nep-ifn New Economics Papers
on International Finance
Issue of 2009‒06‒10
five papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Purchasing Power Parity and Breaking Trend Functions in the Real Exchange Rate By Jair Ojeda Joya
  2. Emerging Floaters : Pass-Throughs and (Some) New Commodity Currencies By Kohlscheen, E
  3. The Exchange Rate-Investment Nexus and Exchange Rate Instability: Another Reason for ‘Fear of Floating’ By Habib Ahmed; C. Paul Hallwood; Stephen M. Miller
  4. Foreign exchange rates in Sweden 1658-1803 By Edvinsson, Rodney
  5. The multiple currencies of Sweden-Finland 1534-1803 By Edvinsson, Rodney

  1. By: Jair Ojeda Joya
    Abstract: This paper provides evidence of long run purchasing power parity by performing a recently developed method to test for unit roots in the presence of structural breaks. Data consist of real exchange rate series for 20 countries including developed and developing economies. Structural breaks are detected in 18 countries and real exchange rates are found to be stationary in all countries except Japan. Estimated linear trends are the result of cross-country total factor productivity differentials between tradable and nontradable sectors. Estimated breaks correspond to large and permanent total factor productivity shocks associated with historical events like wars, structural reforms or deep economic recessions. An exercise with total factor productivity data shows that the Balassa-Samuelson effect explains the estimated long run trends in most countries.
    Keywords: Purchasing power parity, unit root test, structural change, Balassa-Samuelson effect, real exchange rate. Classification JEL: C22, F31, F40, N70
  2. By: Kohlscheen, E (Economics Department, University of Warwick.)
    Abstract: In spite of early skepticism on the merits of floating exchange rate regimes in emerging markets, 8 of the 25 largest countries in this group have now had a floating exchange rate regime for more than a decade. Using parsimonious VAR specifications covering the period of floating exchange rates, this study computes the dynamics of exchange rate pass-throughs to consumer price indices. We find that pass-throughs have typically been moderate even though emerging floaters have seen considerable nominal and real exchange rate volatilities. Previous studies that set out to estimate exchange rate pass-throughs ignored changes in policy regimes, making them vulnerable to the Lucas critique. We find that, within the group of emerging floaters, estimated pass-throughs are higher for countries with greater nominal exchange rate volatilities and that trade more homogeneous goods. These findings are consistent with the pass-through model of Floden and Wilander (2006) and earlier findings by Campa and Goldberg (2005), respectively. Furthermore, we find that the Indonesian Rupiah, the Thai Baht and possibly the Mexican Peso are commodity currencies, in the sense that their real exchange rates are cointegrated with international commodity prices.
    Date: 2009
  3. By: Habib Ahmed (Institute of Middle Eastern and Islamic Studies, Durham University); C. Paul Hallwood (Department of Economics, University of Connecticut); Stephen M. Miller (Department of Economics, University of Nevada, Las Vegas)
    Abstract: We show that expansionary monetary policy causes exchange rate overshooting due to the secondary repercussion comes through the reaction of firms to changed asset prices and the firms’ decisions to invest in real capital. This overshooting effect adds to any overshooting that occurs through the traditional Dornbusch (1976) channel, since our model with its market clearing in the short run excludes any Dornbusch overshooting. The model sheds further light on the volatility of real and nominal exchange rates. It suggests that changes in corporate sector profitability may affect exchange rates through international portfolio diversification in corporate securities, and it offers an additional reason for ‘fear of floating’.
    Keywords: exchange rates, open economy macroeconomics, monetary policy, exchange rate overshooting
    JEL: F31 F32
    Date: 2009–03
  4. By: Edvinsson, Rodney (Dept. of Economic History, Stockholm University)
    Abstract: This paper deals with foreign exchange rates in Sweden 1658-1803. Foreign currencies played a crucial role in Sweden. Most of the domestic currency units were, in fact, originally imported. In the 18th century, the exchange rates most quoted in Sweden were the ones on Amsterdam, Hamburg, London, Paris, Copenhagen, Gdansk and Swedish Pomerania. The primary data are bills of various durations. To estimate spot rates, an assumption must be made of an interest rate on these bills. In the period 1662-1669 the estimated median shadow interest rate on bills of exchange was as high as 12.5 percent, while it most likely decreased substantially in the 18th century.
    Keywords: monetary history; foreign exchange; reichstaler; guilder; pound; taler; zloty; florin; Sweden
    JEL: E42 N13 N23
    Date: 2009–05–26
  5. By: Edvinsson, Rodney (Dept. of Economic History, Stockholm University)
    Abstract: This paper deals with the exchange rates between the domestic currencies of Sweden-Finland in 1534-1803. In 1534, the first silver daler coins were minted in Sweden, which existed alongside the main silver coins at a fluctuating exchange rate. In 1624, a copper standard was introduced. However, the silver standard continued to exist alongside the copper standard. A distinctive feature of the multi-currency standard in Sweden-Finland during the 17th and 18th centuries, was that there was not only a fluctuating market exchange rate between the copper and silver currencies, but also between various silver currencies. At least five or six currency units were used, three based on silver, one or two based on copper and one based on gold. In 1776 a mono-currency, silver standard was reintroduced, with the riksdaler as the main unit. However, montery stability was not long-lasting. In 1789-1803 two different currencies existed, one fiat currency based on riksdaler riksgälds notes and one based on the riksdaler banco that continued to be convertible into silver coins by the Riksbank. In 1803 the relation 1 riksdaler banco = 1.5 riksdaler riksgälds was fixed, which basically ended the period of multiple currencies.
    Keywords: monetary history; bimetallism; debasement; copper standard; Sweden
    JEL: E42 N13 N23
    Date: 2009–05–26

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