nep-ifn New Economics Papers
on International Finance
Issue of 2009‒05‒23
nine papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. State-Uncertainty preferences and the Risk Premium in the Exchange rate market By Juan-Angel Jimenez-Martin; Alfonso Novales Cinca
  2. Can a Habit Formation Model really explain the forward premium anomaly? By Costa, Carlos Eugênio da; Vasconcelos, Jivago X.
  3. A New Test of the Real Interest Rate Parity Hypothesis: Bounds Approach and Structural Breaks By George Bagdatoglou; Alexandros Kontonikas
  4. Real Exchange Rate Misalignments By Cristina Terra, Frederico Valladares
  5. Analysis on β and σ Convergences of East Asian Currencies By OGAWA Eiji; YOSHIMI Taiyo
  6. Assessing Exchange Rate Competitiveness in the Eastern Caribbean Currency Union By Emilio Pineda; Paul Cashin; Yan Sun
  7. Household Heterogeneity and the Real Exchange Rate: Still a Puzzle By Kollmann, Robert
  8. Effective exchange rates of the Bulgarian Lev 1879-1939 By Kalina Dimitrova; Martin Ivanov; Ralitsa Simeonova-Ganeva
  9. Trickle-Down Effects of Changing Value of Euro on US Economy By Bhattacharya, Sulagna

  1. By: Juan-Angel Jimenez-Martin (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense); Alfonso Novales Cinca (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense)
    Abstract: This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: “macroeconomic risk” and “the risk associated with variation in the private agents’ perception on the level of uncertainty”. State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model
    Date: 2009
  2. By: Costa, Carlos Eugênio da; Vasconcelos, Jivago X.
    Abstract: Verdelhan (2009) shows that if one is to explain the foreign exchange forward premium behavior using Campbell and Cochrane (1999)'s habit formation model one must specify it in such a way to generate pro-cyclical short term risk free rates. At the calibration procedure, we show that this is only possible in Campbell and Cochrane's framework under implausible parameters speci cations given that the price-consumption ratio diverges in almost all parameters sets. We, then, adopt Verdelhan's shortcut of xing the sensivity function (st) at its steady state level to attain a nite value for the price-consumption ratio and release it in the simulation stage to ensure pro-cyclical risk free rates. Beyond the potential inconsistencies that such procedure may generate, as suggested by Wachter (2006), with pro- cyclical risk free rates the model generates a downward sloped real yield curve, which is at odds with the data.
    Date: 2009–05–12
  3. By: George Bagdatoglou; Alexandros Kontonikas
    Abstract: We test the real interest rate parity hypothesis using data for the G7 countries over the period 1970-2008. Our contribution is two-fold. First, we utilize the ARDL bounds approach of Pesaran et al. (2001) which allows us to overcome uncertainty about the order of integration of real interest rates. Second, we test for structural breaks in the underlying relationship using the multiple structural breaks test of Bai and Perron (1998, 2003). Our results indicate significant parameter instability and suggest that, despite the advances in economic and financial integration, real interest rate parity has not fully recovered from a breakdown in the 1980s.
    Keywords: real interest rates parity, bounds test, structural breaks
    JEL: F21 F32 C15 C22
    Date: 2009–05
  4. By: Cristina Terra, Frederico Valladares (Université de Cergy-Pontoise, Thema and EPGE/FGV, Tendências Consultoria Integrada)
    Abstract: This paper investigates episodes of real exchange rate appreciations and depreciations for a sample of 85 countries, from 1960 to 1998. The equilibrium real exchange rate series are constructed by estimating cointegration vectors with fundamentals, and departures from it are obtained. A Markov Switching Model is used to characterize the misalignments series as stochastic autoregressive processes governed by two states corresponding to different means and variances. Three are the main findings: first, some countries present no evidence of distinct regimes for misalignment; second, for some countries, there is no RER misalignment in one the regimes; and, third, for those countries with two misalignment regimes, the appreciated regime have higher persistence than the depreciated one.
