nep-ifn New Economics Papers
on International Finance
Issue of 2009‒08‒30
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Forecasting the Real Exchange Rate using a Long Span of Data. A Rematch: Linear vs Nonlinear By David Peel; Ivan Paya; E Pavlidis
  2. Understanding forecast failure of ESTAR models of real exchange rates By Daniel Buncic
  3. Exchange Rates, Oil Price Shocks, and Monetary Policy in an Economy with Traded and Non-Traded Goods. By Micheal Plante
  4. International Portfolio Balance – Modeling the External Adjustment Process By Holinski Nils; Kool Clemens; Muysken Joan
  5. The pass-through effect: a twofold analysis By Antonio Forte
  6. Productivity, the Terms of Trade, and the Real Exchange Rate: The Balassa-Samuelson Hypothesis Revisited By Ehsan U. Choudhri; Lawrence L. Schembri
  7. The Forward- and the Equity-Premium Puzzles: Two Symptoms of the Same Illness? By Costa, Carlos Eugênio da; Issler, João Victor; Matos, Paulo F.
  8. Economic Shocks and Exchange Rate as a Shock Absorber in Indonesia and Thailand By Goo, Siwei; Siregar, Reza Y. Siregar

  1. By: David Peel; Ivan Paya; E Pavlidis
    Abstract: This paper deals with the nonlinear modeling and forecasting of the dollar-sterling real exchange rate using a long span of data. Our contribution is threefold. First, we provide significant evidence of smooth transition dynamics in the series by employing a battery of recently developed in-sample statistical tests. Second, we investigate the small sample properties of several evaluation measures for comparing recursive forecasts when one of the competing models is nonlinear. Finally, we run a forecasting race for the post-Bretton Woods era between the nonlinear real exchange rate model, the random walk, and the linear autoregressive model. The winner turns out to be the nonlinear model, against the odds.
    Keywords: Real Exchange Rate, Nonlinearity, Robust Linearity Tests, Forecast Evaluation, Bootstrapping.
    Date: 2009
  2. By: Daniel Buncic
    Abstract: The forecast performance of the empirical ESTAR model of Taylor, Peel and Sarno (2001) is examined for 4 bilateral real exchange rate series over an out-of-sample eval-uation period of nearly 12 years. Point as well as density forecasts are constructed, considering forecast horizons of 1 to 22 steps head. The study finds that no forecast gains over a simple AR(1) specification exist at any of the forecast horizons that are considered, regardless of whether point or density forecasts are utilised in the evaluation. Non-parametric methods are used in conjunction with simulation techniques to learn about the models and their forecasts. It is shown graphically that the nonlinearity in the point forecasts of the ESTAR model decreases as the forecast horizon increases. The non-parametric methods show also that the multiple steps ahead forecast densities are normal looking with no signs of bi-modality, skewness or kurtosis. Overall, there seems little to be gained from using an ESTAR specification over a sim¬ple AR(1) model.
    Keywords: Purchasing power parity, regime modelling, non-linear real exchange rate models, ESTAR, forecast evaluation, density forecasts, non-parametric methods.
    JEL: C22 C52 C53 F31 F47
    Date: 2009–08–18
  3. By: Micheal Plante (Indiana University, Ball State University)
    Abstract: This paper examines monetary policy responses to oil price shocks in a small open economy that produces traded and non-traded goods. When only labor and oil are used in production and prices are sticky in the non-traded sector the behavior of ination, the nominal exchange rate, and the relative price of the non-traded good depends crucially upon whether the ratio of the cost share of oil to the cost share of labor is higher for the traded or non-traded sector. If the ratio is smaller (higher) for the traded sector then a policy that fully stabilizes non-traded ination causes the nominal exchange rate to appreciate (depreciate) and the relative price of the non-traded good to rise (fall) when there is a surprise rise in the price of oil. Similar results can hold for a policy that stabilizes CPI ination. Under a policy that xes the nominal exchange rate, non-traded ination rises (falls) if the ratio is smaller (larger) for the traded sector. Analytical results show that a policy of xing the exchange rate always produces a unique solution and that a policy of stabilizing non-traded ination produces a unique solution so long as the nominal interest rate is raised more than one-for-one with rises in non-traded ination. A policy that stabilizes CPI ination, however, produces multiple equilibria for a wide range of calibrations of the policy rule.
