nep-ifn New Economics Papers
on International Finance
Issue of 2009‒05‒16
nine papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Purchasing Power Parity and the Taylor Rule By Masao Ogaki; Hyeongwoo Kim
  2. Analýza volatility devizových kurzů vybraných ekonomik By Bednarik, Radek
  3. Models of currency crises with self-fulfilling features: A comment. By Meixing Dai
  4. Presion y ataques especulativos en el mercado cambiario de la Republica Dominicana By Cruz Rodriguez, Alexis
  5. The Name of the Rose: Classifying 1930s Exchange-Rate Regimes By Scott Andrew Urban
  6. Detecting Mean Reversion in Real Exchange Rates from a Multiple Regime STAR Model By Frédérique Bec; Mélika Ben Salem; Marine Carrasco
  7. A Test for the Presence of Central Bank Intervention in the Foreign Exchange Market With an Application to the Bank of Canada By Douglas James Hodgson
  8. What is the Impact of Currency Unions on FDI flows? Evidence from Eurozone Countries By Kyriacos Aristotelous; Stilianos Fountas
  9. Currency crises: The case of Iceland By Panagiotis Liargovas; Dimitrios Dapontas

  1. By: Masao Ogaki (Department of Economics, Ohio State University); Hyeongwoo Kim (Department of Economics, Auburn University)
    Abstract: In the Kehoe and Midrigan (2007) model, the persistence parameter of the real exchange rate is closely related to the measure of price stickiness in the Calvo-pricing model. When we employ this view, Rogo's (1996) 3 to 5 year consensus half-life implies that rms update their prices every 18 to 30 quarters on average. This is at odds with most estimates from U.S. aggregate data when single equation methods are applied to the New Keynesian Phillips Curve (NKPC), or when system methods are applied to Dynamic Stochastic General Equilibrium (DSGE) models that include the NKPC. It is well known, however, that there is a large degree of uncertainty around the consensus half-life of the real exchange rate. To obtain a more efficient estimator, this paper develops a system method that combines the Taylor rule and a standard exchange rate model to estimate half-lives. We use a median unbiased estimator for the system method with nonparametric bootstrap confidence intervals, and compare the results with those from the single equation method typically used in the literature. Applying the method to the real exchange rates of 18 developed countries against the U.S. dollar, we nd that most of the half-life estimates from the single equation method fall in the range of 3 to 5 years with wide confidence intervals that extend to positive infinity. In contrast, the system method yields median-unbiased estimates that are typically shorter than one year with much sharper 95% confidence intervals, most of which range from 3 quarters to 5 years. These median unbiased estimates and the lower bound of the confidence intervals for the half-lives of real exchange rates are consistent with most estimates of price stickiness using aggregate U.S. data for the NKPC and DSGE models.
    Keywords: Purchasing Power Parity, Calvo Pricing, Taylor Rule, Half-Life of PPP Deviations, Median Unbiased Estimator, Grid-t Confidence Interval
    JEL: J31 J24 O15
    Date: 2009–04
  2. By: Bednarik, Radek
    Abstract: This paper is focused on the historical development of selected exchange rates' volatility, that is: AUD, CAD, DEM, DKK, EUR, FRF, GBP, JPY, SEK and CHF against USD. The paper aims to show that relatively large increment of exchange markets' volatility is nothing special in the historical context considering the lenght and the extent.
    Keywords: exchange; rate; volatility; ARCH; GARCH
    JEL: F31
    Date: 2008–12–20
  3. By: Meixing Dai
    Abstract: Much attention has been paid to models of currency crisis with self-fulfilling features and the concept of multiple equilibria developed in the 1990s. They aim at explaining currency crisis without apparent fundamental disequilibrium. They are also useful to render account for currency crisis unpredictability. This paper re-examines an illustrative model of Obstfeld (1996), in which high unemployment may cause an exchange-rate crisis with selffulfilling features. By completing the algebraic demonstration, this paper shows that there are less equilibria than conjectured.
    Keywords: Self-fulfilling currency crisis, Fixed exchange rate, Multiple equilibria.
    JEL: F33 E58
    Date: 2009
  4. By: Cruz Rodriguez, Alexis
    Abstract: This paper examines the determinants of speculative attacks that occurred recently in the Dominican Republic, and proposes a series of indicators to serve as an early warning system for identifying vulnerable periods. The estimates were made using monthly data covering the period between January 1996 and June 2008. The results show that the proposed indicators have the ability to reasonably explain and predict the existence of a speculative attack.
    Keywords: Speculative attaks; foreign exchange market; probit model
    JEL: F31
    Date: 2008–11
  5. By: Scott Andrew Urban (St Antony’s College, Oxford University, Oxford OX2 6JF)
    Abstract: There is an implicit consensus that 1930s exchange-rate regimes can be characterised as some variant of ‘floating’. This paper applies an adaptation of modern methodologies of exchange-rate regime classification to a panel of 47 countries in weekly observations between January 1919 and August 1939. On the basis of modern benchmarks, the 1930s world monetary system would not be considered ‘floating’ or even ‘managed floating’. One implication is that today’s fiat-based, managed-floating international financial architecture is unprecedented.
