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on International Finance |
| By: | Bacchetta, Philippe; Beutler, Toni; van Wincoop, Eric |
| 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; exchange rate models |
| JEL: | F31 F37 F41 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7383&r=ifn |
| By: | Cozmanca,Bogdan-Octavian (Academy of Economic Studies Bucharest and National Bank of Romania); Manea, Florentina (RBS Romania) |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:rjr:wpmems:092102&r=ifn |
| By: | Cozmanca,Bogdan-Octavian (Academy of Economic Studies Bucharest and National Bank of Romania); Manea, Florentina (RBS Romania) |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:rjr:wpmems:092201&r=ifn |
| By: | Melvin, Michael; Taylor, Mark P |
| Abstract: | We provide an overview of the important events of the recent global financial crisis and their implications for exchange rates and market dynamics. Our goal is to catalogue all that was truly of major importance in this episode. We also construct a quantitative measure of crises that allows for a comparison of the current crisis to earlier events. In addition, we address whether one could have predicted costly events before they happened in a manner that would have allowed market participants to moderate their risk exposures and yield better returns from currency speculation. |
| Keywords: | Financial crisis; foreign exchange market |
| JEL: | F31 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7472&r=ifn |
| By: | Valadkhani, Abbas (University of Wollongong); Amin Reza Kamalian (University of Sistan and Baluchestan, Iran); Majid Nameni (President’s Department of Strategic Planning and Control, Iran) |
| Abstract: | The Iranian currency (rial) depreciated on average 12.2 per cent per annum against the U.S dollar during the period 1960-1998 but, despite continued two-digit rates of inflation, the rial has witnessed only a meagre 1.7 per cent fall in its value in the post 1998 era. This paper examines this perplexing issue by identifying the major long-run determinants of the black market exchange rate. This paper uses the multivariate cointegration test, a threshold regression model and annual time series data (1960-2008) to determine exactly at what exchange rate the effect of relative prices on the exchange rate has been subject to an asymmetry adjustment process. We found that the relative CPIs in Iran and the U.S., total stock of foreign debt and the price of crude oil are the major long-run determinants of the black market exchange rate. However, the impact of relative prices (as measured by the magnitude of its elasticity) has significantly diminished from almost unity in the pre 1998 period to less than one-fourth since 1998. Based on our results, if oil prices continue to plunge, liquidity and inflation are out of control and at the same time Iran accumulates more external debt, the exchange rate will eventually exhibit an unprecedented and explosive depreciation in the coming years. No previous study has examined this issue using a threshold regression model without splitting the entire sample into two sections according to an endogenously determined threshold for the exchange rate. |
| Keywords: | Iran, Black market exchange rate, Threshold regression |
| JEL: | C22 F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:uow:depec1:wp09-07&r=ifn |
| By: | Gregory Clare (Rutgers University); Ira N. Gang (Rutgers University) |
| Abstract: | We examine the effects of exchange rate and political risks on foreign direct investment (FDI) for multinationals. Our strategy is to examine FDI by U.S. firms at two levels: in all industries and on the subset of only firms in manufacturing industries. When investing in developed economies the firms appear to take past and present variation in exchange rates into consideration. When investing in less developed nations the past and present variation does not appear to weigh as heavily as the present and future variation. Decreasing political risk increases FDI. |
| Keywords: | Exchange Rates, Foreign Direct Investment, Uncertainty |
| JEL: | F21 F31 |
| Date: | 2009–04–27 |
| URL: | http://d.repec.org/n?u=RePEc:rut:rutres:200903&r=ifn |
| By: | Kollmann, Robert |
| Abstract: | Recent empirical research documents that an exogenous rise in government purchases in a given country triggers a persistent depreciation of its real exchange rate - which raises an important puzzle, as standard macro models predict an appreciation of the real exchange rate. This paper presents a simple model with limited international risk sharing that can account for the empirical real exchange rate response. When faced with a country-specific rise in government purchases, local households experience a negative wealth effect; they thus work harder, and domestic output increases. Under balanced trade (financial autarky) this supply-side effect is so strong that the terms of trade worsen, and the real exchange rate depreciates. In a bonds-only economy, an increase in government purchases triggers a real exchange rate depreciation, if the rise in government purchases is sufficiently persistent and/or labor supply is highly elastic. |
| Keywords: | government purchases; limited international risk sharing; real exchange rate |
| JEL: | E62 F36 F41 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7427&r=ifn |
| By: | Abdul Hakim (Faculty of Economics, Indonesian Islamic University); Michael McAleer (Econometric Institute, Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute and Center for International Research on the Japanese Economy (CIRJE), Faculty of Economics, University of Tokyo) |
| Abstract: | The paper models the dynamic conditional correlations in emerging stock, bond and foreign exchange markets using the DCC model of Engle (2002) and the GARCC model of McAleer et al. (2008). The highly restrictive DCC model suggests that the conditional correlations of the overall returns are constant. In contrast, the GARCC model finds that the conditional correlations between bond-bond markets and between stock-stock markets are relatively constant across developed-emerging markets, while those between emerging-emerging markets are dynamic. The conditional correlations between stock-bond markets across developed-emerging markets are also more dynamic as compared with those between emerging-emerging markets. |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:tky:fseres:2009cf677&r=ifn |
| By: | Berman, Nicolas; Martin, Philippe; Mayer, Thierry |
| Abstract: | This paper analyzes the reaction of exporters to exchange rate changes. We present a model where, in the presence of distribution costs in the export market, high and low productivity firms react differently to a depreciation . Whereas high productivity firms optimally raise their markup rather than the volume they export, low productivity firms choose the opposite strategy. Hence, pricing to market is both endogenous and heterogenous. This heterogeneity has important consequences for the aggregate impact of exchange rate movements. The presence of fixed costs to export means that only high productivity firms can export, firms which precisely react to an exchange rate depreciation by increasing their export price rather than their sales. We show that this selection effect can explain the weak impact of exchange rate movements on aggregate export volumes. We then test the main predictions of the model on a very rich French firm level data set with destination-specific export values and volumes on the period 1995-2005. Our results confirm that high performance firms react to a depreciation by increasing their export price rather than their export volume. The reverse is true for low productivity exporters. Pricing to market by exporters is also more pervasive in sectors and destination countries with higher distribution costs. Consistent with our theoretical framework, we show that the probability of firms to enter the export market following a depreciation increases. The extensive margin response to exchange rate changes is modest at the aggregate level because firms that enter, following a depreciation, are smaller relative to existing firms. |
| Keywords: | distribution costs; Exchange rates; exports; heterogeneity; pricing to market; productivity |
| JEL: | F12 F41 |
| Date: | 2009–10 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7493&r=ifn |