nep-ifn New Economics Papers
on International Finance
Issue of 2009‒08‒16
seven papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Foreign Exchange Intervention and Exchange Rate Volatility in Peru By Humala, Alberto; Rodríguez, Gabriel
  2. A Model of Market Clearing Exchange Rates By Rajas Parchure
  3. Accounting for Incomplete Pass-Through By Emi Nakamura; Dawit Zerom
  4. Fiscal stabilization with partial exchange rate pass-through By Erasmus K. Kersting
  5. The Real Exchange Rate And The U. S. Economy 2000 - 2008 By John J. Heim
  6. Empirical Behavior of a World Stock Index from Intra-Day to Monthly Time Scales By Wolfgang Breymann; David Lüthi; Eckhard Platen
  7. Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy By Hernandez-Verme, Paula; Wang, Wen-Yao

  1. By: Humala, Alberto (Central Reserve Bank of Peru); Rodríguez, Gabriel (Central Reserve Bank of Peru and Pontificia Universidad Católica del Perú)
    Abstract: Flexible exchange rate experience in Peru has been accompanied by frequent official interventions in the form of foreign exchange purchases or sales. Monetary authority pursues reducing excess volatility in the exchange rate through its direct intervention. However, in recent years, this intervention has concentrated in US dollars purchases, apparently signaling a bias towards defending a given exchange rate level (not necessarily fixed). For the period 1994 - 2007, this document assesses consistency of the empirical evidence with the goal of reducing exchange rate volatility. Thus, it uses univariate and multivariate time series models subject to stochastic shifts to study currency pressures. Results suggest consistency with the reduced-volatility goal. Nonetheless, in line with other studies, factors such as the foreign exchange gap with respect to its trend also induce foreign exchange intervention.
    Keywords: Foreign Exchange Intervention, Exchange Rate Volatility, Markov-Switching Models.
    JEL: C22 C32 E52 F31
    Date: 2009–03
  2. By: Rajas Parchure
    Abstract: This paper formulates a model of exchange rate determination that describes the market processes by which the foreign exchange markets are cleared and international receipts of countries are brought into equality with their international payments. The model is capable of being explicitly solved for the actual world economy provided the balance of payments data which are routinely collected by central banks and reported to the IMF are arranged by their countrywise origins and destinations.
    Keywords: foreign exchange markets, data, national currency, currency, exchange rates, homogenous equations, Forward Exchange Rates, markets, foreign exchange rate, world economy, international receipts, payments, balance of payments, central banks, IMF,
    Date: 2009
  3. By: Emi Nakamura; Dawit Zerom
    Abstract: Recent theoretical work has suggested a number of potentially important factors in causing incomplete pass-through of exchange rates to prices, including markup adjustment, local costs and barriers to price adjustment. We empirically analyze the determinants of incomplete pass-through in the coffee industry. The observed pass-through in this industry replicates key features of pass-through documented in aggregate data: prices respond sluggishly and incompletely to changes in costs. We use microdata on sales and prices to uncover the role of markup adjustment, local costs, and barriers to price adjustment in determining incomplete pass-through using a structural oligopoly model that nests all three potential factors. The implied pricing model explains the main dynamic features of short and long-run pass-through. Local costs reduce long-run pass-through (after 6 quarters) by a factor of 59% relative to a CES benchmark. Markup adjustment reduces pass-through by an additional factor of 33%, where the extent of markup adjustment depends on the estimated "super-elasticity'' of demand. The estimated menu costs are small 0.23% of revenue) and have a negligible effect on long-run pass-through, but are quantitatively successful in explaining the delayed response of prices to costs. The estimated strategic complementarities in pricing do not, therefore, substantially delay the response of prices to costs. We find that delayed pass-through in the coffee industry occurs almost entirely at the wholesale rather than the retail level.