    Keywords: Fixed Exchange Rate, International Reserves, Intervention
    JEL: F31 F33 N10
    Date: 2009–04–01
  6. By: Frédérique Bec; Mélika Ben Salem; Marine Carrasco
    Abstract: Recent studies on general equilibrium models with transaction costs show that the dynamics of the real exchange rate are necessarily nonlinear. Our contribution to the literature on nonlinear price adjustment mechanisms is treefold. First, we model the real exchange rate by a Multi-Regime Logistic Smooth Transition AutoRegression (MR-LSTAR), allowing for both ESTAR-type and SETAR-type dynmaics. This choice is motivated by the fact that even the theoretical models, which predict a smooth behavior for the real exchange rate, do not rule out the possibility of a discontinuous adjustment as a limit case. Second, we propose two classes of unit-root tests against this MR-LSTAR alternative, based respectively on the likelihood and on a auxiliary model. Their asymptotic distributions are derived analytically. Third, when applied to 28 bilateral real exchange rates, our tests reject the null hypothesis of a unit root for eleven series bringing evidence in favor of the purchasing power parity. <P>Des études récentes sur les modèles d’équilibre général prenant en considération les coûts des transactions démontrent que la dynamique du taux de change réel est nécessairement non linéaire. Notre contribution à la littérature portant sur les mécanismes d’ajustement non linéaire des prix comporte trois volets. Premièrement, nous modélisons le taux de change réel en recourant à une autorégression de type MR-LSTAR (Multi-Regime Logistic Smooth Transition AutoRegression), qui permet d’observer la dynamique des modèles ESTAR (Exponential Smooth TAR) et SETAR (Self-Exciting Treshold Autoregressive). Notre choix est motivé par le fait que même les modèles théoriques, qui prédisent un comportement lisse du taux de change réel, n’excluent pas la possibilité d’un ajustement discontinu à la limite. Deuxièmement, nous proposons deux catégories de tests de racine unitaire, dans le cadre de l’option MR-LSTAR, fondées respectivement sur la vraisemblance et sur un modèle auxiliaire. Leurs distributions asymptotiques résultent d’un processus analytique. Troisièmement, lorsque nos tests sont appliqués à 28 taux de change réels bilatéraux, ils rejettent l’hypothèse nulle d’une racine unitaire dans le cas de onze séries, faisant ainsi la preuve de la parité du pouvoir d’achat.
    Keywords: Half-life, purchasing power parity, mixing conditions, smooth transition autoregressive model, unit-root test, real exchange rate, Demi-vie, parité du pouvoir d’achat, conditions de mélange, modèle autorégressif à transition lisse, test d’unité racinaire, taux de change réel
    JEL: C12 C22 F31
    Date: 2009–05–01
  7. By: Douglas James Hodgson
    Abstract: We propose a general non-linear simultaneous equations framework for the econometric analysis of models of intervention in foreign exchange markets by central banks in response to deviations of exchange rates from target levels. We consider the instrumental variables estimation of possibly non-linear response functions and tests of intervention when the functional form may be non-linear, asymmetric, and may contain unknown shape parameters. The methodology applies techniques developed for testing in the presence of nuisance parameters unidentified under a null hypothesis to a nonlinear simultaneous equations model. We report the results of an empirical analysis of activity of the Bank of Canada, for the period from 1953-2006, with regard to the Canada-U.S. exchange rate, with changes in foreign reserves proxying for intervention activity. <P>Nous proposons un cadre de référence général pour les équations non-linéaires simultanées s’appliquant à l’analyse économétrique de modèles d’intervention des banques centrales dans les marchés des devises étrangères, en réponse aux écarts des taux de change par rapport aux niveaux cibles. Nous prenons en considération l’estimation des variables instrumentales liées aux fonctions de réponses possiblement non-linéaires et aux tests en matière d’interventions lorsque la forme fonctionnelle peut être non linéaire, asymétrique et lorsqu’elle peut contenir des paramètres de forme inconnue. La méthodologie applique, à un modèle à équations simultanées non linéaires, des techniques élaborées pour effectuer des tests en présence de paramètres de nuisance non identifiés sous une hypothèse nulle. Nous présentons les résultats d’une analyse empirique des activités de la Banque du Canada, durant la période de 1953-2006, relativement au taux de change Canada-É.-U., les variations des réserves étrangères permettant les activités d’intervention.
    Keywords: unidentified nuisance parameter, nonlinear simultaneous equations, foreign exchange reserves, policy reaction functions, paramètre de nuisance non identifié, équations simultanées non linéaires, réserves de change, fonctions de réaction de la politique
    Date: 2009–04–01
  8. By: Kyriacos Aristotelous (Department of Business, Accounting, and Economics, Otterbein College); Stilianos Fountas (Department of Economics, University of Macedonia)
    Abstract: This paper investigates the effect of EMU on inward FDI flows to eurozone using panel data from 22 OECD countries for the period 1973-2006. The empirical findings suggest that the EMU led to a statistically significant overall increase in inward FDI flows to countries that adopted the euro as their national currency. They also show that the EMU effect on inward FDI flows differs substantially across member countries with the core countries having benefited mostly from FDI flows.
    Keywords: bank Currency Unions, Euro, EMU, FDI.
    JEL: F15 F21 F36
    Date: 2009–05
  9. By: Panagiotis Liargovas; Dimitrios Dapontas
    Abstract: This paper tries to explain the recent currency crisis in Iceland and draw some policy lessons. It shows that the recent currency crisis in Iceland is mainly due to a loose monetary policy preceding the crisis. Structural reforms which could have prevented the occurrence of the crisis were missing.
    Date: 2009

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