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on International Finance |
| By: | Thórarinn G. Pétursson |
| Abstract: | This paper analysis whether the adoption of inflation targeting affects excessive exchange rate volatility, i.e. the share of exchange rate fluctuations not related to economic fundamentals. Using a signal-extraction approach to estimate this excessive volatility in multivariate exchange rates in a sample of forty-four countries, the empirical results show no systematic relationship between inflation targeting and excessive exchange rate volatility. Joint analysis of the effects of inflation targeting and EMU membership shows, however, that a membership in the monetary union significantly reduces this excessive volatility. Together, the results suggest that floating exchange rates not only serve as a shock absorber but are also an independent source of shocks, and that these excessive fluctuations in exchange rates can be reduced by joining a monetary union. At the same time the results suggest that adopting inflation targeting does not by itself contribute to excessive exchange rate volatility. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:ice:wpaper:wp43&r=ifn |
| By: | Mika Kato (Howard University, Washington, D.C., USA); Christian R. Proano (IMK at the Hans Boeckler Foundation); Willi Semmler (New School Univeristy New York, USA) |
| Abstract: | This paper studies the design of optimal monetary policy rules for emerging economies confronted to sharp capital outflows and speculative attacks. We extend Taylor type monetary policy rules by allowing the central bank to give some weight to the level of precautionary foreign reserve balances as one of its targets. We show that a currency crisis scenario can easily occur when the weight is zero, and that it can be avoided when the weight is positive. The impacts of the central bank's monetary control on the output level, the inflation rate, the exchange rate, and the foreign reserve level are investigated as well. By applying both the Hamiltonian as well as the Hamilton-Jacobi-Bellman (HJB) equation (the latter leading to a dynamic programming formulation of the problem), we can explore safe domains of attractions in a variety of complicated model variants. Given the uncertainties the central banks faces, we also show of how central banks can enlarge safe domains of attraction. |
| Keywords: | Currency Crises, Capital Outflows, Monetary Policy Rules |
| JEL: | E5 F3 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:imk:wpaper:8-2009&r=ifn |
| By: | Filippo Cesarano (Banca D'Italia); Giulio Cifarelli (Università degli Studi di Firenze, Dipartimento di Scienze Economiche); Gianni Toniolo |
| Abstract: | The three exchange rate regimes adopted by Italy from 1883 up to the eve of World War I — the gold standard (1883-1893), floating rates (1894-1902), and “gold shadowing” (1903-1911) — produced a puzzling result: formal adherence to the gold standard ended in failure while shadowing the gold standard proved very successful. This paper discusses the main policies underlying Italy’s performance particularly focusing on the strategy of reserve accumulation. It presents a cointegration analysis identifying a distinct co-movement between exchange rate, reserves, and banknotes that holds over the three sub-periods of the sample. Given this long-run relationship, the different performance in each regime is explained by the diversity of policy measures, reflected in the different variables adjusting the system in the various regimes. Italy’s variegated experience during the gold standard provides a valuable lesson about current developments in the international scenario, showing the central role of fundamenals and consistent policies. |
| Keywords: | Exchange rate; gold standard; reserve policy; cointegration |
| JEL: | F31 F33 N13 N23 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:frz:wpaper:wp2009_11.rdf&r=ifn |
| By: | Christopher D. Carroll (Johns Hopkins University); Olivier Jeanne (Peterson Institute for International Economics) |
| Abstract: | We model the motives for residents of a country to hold foreign assets, including the precautionary motive that has been omitted from much previous literature as intractable. Our model captures many of the principal insights from the existing specialized literature on the precautionary motive, deriving a convenient formula for the economy's target value of assets. The target is the level of assets that balances impatience, prudence, risk, intertemporal substitution, and the rate of return. We use the model to shed light on two topical questions: The "upstream" flows of capital from developing countries to advanced countries, and the long-run impact of resorbing global financial imbalances. |
| Keywords: | Buffer Stock Saving, Net Foreign Assets, Sovereign Wealth Funds, Foreign Exchange Reserves, Small Open Economy |
| JEL: | C61 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:iie:wpaper:wp09-10&r=ifn |