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on International Finance |
| By: | Licchetta, Mirko (Bank of England) |
| Abstract: | This paper investigates the role of external balance sheet variables as determinants of currency crises in emerging market (EME) and advanced economies. A random effect probit model is used in a panel of 40 countries with monthly data over the January 1980-December 2004 period. The main results of the paper are as follows. First, size and, particularly, the composition of a country's external balance sheet are found to play an important role in the onset of crises. Second, EMEs seem to be more sensitive to external balance sheet variables than developed countries, and so too do economies with fixed or quasi-fixed exchange rate regimes. Third, further support is provided to standard theoretical explanations of currency crises. The likelihood of a crisis is found to increase with: the extent to which the real exchange rate rises above its trend; faster growth in broad money (relative to the level of international reserves); larger current account and budget balance deficits; lower GDP growth; and, if a neighbouring country already has a crisis. Economic fundamentals are also found to be a more important explanation of the onset of currency crises during the 1980s than during the 1990s, suggesting that more recent crises are less 'fundamentally' driven. |
| Keywords: | Currency crises; early warnings system; emerging markets |
| JEL: | F31 F33 F37 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0366&r=ifn |
| By: | M. Ayhan Kose; Selim Elekdag; Roberto Cardarelli |
| Abstract: | This paper examines the macroeconomic implications of, and policy responses to surges in private capital inflows across a large group of emerging and advanced economies. In particular, we identify 109 episodes of large net private capital inflows to 52 countries over 1987-2007. Episodes of large capital inflows are often associated with real exchange rate appreciations and deteriorating current account balances. More importantly, such episodes tend to be accompanied by an acceleration of GDP growth, but afterwards growth has often dropped significantly. A comprehensive assessment of various policy responses to the large inflow episodes leads to three major conclusions. First, keeping public expenditure growth steady during episodes can help limit real currency appreciation and foster better growth outcomes in their aftermath. Second, resisting nominal exchange rate appreciation through sterilized intervention is likely to be ineffective when the influx of capital is persistent. Third, tightening capital controls has not in general been associated with better outcomes. |
| Keywords: | Capital inflows , Emerging markets , Current account deficits , Exchange rate policy , Fiscal policy , Capital controls , Cross country analysis , |
| Date: | 2009–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/40&r=ifn |
| By: | Gita Gopinath; Pierre-Olivier Gourinchas; Chang-Tai Hsieh; Nicholas Li |
| Abstract: | To what extent do national borders and national currencies impose costs that segment markets across countries? To answer this question we use a dataset with product level retail prices and wholesale costs for a large grocery chain with stores in the U.S. and Canada. We develop a model of pricing by location and employ a regression discontinuity approach to estimate and interpret the border effect. We report three main facts: 1) The median absolute retail price and whole-sale cost discontinuity between adjacent stores on either side of the U.S.-Canada border is as high as 21%. In contrast, within-country border discontinuity is close to 0%; 2) The variation in the retail price gap at the border is almost entirely driven by variation in wholesale costs, not by variation in markups; 3) The border gap in prices and costs co-move almost one to one with changes in the U.S.-Canada nominal exchange rate. We show these facts suggest that the price gaps we estimate provide only a lower bound on border costs. |
| JEL: | F3 F4 |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14938&r=ifn |
| By: | Alicia García-Herrero; Tuuli Koivu |
| Abstract: | This paper shows empirically that China's trade balance is sensitive to fluctuations in the real effective exchange rate of the renminbi. However, the current size of the trade surplus is such that exchange rate policy alone will probably not be able to address the imbalance. The potential reduction in the trade surplus resulting from an increase in the renminbi exchange rate is limited mainly because Chinese imports do not react as expected to a renminbi appreciation - they tend to fall rather than increase. By estimating bilateral import equations for China and its major trade partners, we find that the reaction for imports is generally confirmed for China's trade with Southeast Asian countries. That result might be attributable to Asia's vertical integration, as a large share of Chinese imports from Southeast Asia are re-exported. We also find that total exports from a number of Asian countries react negatively to a renminbi appreciation, which points to a dependence of Asian countries' exports on those of China. |
| Keywords: | China, trade, exports, real exchange rate |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:282&r=ifn |
| By: | Prachi Mishra; Antonio Spilimbergo |
| Abstract: | We analyze how the pass-through from exchange rate to domestic wages depends on the degree of integration between domestic and foreign labor markets. Using data from 66 countries over the period 1981–2005, we find that the elasticity of domestic wages to real exchange rate is 0.1 after a year for countries with high barriers to external labor mobility, but about 0.4 in countries with low barriers to mobility. The results are robust to the inclusion of various controls, different measures of exchange rates, and concepts of labor market integration. These findings call for including labor mobility in macro models of external adjustment. |
| Keywords: | Labor markets , Migration , Exchange rates , Wages , Economic integration , Time series , Cross country analysis , Economic models , |
| Date: | 2009–03–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/44&r=ifn |
| By: | Martinez-Garcia, Enrique (Federal Reserve Bank of Dallas); Sondergaard, Jens (Bank of England) |
| Abstract: | This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing to market to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats earlier work that has shown how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that so-called persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilisation and investment adjustment costs. In summary, the PPP puzzle is still very much alive and well. |
| Keywords: | Real exchange rates; capital accumulation; Taylor rules. |
| JEL: | F11 F42 F43 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:boe:boeewp:0368&r=ifn |
| By: | Nienke Oomes; Gohan Minasyan; Ara Stepanyan |
| Abstract: | This papers estimates the equilibrium exchange rate for Armenia using three different approaches: the purchasing power parity (PPP) approach, the behavioral equilibrium exchange rate (BEER) approach, and the external sustainability (ES) approach. All three approaches suggest that the dram was overvalued by about 20–30 percent prior to the devaluation of the dram in March 2009. |
| Keywords: | Exchange rate appreciation , Armenia , Armenian dram , Purchasing power parity , Fiscal sustainability , Economic models , |
| Date: | 2009–03–19 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/49&r=ifn |
| By: | Joanna Beza-Bojanowska (National Bank of Poland) |
| Abstract: | Poland is expected to enter the Exchange Rate Mechanism II (ERM II). The European Central Bank recommends that the ERM II central rate should reflect the best possible assessment of the equilibrium exchange rate. Since the equilibrium rate is changing in time, it is important to identify the pushing and pulling forces of the exchange rate. This knowledge will let the authorities to defend only the exchange rate that is in equilibrium and to assess outcomes of their actions. We use the VEC approach of Johansen to estimate the behavioral equilibrium exchange rate and to identify the pushing forces of the Polish zloty/euro rate. We apply the Gonzalo-Granger decomposition to calculate the permanent equilibrium exchange rate and to identify the pulling forces of the zloty exchange rate. We demonstrate that this approach may be useful for Polish authorities while entering the ERM II as well as within that mechanism. |
| Keywords: | equilibrium exchange rate, cointegration analysis, Gonzalo- Granger decomposition, ERM II |
| JEL: | C32 C51 F31 |
| Date: | 2009–02–25 |
| URL: | http://d.repec.org/n?u=RePEc:wse:wpaper:31&r=ifn |