    Keywords: real exchange rate misalignment, Markov switching model
    JEL: F31 F37
    Date: 2009
  5. By: OGAWA Eiji; YOSHIMI Taiyo
    Abstract: This paper focuses on recent events which include the RMB reform in China and the global financial crisis to investigate statistically recent diverging trends among East Asian currencies. For the purpose, their weighted average value (Asian Monetary Unit: AMU) and their deviations (AMU Deviation Indicators) from benchmark levels are used to analyze both β and σ convergences of East Asian currencies. Our analytical results show that the monetary authority of China has still kept stabilizing the exchange rate of the Chinese yuan against only the US dollar even though it announced its adoption of a managed floating exchange rate system with reference to a currency. Analytical results on β and σ convergences show that deviations among the East Asian currencies have been diverging in recent years, especially after 2005. The widening deviations reflect not the RMB reform but recent international capital flows and the global financial crisis. In addition, it is important as its background that the monetary authorities of the countries are adopting a variety of exchange rate systems. In other words, a coordination failure in adopting exchange rate systems among these monetary authorities increases volatility and misalignment of intra-regional exchange rates in East Asia.
    Date: 2009–05
  6. By: Emilio Pineda; Paul Cashin; Yan Sun
    Abstract: This paper uses three methods to assess movements of real exchange rates in the ECCU over time. First, the purchasing power parity hypothesis is tested and then used to provide a benchmark for equilibrium real exchange rates in the region. Second, a fundamentals-based equilibrium real exchange rate approach is used to explore sources of real exchange rate fluctuations in ECCU countries. And third, a macroeconomic balance approach is used to estimate equilibrium current account or current account "norms". The main finding of these analyses is that there is little evidence of overvaluation of the EC dollar. Furthermore, this paper contributes to the literature by analyzing the distinctive impact of tourism in determining real exchange rates through the wealth effect induced by tourism-driven increases in terms of trade and productivity.
    Keywords: Exchange rates , Eastern Caribbean Currency Union , Real effective exchange rates , Purchasing power parity , Tourism , Competition , Economic models ,
    Date: 2009–04–22
  7. By: Kollmann, Robert
    Abstract: Kocherlakota and Pistaferri (EJ, 2007) [KP] develop a model of a world economy with private-information Pareto optimal (PIPO) risk sharing; in that model, the real exchange rate tracks relative domestic/foreign cross-sectional distributions of consumption. KP claim that the PIPO model fits the UK/US real exchange rate well. This paper shows that the PIPO model is inconsistent with the UK/US data. Minor specification changes overturn KP’s regression results. I also document that the relevant (relative) cross-sectional consumption moment is orders of magnitude more volatile than the real exchange rate, and less persistent. The link between the real exchange rage and consumption (heterogeneity) remains a puzzle.
    Keywords: heterogeneity; International risk sharing; real exchange rate
    JEL: F36 F41
    Date: 2009–05
  8. By: Kalina Dimitrova; Martin Ivanov; Ralitsa Simeonova-Ganeva
    Abstract: The paper constructs the first series of nominal and real effective exchange rates of the Bulgarian Lev from its establishment in 1879 until 1939. The dynamics of both indicators during the Classical Gold Standard fits the general picture of exchange rate development of other European countries while their movements in the Interwar years reflects the exchange rate policy of the monetary authority and the price effects of the Great Depression. The study also provides econometric estimation of the impact of the real effective exchange rates and foreign demand on Bulgaria’s real export performance allowing for some policy implications.
    Date: 2009–05
  9. By: Bhattacharya, Sulagna
    Abstract: Historically, the US Dollar had been accepted as the strongest currency and it had no competition at the regional or global level. But inception of Euro changed this unique stature and status enjoyed by USD. With introduction of Euro as the common currency, the European Union became USA’s closest competitor in terms of economic size, performance, indicators and political and economic clout. Over time, value of euro started appreciating and accordingly, Euro/USD exchange rate which is fully floating, started rising. A rising Euro affects the US economy in three ways: directly, indirectly and through a cascading effect caused by an interaction of these direct and indirect influences. This paper attempts to identify and explore the effects of an appreciating Euro on some select economic indicators of the US, both historically and projected. It also establishes the relationship between some of these indicators which are not directly cross-related, by analyzing the impact of the Euro on the economy’s most sensitive economic parameters. Section I briefly touches upon the scope and objective of this paper. Section II introduces the concept of exchange rate, different exchange rate regimes and determinants of exchange rates. Section III views the historical relationship between the Euro/USD exchange rate and the most important macroeconomic indictors of the US economy. Section IV explores the projected impact of potential future Euro/USD exchange rate on the same indictors and explains the linkages. Section V concludes.
    Keywords: Euro; Appreciation; US Economy; Trickle-Down;Exchange Rate;Currency
    JEL: F42 E27 E52 F31
    Date: 2009–05–17

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