nep-ifn New Economics Papers
on International Finance
Issue of 2009‒06‒03
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Order flow and exchange rate changes: A look at the NZD/USD and AUD/USD By Nick Smyth
  2. Monetary policy and exchange rate overshooting: Dornbusch was right after all By Hilde C. Bjørnland
  3. The "Addiction" with FDI and Current Account Balance By Joze Mencinger
  4. Intraday Evidence of the Informational Efficiency of the Yen/Dollar Exchange Rate By Kentaro Iwatsubo; Yoshihiro Kitamura
  5. Aggregate and sector-specific exchange rate indexes for the Portuguese economy By Fernando Alexandre; Pedro Bação; João Cerejeira; Miguel Portela
  6. Does Trade Integration Alter Monetary Policy Transmission? By Tobias J. Cwik; Gernot J. Müller; Maik Wolters
  7. New financial architecture and regional monetary integration in Latin America By Jean-François Ponsot
  8. Nominal Convergence By Iancu, Aurel
  9. Volatility Models : frrom GARCH to Multi-Horizon Cascades By Alexander Subbotin; Thierry Chauveau; Kateryna Shapovalova
  10. A Note on Studies of Monetary Policy and Implementation in Vietnam By Tran Tri Dung; Quan-Hoang Vuong

  1. By: Nick Smyth (Reserve Bank of New Zealand)
    Abstract: In this paper, we apply a series of empirical microstructure tests to the NZD/USD and AUD/USD. In contrast to a more traditional macro approach to explaining exchange rate changes, microstructure studies focus on the role that transactions play in helping the market aggregate information on individual market participants expectations of economic fundamentals and risk preferences. Our data comes from the Reuters Spot Matching service, the main interbank trading platform in both currency pairs, and covers almost five and a half years of transactions from January 2001 to March 2006, a much longer and more representative time series than many empirical microstructure applications to date. We find that there is a strong contemporaneous relationship between net order flow (the net of buyerinitiated and seller-initiated transactions) and changes in the NZD/USD and AUD/USD at frequencies from one minute to one week, similar to studies on other currencies. We also find that cross-currency order flow has a positive association with changes in the other exchange rate (ie AUD/USD order flow has a positive contemporaneous relationship with changes in the NZD/USD). Finally, we examine a wide range of New Zealand, Australian and US data releases and central bank interest rate decisions and find that order flow plays an important role in communicating different interpretations of macroeconomic news.
    JEL: F31 G14
    Date: 2009–04
  2. By: Hilde C. Bjørnland (Norwegian School of Management (BI), Norges Bank (Central Bank of Norway) and UC Berkeley)
    Abstract: Dornbusch's exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has been viewed by some researchers as a "stylized fact" to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them. In contrast, we achieve identification by imposing a long-run neutrality restriction on the real exchange rate, thereby allowing for contemporaneous interaction between the interest rate and the exchange rate. In a study of four open economies, we find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate, which appreciates on impact. The maximum effect occurs within 1-2 quarters, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.
    Keywords: Exchange rate, uncovered interest parity (UIP), Dornbusch overshooting, monetary policy, Structural VAR.
    JEL: E32 E52 F31 F41
    Date: 2009–06–05
  3. By: Joze Mencinger
    Abstract: The EU new member states (NMS) have been recipients of substantial net capital inflows in the form of FDI. Economic policy makers and development strategists often regard them as the pillar of the development and neglect their potential long run consequences: inevitable deficit in the investment balance. FDI however affects current account balance also indirectly by improving or deteriorating trade balance which might overweigh negative direct effects, moderate them, or add to the deterioration of the current account balance. Capital outflows through the investment account in NMS have been increasing rapidly . Namely, the rates of return on FDI are twice the rates of return on portfolio investments and three times the rates of return on loans. Indirect effects have moderated strong direct effects but could not overweigh structural current account deficit caused by transition. A major problem might arise as a consequence of the “addiction” with FDI. First, the outflows of capital speeded up by the opportunities of multinationals to reallocate production to the countries with even cheaper labor might become larger than new inflows. Second, sudden interruption of FDI inflows could result in an exchange rate crisis.
    Keywords: current account, factors services, foreign direct investments
    JEL: F32 F21
    Date: 2008–06
  4. By: Kentaro Iwatsubo (Graduate School of Economics, Kobe University); Yoshihiro Kitamura (Faculty of Economics, University of Toyama)
    Abstract: The informational efficiency of the yen/dollar exchange rate is investigated in five market segments within each business day from 1987 to 2007. Among the results, we first find that the daily exchange rate has a cointegrating relationship with the cumula-tive price change of the segment for which the London and New York markets are both open, but not with that of any other segments. Second, the cumulative price change of the London/N.Y. segment is the most persistent among the five market segments in the medium- and long-run. These results suggest that the greatest concentration of informed traders is in the London/N.Y. segment where intraday transactions are the highest. This is consistent with the theoretical prediction by Admati and Pfleiderer (1988) that prices are more informative when trading volume is heavier.
