nep-ifn New Economics Papers
on International Finance
Issue of 2009‒08‒02
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Can Parameter Instability Explain the Meese-Rogoff Puzzle? By Philippe Bacchetta; Eric van Wincoop; Toni Beutler
  2. The Case for an Intermediate Exchange Rate Regime with Endogenizing Market Structures and Capital Mobility By Kaltenbrunner, Annina; Nissanke, Machiko
  3. Sources of Current Account Fluctuations in Industrialized Countries By Aikaterini Karadimitropoulou; Miguel A. León-Ledesma
  4. Capital account liberalization, financial development and industry growth: a synthetic view By Eichengreen, Barry; Gullapalli, Rachita; Panizza, Ugo
  5. Resolving the unbiasedness puzzle in the foreign exchange market By Daniel L. Thornton
  6. On causal Relationships Between Exchange Rates and Fundamentals: Better Than You Think By Dimitris Christopoulos; Miguel A. León-Ledesma
  7. Capital inflows and exchange rate in LDC: The Dutch disease problem revisited By Mouhamadou Sy; Hamidreza Tabarraei

  1. By: Philippe Bacchetta; Eric van Wincoop; Toni Beutler
    Abstract: The empirical literature on nominal exchange rates shows that the current exchange rate is often a better predictor of future exchange rates than a linear combination of macroeconomic fundamentals. This result is behind the famous Meese-Rogoff puzzle. In this paper we evaluate whether parameter instability can account for this puzzle. We consider a theoretical reduced-form relationship between the exchange rate and fundamentals in which parameters are either constant or time varying. We calibrate the model to data for exchange rates and fundamentals and conduct the exact same Meese-Rogoff exercise with data generated by the model. Our main finding is that the impact of time-varying parameters on the prediction performance is either very small or goes in the wrong direction. To help interpret the findings, we derive theoretical results on the impact of time-varying parameters on the out-of-sample forecasting performance of the model. We conclude that it is not time-varying parameters, but rather small sample estimation bias, that explains the Meese-Rogoff puzzle.
    Keywords: exchange rate forecasting; time-varying coefficients
    JEL: F31 F37 F41
    Date: 2009–07
  2. By: Kaltenbrunner, Annina; Nissanke, Machiko
    Abstract: Set in the context of the recent theoretical and policy debates on appropriate exchange rate regimes for emerging market economies in a world of free capital mobility, the paper attempts to present the case for an intermediate exchange rate regime, drawing on recent theoretical and empirical literatures on behavioural finance and currency market structures; and to examine empirically the experiences and evolution of Brazil.s foreign exchange market under different exchange rate regimes.
    Keywords: exchange rate management, emerging markets, Brazil
    Date: 2009
  3. By: Aikaterini Karadimitropoulou; Miguel A. León-Ledesma
    Abstract: We analyze the sources of current account fluctuations for the G6 economies. Based on Bergin and Sheffrin’s (2000) two-goods inter-temporal framework, we build a SVAR model including the world real interest rate, net output, real exchange rate, and the current account. The theory model allows for the identification of structural shocks in the SVAR using longrun restrictions. Our results suggest three main conclusions: i) we find evidence in favour of the present-value model of the CA for all countries except France; ii) there is substantial support for the two-good intertemporal model, since both external supply and preferences shocks account for an important proportion of CA fluctuations; iii) temporary domestic shocks account for a large proportion of CA fluctuations, but the excess response of the CA is less pronounced than in previous studies.
    Keywords: Current account; real exchange rate; two-good intertemporal model; SVAR
    JEL: F32 F41
    Date: 2009–07
  4. By: Eichengreen, Barry; Gullapalli, Rachita; Panizza, Ugo
    Abstract: This paper synthesizes previous studies analyzing the effects of capital account liberalization on industry growth while controlling for financial crises, domestic financial development and the strength of institutions. We find reasonably strong evidence that financial openness has positive effects on the growth of financially-dependent industries, although these growth-enhancing effects evaporate during financial crises. Further analysis indicates that the positive effects of capital account liberalization are limited to countries with relatively well-developed financial systems, good accounting standards, strong creditor rights and rule of law. It suggests that countries must reach a certain threshold in terms of institutional and economic development before they can expect to benefit from capital account liberalization.
    Keywords: Capital account liberalization, Financial development, External dependence
    JEL: F34 F36
    Date: 2009–06
  5. By: Daniel L. Thornton
    Abstract: An unresolved puzzle in the empirical foreign exchange literature is that tests of forward rate unbiasedness using the forward rate and forward premium equations yield markedly different conclusions about the unbiasedness of the forward exchange rate. This puzzle is resolved by showing that because of the persistence in exchange rates, estimates of the slope coefficient from the forward premium equation are extremely sensitive to small violations of the null hypothesis of the type and magnitude that are likely to exist in the real world. Moreover, contrary to suggestions in the literature and common practice, the forward premium equation does not necessarily provide a better test of unbiasedness than the forward rate equation.
    Keywords: Foreign exchange
    Date: 2009
  6. By: Dimitris Christopoulos; Miguel A. León-Ledesma
    Abstract: This note revisits the temporal causality between exchange rates and fundamentals put forward by Engel and West (2005). We analyze the causal link within multivariate VARs by making use of the concept of multi-step causality. Our results show that, considering information content beyond one-period ahead, the causal link between exchange rates and fundamentals is stronger than previously reported. We find Granger-causality running from exchange rates to fundamentals at some horizon in 49% of our tests and running from fundamentals to exchange rates in 59% of them.
    Keywords: Granger-causality; multi-step; exchange rates; fundamentals
    JEL: F31 F37 C32
    Date: 2009–07
  7. By: Mouhamadou Sy; Hamidreza Tabarraei
    Abstract: In this paper, the link between capital inflows and real exchange rate movements in LDC is revisited theoretically and empirically. Theoretically by representing a simple model to show that the real exchange rate depends mainly on real fundamentals as the term of trade or gross domestic product per capita and empirically by taking into account the heterogeneity of the sample, the dynamic of the RER and the non stationary nature of the data. Capital inflows can be the oil revenues, foreign aid or FDI. Empirically, it is also shown that these real fundamentals are the main driving forces of real exchange movements in these countries comparing to capital inflows. The TOT by itself account for 40% of the RER variations while capital inflows account only for 12% of RER variations. The Dutch disease theory is not rejected but its size on RER movements in LDC is not very big.
    Date: 2009

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