    JEL: E30 F10 L11 L16
    Date: 2009–08
  4. By: Erasmus K. Kersting
    Abstract: This paper examines the role of fiscal stabilization policy in a two-country framework that allows for a general degree of exchange rate pass-through. I derive analytical solutions for optimal monetary and fiscal policy which are shown to depend on the degree of pass-through. In the case of partial pass-through, an optimizing policy maker uses countercyclical fiscal stabilization in addition to monetary stabilization. However, in the extreme cases of complete or zero pass-through, the fiscal stabilization instrument is not employed. There is also no additional gain from the fiscal instrument in the case of coordination between the two countries. These results are due to the specific way the optimal fiscal policy rule affects marginal costs: Rather than being a substitute for monetary policy, fiscal policy complements it by increasing the correlation of the marginal cost terms within and across countries. This in turn makes monetary policy more effective at stabilizing them.
    Keywords: Economic stabilization ; Monetary policy ; Fiscal policy
    Date: 2009
  5. By: John J. Heim (Department of Economics, Rensselaer Polytechnic Institute, Troy, NY 12180-3590, USA)
    Abstract: This paper is a revision of Rensselaer Polytechnic Institute’s Working Papers in Economics Series, No. 803, entitled “How Falling Exchange Rates 2000 – 2007 Have Affected the U.S. Economy and Trade Deficit (Evaluated Using the Federal Reserve’s Real Broad Exchange Rate)”. It expands the analysis to measure exchange rate effects on the U.S. economy through 2008. It also utilizes a significantly improved method for assessing the meaning of the regression coefficient on the exchange rate variable in consumption and investment functions, removing ambiguity as to whether they should be interpreted as income or substitution effects. The paper attempts econometrically, using a seven behavioral equation model, to determine the total impact during 2000-2008 of the U.S. real exchange rate’s 13.8% decline. Using projections based on an econometric model of the U.S. economy 1960 – 2000, the paper suggests that the effect on demand for domestically produced consumer goods (and exports) is positive, but strongly negative for investment goods. The estimated overall negative effect of declining real exchange rates on the GDP is 1.9% over the eight years, or about a quarter percent decline a year. This revised estimate is less than half the estimated impact reported Working Paper 803. It is estimated the decline reduced the trade deficit $189 billion from what it otherwise would have been, down from $244 billion reported Working Paper 803.
    JEL: C20 C22 E00 E01 E20 E21 E22 E27
    Date: 2009–08
  6. By: Wolfgang Breymann (Zurich University of Applied Science); David Lüthi (Zurich University of Applied Science); Eckhard Platen (School of Finance and Economics, University of Technology, Sydney)
    Abstract: Most of the papers that study the distributional and fractal properties of financial instruments focus on stock prices or foreign exchange rates. This typically leads to mixed results concerning the distributions of log-returns and some multi-fractal properties of exchange rates, stock prices, and regional indices. This paper uses a well diversi¯ed world stock index as the central object of analysis. Such index approximates the growth optimal portfolio, which is demonstrated under the benchmark approach, it is the ideal reference unit for studying basic securities. When denominating this world index in units of a given currency, one measures the movements of the currency against the entire market. This provides a least disturbed observation of the currency dynamics. In this manner, one can expect to disentangle, e.g., the superposition of the two currencies involved in an exchange rate. This benchmark approach to the empirical analysis of ¯nancial data allows us to establish remarkable stylized facts. Most important is the observation that the repeatedly documented multi-fractal appearance of financial time series is very weak and much less pronounced than the deviation of the mono-scaling properties from Brownian-motion type scaling. The generalized Hurst exponent H(2) assumes typical values between 0.55 and 0.6. Accordingly, autocorrelations of log-returns decay according to a power law, and the quadratic variation vanishes when going to vanishing observation time step size. Furthermore, one can identify the Student t distribution as the log-return distribution of a well-diversified world stock index for long time horizons when a long enough data series is used for estimation. The study of dependence properties, finally, reveals that jumps at daily horizon originate primarily in the stock market while at 5 min horizon they originate in the foreign exchange market. These results are contrasted with the behavior of foreign exchange rates. The principal message of the empirical analysis is that there is evidence that a diffusion model without multi-scaling could reasonably well model the dynamics of a broadly diversified world stock index.
    Date: 2009–06–01
  7. By: Hernandez-Verme, Paula; Wang, Wen-Yao
    Abstract: We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.
    Keywords: Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.
    JEL: G14 E43 F34 E31 O53 E44 G33 F33 O11 F32 E58 E42 O16 E52 E65 F41 F31 G21
    Date: 2009–03–05

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