nep-ifn New Economics Papers
on International Finance
Issue of 2009‒07‒03
eleven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Long-run validity of purchasing power parity and rank tests for cointegration for Central Asian Countries By Liew, Venus Khim-Sen; Chia, Ricky Chee-Jiun; Ling, Tai-Hu
  2. What Explains Global Exchange Rate Movements During the Financial Crisis? By Marcel Fratzscher
  3. Crash Risk in Currency Markets By Farhi, Emmanuel; Fraiberger, Samuel P.; Gabaix, Xavier; Rancière, Romain; Verdelhan, Adrien
  4. Did the Structure of Trade and Foreign Debt Affect Reserve Currency Composition? Evidence form Interwar Japan By Mariko Hatase; Mari Ohnuki
  5. Does the Currency Regime Shape Unhedged Currency Exposure? By Ila Patnaik
  6. Exchange rate exposure: A nonparametric approach By Uluc Aysun; Melanie Guldi
  7. A brief empirical history of U.S. foreign-exchange intervention: 1973-1995 By Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
  8. Foreign Exchange Liberalization: Perceptions, Realities and Way Forward By P Samarasiri
  9. Real Exchange Rates and Time-Varying Trade Costs By David Peel; Ivan Paya; E Pavlidis
  10. Exchange Market Pressure in Central Europe: An Application of the Girton-Roper Model By Stavarek, Daniel; Dohnal, Marek
  11. Does it pay to have the euro? Italy’s politics and financial markets under the lira and the euro. By Marcel Fratzscher; Livio Stracca

  1. By: Liew, Venus Khim-Sen; Chia, Ricky Chee-Jiun; Ling, Tai-Hu
    Abstract: This study finds that Purchasing Power Parity holds in the long-run for Azerbaijan, Kazakhstan and Kyrgyzstan, based on Breitung’s (2001) rank tests for cointegration. Results from further analysis indicates that nominal exchange rates and relative prices are nonlinearly interrelated. Trade barriers, transportation costs and government intervention in the pricing system in these countries may have resulted in the establishment of the above-mentioned nonlinear relationship.
    Keywords: Purchasing power parity; Cointegration; Nonlinear; Rank tests; Central Asia.
    JEL: C14 F41 F31
    Date: 2009
  2. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: A striking and unexpected feature of the financial crisis has been the sharp appreciation of the US dollar against virtually all currencies globally. The paper finds that negative US-specific macroeconomic shocks during the crisis have triggered a significant strengthening of the US dollar, rather than a weakening. Macroeconomic fundamentals and financial exposure of individual countries are found to have played a key role in the transmission process of US shocks: in particular countries with low FX reserves, weak current account positions and high direct financial exposure vis-à-vis the United States have experienced substantially larger currency depreciations during the crisis overall, and to US shocks in particular. JEL Classification: F31, F4, G1.
    Keywords: Financial crisis, exchange rates, global imbalances, shocks, United States, US dollar, transmission channels.
    Date: 2009–06
  3. By: Farhi, Emmanuel; Fraiberger, Samuel P.; Gabaix, Xavier; Rancière, Romain; Verdelhan, Adrien
    Abstract: How much of carry trade excess returns can be explained by the presence of disaster risk? To answer this question, we propose a simple structural model that includes both Gaussian and disaster risk premia and can be estimated even in samples that do not contain disasters. The model points to a novel estimation procedure based on currency options with potentially different strikes. We implement this procedure on a large set of countries over the 1996-2008 period, forming portfolios of hedged and unhedged carry trade excess returns by sorting currencies based on their forward discounts. We find that disaster risk premia account for about 25% of expected carry trade excess returns in advanced countries.
    Keywords: carry trade; currency crisis; currency options; disaster risk; exchange rate; financial crisis
    JEL: F3 F31 G14
    Date: 2009–06
  4. By: Mariko Hatase (Director and Senior Economist, History Section, Institute for Monetary and Economic Studies, Bank of Japan (E-mail:; Mari Ohnuki (Associate Director and Economist, History Section, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mari.
    Abstract: Historical experience is often invoked in the modern debate on competition among reserve currencies, yet little is known about quantitative aspects or institutional features of reserve management. By drawing on newly obtained data on foreign exchange reserves, especially those broken down by currency, this paper explores the competition between the British pound sterling and the U.S. dollar for the status of leading reserve currency in Japan during the interwar period. We find that competition between these two currencies remained undecided and that their relative status alternated repeatedly. Historical materials and the results of econometric analysis suggest that the key factors explaining a choice of reserve currencies are trade volumes and the currency denomination of external debt. The latter criteria supported maintaining sterlingfs status as a reserve currency for the interwar period, reflecting its considerable share in debt service generated through issues that had been launched when London was the sole international market. The stability of potential reserve currencies is shown to be crucial as well. We also find evidence of institutional factors, which include taxation, foreign exchange controls, and restrictions on financial activities.