    Keywords: Informational efficiency; Market segments; Yen/dollar exchange rate
    JEL: F31
    Date: 2008–04
  5. By: Fernando Alexandre (Escola de Economia e Gestão and NIPE, University of Minho); Pedro Bação (University of Coimbra and GEMF); João Cerejeira (Escola de Economia e Gestão and NIPE, University of Minho); Miguel Portela (Escola de Economia e Gestão and NIPE, University of Minho and IZA)
    Abstract: Economic theory and empirical evidence suggest that fluctuations in exchange rates may have strong reallocation effects. Accession to the Exchange Rate Mechanism in 1992, and then to the European Monetary Union in 1999, implied a drastic change in the behaviour of Portugal’s exchange rate indexes. The analysis of those indexes is therefore bound to play an important role in the study of the evolution of the Portuguese economy in the last two decades. However, there are many alternative exchange rate indexes. In this paper, we compute and compare aggregate and sector-specific exchange rate indexes for the Portuguese economy. We find that alternative effective exchange rate indexes are very similar between them. We also find that sector-specific effective exchange rates are strongly correlated with aggregate indexes. Nevertheless, we show that sector-specific exchange rates are more informative than aggregate exchange rates in explaining changes in employment: whereas aggregate indexes are statistically insignificant in employment equations, regressions using sector-specific exchange rate indexes show a statistically significant and economically large effect of exchange rates on employment.
    Keywords: Exchange Rates, International Trade, Employment, EMU.
    JEL: F15 F16 F41
    Date: 2009–05
  6. By: Tobias J. Cwik (Goethe Uniyversity Frankfurt); Gernot J. Müller (Goethe University Frankfurt); Maik Wolters (Goethe University Frankfurt)
    Abstract: This paper explores the role of trade integration—or openness—for monetary policy transmission in a medium-scale New Keynesian model. Allowing for strategic complementarities in price-setting, we highlight a new dimension of the exchange rate channel by which monetary policy directly impacts domestic inflation. Although the strength of this effect increases with economic openness, it also requires that import prices respond to exchange rate changes. In this case domestic producers find it optimal to adjust their prices to exchange rate changes which alter the domestic currency price of their foreign competitors. We pin down key parameters of the model by matching impulse responses obtained from a vector autoregression on U.S. time series relative to an aggregate of industrialized countries. While we find evidence for strong complementarities, exchange rate pass-through is limited. Openness has therefore little bearing on monetary transmission in the estimated model.
    Keywords: Monetary Policy Transmission, Open Economy, Trade Integration, Exchange Rate Channel, Strategic Complementarity, Exchange Rate Pass-Through
    JEL: F41 F42 E32
    Date: 2008–08–18
  7. By: Jean-François Ponsot (LEPII - Laboratoire d'Économie de la Production et de l'Intégration Internationale - CNRS : UMR5252 - Université Pierre Mendès-France - Grenoble II)
    Abstract: Reducing transaction costs and the need for international reserves is a primary objective to the establishment of regional payment agreements. Another objective, especially in the case of Latin America where the Ecuadorian promoters of the Bank of the South and the New Architecture are planning the implement of a regional clearing system, is to reduce member countries dependence on the US dollar as an international standard and reserve currency. To help improving the design of such agreements this paper refers to the plan Keynes designed for the Bretton Woods Conference. First, it observes that cases were made against this plan from which useful lessons may still be drawn. Second, it shows that Keynes defined a system for exchanging domestic currencies for each other that can be improved and help design currency unions in accordance with their promoters'objectives.
    Keywords: regional monetary arrangements ; foreign exchange ; currency union ; dollar standard, payment systems; Latin America
    Date: 2009–05–14
  8. By: Iancu, Aurel
    Abstract: After presenting the institutional construction during the pre-accession and post-accession to the Economic and Monetary Union (EMU), the exchange rate mechanisms (ERM) in several countries and the convergence criteria, we go on with a brief analysis of the way the CEE countries cope with the convergence criteria in accordance with the Maastricht Treaty. Then, the study deals with a topic often discussed in the scientific literature and included on the agenda of decision-makers at various levels, in order to clarify the following major issues: a shorter transition to the euro, the exchange rate equilibrium versus the inflation rate diminution and the Balassa-Samuelson effect, the exchange rates and the exchange rate deviation index, evidences concerning the real exchange rate equilibrium and the appreciation of the exchange rate in the CEE countries.
    Keywords: Convergence criteria, exchange rate, exchange rate mechanisms, Euro Area, Balassa-Samuelson effect, tradable goods, non-tradable goods, exchange rate deviation index, purchasing power parity
    JEL: F31 F33 O43 O47
    Date: 2009–06
  9. By: Alexander Subbotin (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Thierry Chauveau (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I); Kateryna Shapovalova (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: We overview different methods of modeling volatility of stock prices and exchange rates, focusing on their ability to reproduce the empirical properties in the corresponding time series. The properties of price fluctuations vary across the time scales of observation. The adequacy of different models for describing price dynamics at several time horizons simultaneously is the central topic of this study. We propose a detailed survey of recent volatility models, accounting for multiple horizons. These models are based on different and sometimes competing theoretical concepts. They belong either to GARCH or stochastic volatility model families and often borrow methodological tools from statistical physics. We compare their properties and comment on their pratical usefulness and perspectives.
    Keywords: Volatility modeling, GARCH, stochastic volatility, volatility cascade, multiple horizons in volatility.
    Date: 2009–05
  10. By: Tran Tri Dung (Dan Houtte, Vuong & Partners, Hanoi, Vietnam.); Quan-Hoang Vuong (Centre Emile Bernheim, Solvay Brussels School of Economics and Management, Université Libre de Bruxelles, Brussels.)
    Abstract: In this short paper, we have gone through some key results of monetary policy research applied for the Vietnamese economy, over the past 20 years after Doi Moi, together with a few caveats when putting these results in use. We look at different research themes, and suggest that future research make better and more diverse choice of analytic framework, and also put macro and micro-setting connection at work, which appear to likely bring about better and more insightful results for the monetary economics literature in Vietnam.
    Keywords: Vietnam; market economy; monetary policy; exchange rate regime
    JEL: G10 G18 E22 E31 E44
    Date: 2009–06

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