    Date: 2009–08
  4. By: Holinski Nils; Kool Clemens; Muysken Joan (METEOR)
    Abstract: Unprecedented growth in private cross-border asset trade and asymmetric internationalbalance sheets are well-documented stylized facts of financial integration. Moreover, weobserve that current accounts are no longer the number one determinant of external balances. Advancing the work of Blanchard et al. (2005), this paper develops a portfolio-balance model that recognizes these stylized facts and shows how they influence the joint dynamics of the current account, the exchange rate and relative asset prices. Calibrating the model to the external adjustment process of the US, the model produces results that are broadly consistent with recent empirical trends. In particular, we find that the composition of its international balance sheet helps the US to better cope with external shocks.
    Keywords: international economics and trade ;
    Date: 2009
  5. By: Antonio Forte
    Abstract: In this paper I analyse the pass-through effect in four big areas using different approaches. On the one hand, I inspect this issue comparing the REER (real effective exchange rate) with the WARP (weighted average relative price) in the US, the UK, Japan and the Euro area. On the other hand, I try to support the findings of the first part with a double econometric analysis: I employ single equation and Var approaches in order to provide wide and robust results. The global conclusion is that in the major economies of the world the pass-through effect has been very light from January 1999 onward and that, especially in the Euro area, this result is linked with the firms behaviour.
    Keywords: Real effective exchange rate, weighted average relative price, WARP, REER, double econometric analysis.
    JEL: F30 F31
    Date: 2009–08–08
  6. By: Ehsan U. Choudhri; Lawrence L. Schembri
    Abstract: The paper examines how the Balassa-Samuelson hypothesis is affected by a modern variation of the standard model that allows product differentiation (within the traded and nontraded goods sectors) with the number of firms determined exogenously or endogenously. The hypothesis is found to be fragile in the modified framework. Small variations in the elasticity of substitution between home and foreign traded goods (within the range of estimates suggested in the literature), for example, can make the effect of a traded-goods productivity improvement on the real exchange rate negative or positive, as well as small or large. This result provides a potential explanation of the mixed empirical results that have been obtained on the relationship between productivity and the real exchange rate.
    Keywords: Exchange rates; Productivity
    JEL: F41 F31
    Date: 2009
  7. By: Costa, Carlos Eugênio da; Issler, João Victor; Matos, Paulo F.
    Abstract: We build a pricing kernel using only US domestic assets data and checkwhether it accounts for foreign markets stylized facts that escape consumptionbased models. By interpreting our stochastic discount factor as the projection ofa pricing kernel from a fully specified model in the space of returns, our results indicatethat a model that accounts for the behavior of domestic assets goes a longway toward accounting for the behavior of foreign assets. We address predictabilityissues associated with the forward premium puzzle by: i) using instrumentsthat are known to forecast excess returns in the moments restrictions associatedwith Euler equations, and; ii) by pricing Lustig and Verdelhan (2007)'s foreigncurrency portfolios. Our results indicate that the relevant state variables that explainforeign-currency market asset prices are also the driving forces behind U.S.domestic assets behavior.
    Date: 2009–08–12
  8. By: Goo, Siwei; Siregar, Reza Y. Siregar
    Abstract: This study investigates the requirement for the exchange rate to be a shock absorber in Indonesia and Thailand from 1986 to 2007. In general, we find that the economic shocks have predominantly been asymmetric relative to the US and the Japanese economies. Yet, the weights attached to the US dollar remain respectably high in the exchange rate management of the rupiah and the baht, in particular for the latter currency, during the post-1997 crisis. Hence, relinquishing the role of exchange rate as a shock absorber has been costly during both the pre-and the post-1997 crisis periods for these Southeast Asian countries. Furthermore, it is arguably more costly for Thailand during the post-1997, and for Indonesia during the pre-1997 crisis.
    Keywords: Economic Shocks; Shock Absorber; Exchange Rate; Structural Vector Autoregression; Indonesia; Thailand
    JEL: E52 C22 F31
    Date: 2009–08–19

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