries; Maastricht criteria; Maastricht Treaty;
    JEL: F02 F3 F31 F33
    Date: 2009–04–19
  7. By: Calderon, Cesar; Kubota, Megumi
    Abstract: The"New Open Economy Macroeconomics"argues that: (a) non-monetary factors have gained importance in explaining exchange rate volatility, and (b) trade and financial openness may have a potential role of mitigating and/or amplifying real and nominal shocks to real exchange rates. The goal of the present paper is to examine the ability of trade and financial openness to exacerbate or mitigate real exchange rate volatility. The authors collected information on the real effective exchange rate, its fundamentals, and (outcome and policy measures of) trade and financial openness for a sample of industrial and developing countries for the period 1975-2005. Using instrumental variables techniques, the analysis finds that: (a) High real exchange rate volatility is the result of highly volatile productivity shocks, and sharp oscillations in monetary and fiscal policy shocks. (b) Countries more integrated with international markets of goods and services tend to display more stable real exchange rate fluctuations. (c) Financial openness seems to amplify the fluctuations in real exchange rates. (d) The composition of trade and capital flows plays a role in explaining the smoothing properties of trade and financial openness. Although the former is mainly driven by manufacturing trade, the latter depends on the share of debt (and equity) in total foreign liabilities. (e) Financial openness would attenuate (magnify) real exchange rate volatility, the greater the share of equity (debt) in foreign liabilities. (f) The composition of flows also matters for explaining the smoothing properties of trade and financial openness in periods of currency crisis.
    Keywords: Emerging Markets,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Economic Conditions and Volatility
    Date: 2009–04–01
  8. By: Melander, Ola (Dept. of Economics, Stockholm School of Economics)
    Abstract: This paper studies the effects of real exchange rate (RXR) shocks in an economy with extreme liability dollarization using vector autoregression (VAR) methods. Bolivia's extreme liability dollarization makes it an interesting case for empirical testing of the contractionary-depreciations hypothesis. In contrast to the previous contractionary-depreciations literature, the paper uses identification assumptions which are inspired by modern macroeconomic theory and common in the empirical VAR literature on the effects of monetary policy. I find that a RXR depreciation has negligible effects on output, since a contractionary balance-sheet effect on investment is counteracted by the standard expansionary effect on net exports. Furthermore, I find that a RXR depreciation has inflationary effects.
    Keywords: Real exchange rate; VAR; liability dollarization; balance sheet effects; contractionary depreciation
    JEL: E44 F41 G15
    Date: 2009–04–17

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