    Keywords: Foreign Exchange Reserves, Gold Exchange Standard, Exchange Rate, Trade Strucutre, Debt Structure, Japan
    JEL: F31 F32 F33 F34 N20 N25
    Date: 2009–06
  5. By: Ila Patnaik
    Abstract: This paper examines how unhedged currency exposure of firms varies with changes in currency exibility. A sequence of four time-periods with alternating high and low currency volatility in India provides a natural experiment in which changes in currency exposure of a panel of firms is measured, and the moral hazard versus incomplete markets hypotheses tested. We find that firms carried higher currency exposure in periods when the currency was less exible. We also find homogeneity of views,where firms set themselves up to benefit from a rupee appreciation, in the later two periods. Our results support the moral hazard hypothesis that low currency exibility encourages firms to hold unhedged exposure in response to implicit government guarantees.[NIPFP WP 2008 - 50]
    Keywords: currency regime; currency exposure of firms; moral hazard; one-way bets on exchange rates.
    Date: 2009
  6. By: Uluc Aysun (University of Connecticut); Melanie Guldi (Mount Holyoke College)
    Abstract: The typical conclusion reached when researchers examine exchange rate exposure using a linear model is that only a few firms are exposed. This finding is puzzling since institutional knowledge and basic finance theory points to a larger effect. In this paper, we compare results obtained using a linear approach with those from nonlinear, partially parametric and nonparametric models. Our data consist of nonfinancial firms in five emerging market countries and the US. Among firms that were not found to have a linear exposure, we find that a considerable proportion of these are exposed when nonlinear, partially parametric or nonparametric models are used. The increase in exposure is most striking when a nonparametric model is used. We also find evidence that firms' hedging activities decrease linear exposure but do not affect nonparametric exposure.
    Keywords: nonparametric, exchange rate exposure, hedging.
    JEL: E44 F31 F41
    Date: 2009–06
  7. By: Michael D. Bordo; Owen F. Humpage; Anna J. Schwartz
    Abstract: This paper assesses U.S. foreign-exchange intervention since the inception of generalized floating. We find that intervention was by and large ineffectual. We first identify which interventions were successful according to three criteria. Then, we test whether the number of observed successes significantly exceeds the amount that would randomly occur given the near-martingale nature of daily exchange-rate changes. Finally, we investigate whether the various characteristics of an intervention - its size, frequency, or coordination - can increase the probability of success. We find that intervention did tend to moderate same-day exchange-rate movements relative to the previous day, but this effect is not robust across subperiods or currencies and it occurs infrequently. Increasing the size of an intervention increases the probability of success, but no other variable consistently makes a difference, including coordinating interventions with other central banks.
    Keywords: Foreign exchange administration
    Date: 2009
  8. By: P Samarasiri
    Abstract: The article focuses on understanding of the economics of the exchange control liberalisation in macroeconomic perspectives and, therefore, the article does not attempt to interpret or explore the legal background relating to exchange control and liberalization and details of liberalization measures and their impact. The exchange control is a part of the broad regulatory policy package to intervene in or guide economic activities and markets in terms of the relevant legal provisions that empower the authorities to apply such interventions in the public interest. Accordingly, the exchange control and its liberalisation involve a considerable volume of legal aspects and procedures. However, the exchange control as well as its liberalization should be applied and evaluated carefully with a good understanding of the underlying economics because their purpose is to promote the economic welfare of the general public. [Central Bank Public Seminar]
    Keywords: Foreign Exchange; Globalisation; liberalisation; Exchange Controls; Monetary Law Act; Exchange Control Act; Liberalisation Measures; Current Account Liberalisation; Capital Account Liberalisation; Sectoral imbalance; capital mobility; financial crises; economic impact
    Date: 2009
  9. By: David Peel; Ivan Paya; E Pavlidis
    Abstract: Previous empirical work on the Purchasing Power Parity does not explicitly account for time-varying trade costs. Motivated by the recent gravity literature we incorporate a microfounded measure of trade costs into two nonlinear regression models for the real exchange rate. Using data for the dollar-sterling real exchange rate from 1830 to 2005, we provide significant evidence in favor of a positive relation between the level of trade costs and the degree of persistence of the real exchange rate.
    Keywords: Real Exchange Rates, Time-Varying Trade Costs, Smooth Transition Nonlinearity, Persistence, Simulation Methods
    Date: 2009
  10. By: Stavarek, Daniel; Dohnal, Marek
    Abstract: This paper applies the Girton-Roper model of exchange market pressure (EMP) on four Central European economies (Czech Republic, Hungary, Poland, Slovakia) over the period 1995-2008. The results suggest that there is a strong negative relation between domestic credit and EMP in all countries. We also found evidence of positive effect of domestic income on EMP in most of the countries. The paper reveals that EMP in the Czech Republic and Hungary was mostly absorbed by changes of exchange rate while changes in reserves absorbed EMP in Slovakia. The levels of EMP estimated do not pose a significant threat for fulfilment of the exchange rate stability convergence criterion.
    Keywords: exchange market pressure; Girton-Roper model; euro-candidate countries
    JEL: C32 F31 F36
    Date: 2009–06–15
  11. By: Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
    Abstract: There is a broad consensus that the quality of the political system and its institutions are fundamental for a country’s prosperity. The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks. The findings of the paper there-fore suggest another important economic dimension and channel through which Italy may have been affected by EMU. Our analysis could also be potentially interesting for other countries with weak institutions considering adopting a currency based on stronger institutions. JEL Classification: F31, F33, G14.
    Keywords: Euro, Italy, political economy, exchange rates, asset prices, financial markets, shocks.
    Date: 2009–06

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