nep-ifn New Economics Papers
on International Finance
Issue of 2009‒09‒11
eight papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals By Philippe Bacchetta; Eric van Wincoop
  2. Intervention index and exchange rate regimes: the cases of selected East-Asian economies By Pontines, Victor; Siregar, Reza
  3. Nonlinear Foreign Exchange Exposure: Evidence from Brazilian Companies By Rossi, José Luiz J.
  4. What Is the Impact of the Global Financial Crisis on the Banking System in East Asia? By Michael Pomerleano
  5. Cross-country causes and consequences of the 2008 crisis: early warning By Andrew K. Rose; Mark M. Spiegel
  6. Macroeconomic Volatility and Exchange Rate Pass-through under Internationalized Production By Aurélien Eyquem; Gunes Kamber
  7. Financial professionals' overconfidence: Is it experience, job, or attitude? By Gloede, Oliver; Menkhoff, Lukas
  8. Lessons for China from Financial Liberalization in Scandinavia By Hongyi Chen; Lars Jonung; Olaf Unteroberdoerster

  1. By: Philippe Bacchetta (University of Lausanne, Centre for Economic Policy Research, Hong Kong Institute for Monetary Research); Eric van Wincoop (University of Virginia, National Bureau of Economic Research, Hong Kong Institute for Monetary Research)
    Abstract: It is well known from anecdotal, survey and econometric evidence that the relationship between the exchange rate and macro fundamentals is highly unstable. This could be explained when structural parameters are known and very volatile, neither of which seems plausible. Instead we argue that large and frequent variations in the relationship between the exchange rate and macro fundamentals naturally develop when structural parameters in the economy are unknown and change very slowly. We show that the reduced form relationship between exchange rates and fundamentals is driven not by the structural parameters themselves, but rather by expectations of these parameters. These expectations can be highly unstable as a result of perfectly rational "scapegoat" effects. This happens when parameters can potentially change much more in the long run than the short run. This generates substantial uncertainty about the level of parameters, even though monthly or annual changes are small. This mechanism can also be relevant in other contexts of forward looking variables and could explain the widespread evidence of parameter instability found in macroeconomic and financial data. Finally, we show that parameter instability has remarkably little effect on the volatility of exchange rates, the in-sample explanatory power of macro fundamentals and the ability to forecast out of sample.
    Date: 2009–08
  2. By: Pontines, Victor; Siregar, Reza
    Abstract: Given the absence of publicly available information on foreign exchange intervention, we propose an index of central bank intervention in the exchange market to classify exchange rate regimes adopted by four East Asian economies. We revisit an old debate on whether these crisis-effected East Asia countries have indeed returned to their pre-1997 rigid exchange rate policies. If, instead, there had been evidences of a policy shift to a more flexible regime, was the move voluntary, or mainly due to high market pressures on the currency? Our findings clearly reject the “hollow middle” hypothesis.
    Keywords: Exchange Market Intervention; Exchange Rate Regimes; East Asian Countries
    JEL: F41 F31
    Date: 2009–01–15
  3. By: Rossi, José Luiz J.
    Date: 2009–10
  4. By: Michael Pomerleano
    Abstract: This paper assesses the condition and outlook of the financial sectors—in particular, the banking sector—in the East Asia region in the aftermath of the current global financial crisis. The risks in the banking systems in East Asia are analyzed using the standard supervisory framework, which assesses capital adequacy, asset quality, management, earnings, and liquidity (CAMEL). [WP 146].
    Keywords: financial sectors, banking sector, banking, financial, East Asia, Asia, banking system, capital, capital adequacy, asset, management, earnings, liquidity, CAMEL, global financial crisis, Thailand, exchange rate, lonas, Japan,
    Date: 2009
  5. By: Andrew K. Rose; Mark M. Spiegel
    Abstract: This paper models the causes of the 2008 financial crisis together with its manifestations, using a Multiple Indicator Multiple Cause (MIMIC) model. Our analysis is conducted on a cross-section of 107 countries; we focus on national causes and consequences of the crisis, ignoring crosscountry "contagion" effects. Our model of the incidence of the crisis combines 2008 changes in real GDP, the stock market, country credit ratings, and the exchange rate. We explore the linkages between these manifestations of the crisis and a number of its possible causes from 2006 and earlier. We include over sixty potential causes of the crisis, covering such categories as: financial system policies and conditions; asset price appreciation in real estate and equity markets; international imbalances and foreign reserve adequacy; macroeconomic policies; and institutional and geographic features. Despite the fact that we use a wide number of possible causes in a flexible statistical framework, we are unable to link most of the commonly cited causes of the crisis to its incidence across countries. This negative finding in the cross-section makes us skeptical of the accuracy of "early warning" systems of potential crises, which must also predict their timing.
    Keywords: Financial crises ; Econometric models
    Date: 2009
  6. By: Aurélien Eyquem (GATE - Groupe d'analyse et de théorie économique - CNRS : UMR5824 - Université Lumière - Lyon II - Ecole Normale Supérieure Lettres et Sciences Humaines); Gunes Kamber (EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris, C - centre d'Etudes des Politiques Economiques de l'université d'Evry - Université d'Evry-Val d'Essonne)
    Abstract: This paper shows that internationalized production, modelled as trade in intermediate goods, challenges the standard result according to which exchange rate volatility insulates small open economies from external shocks. Movements of relative prices affect the economy through an additional channel, denoted as the cost channel. We show that this channel also acts as an automatic stabilizer and that macroeconomic volatility is dramatically reduced when trade in intermediate goods is taken into account. Finally, trade in intermediate goods affects the exchange rate pass-through to consumption prices and may contribute explaining the puzzle described by McCallum & Nelson (2000).
    Keywords: Small open economy ; internationalized production ; macroeconomic volatility ; exchange rate pass-through
    Date: 2009
  7. By: Gloede, Oliver; Menkhoff, Lukas
    Abstract: This paper examines financial professionals' overconfidence in their forecasting performance. We are the first to compare individual financial professionals' self-ratings with their true forecasting performance. Data spans several years at monthly frequency. The forecasters in our sample do not provide feasible self-ratings compared to their true performance but show overconfidence on average. In analyzing this, we find an easing relation to experience. Job characteristics are also related to less overconfidence, such as being a fund manager and using fundamental analysis. The same effect is found for the attitude to herd, whereas recent forecasting success comes along with more overconfidence.
    Keywords: overconfidence, self-rating, forecasting, foreign exchange, better-than-average, experience, performance
    JEL: G1 D84 F31
    Date: 2009–08
  8. By: Hongyi Chen (Hong Kong Institute for Monetary Research); Lars Jonung (DG ECFIN, European Commission, Brussels, Hong Kong Institute for Monetary Research); Olaf Unteroberdoerster (International Monetary Fund, Washington DC)
    Abstract: This report identifies a set of policy lessons for China today drawn from the experience of financial deregulation, financial crisis and recovery in Scandinavia during the period 1985-2000. Although there are considerable differences between the huge Chinese economy and the small Nordic countries, there are enough similarities to make lesson-drawing a worthwhile exercise. Based on the Scandinavian experience and the added complexity of China¡¦s status as a transition economy, financial reforms should strike a proper balance between being gradual (to avoid costly mistakes) and substantive (to secure efficiency gains in the longer term) with due consideration being given to initial conditions concerning regulation, taxes and exchange rate arrangements. A well managed process of financial deregulation requires that policy-makers and market participants fully understand the interlinkages between financial reforms and the rest of the economy. In addition, the supervisory and management systems in the financial sector should move in step with the liberalization process.
    Keywords: Financial Liberalization, Financial Crisis, Transition, Financial Regulation, Banking, Boom-Bust, China, Scandinavia, the Nordics
    JEL: E52 E58 F31 F32 G21 G28 G32 P52
    Date: 2009–07

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