nep-ifn New Economics Papers
on International Finance
Issue of 2009‒12‒05
four papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. An Optimum-Currency-Area Odyssey By Harris Dellas; George S.Tavlas
  2. Evidence of the role of the real exchange rate in the growth of the GDP in Argentina (1989-2007) By Saidón, Mariana
  3. Export-led growth, real exchange rates and the fallacy of composition By Robert A. Blecker; Arslan Razmi
  4. Equilibrium sovereign default with endogenous exchange rate depreciation By Popov, Sergey V.; Wiczer, David G.

  1. By: Harris Dellas (University of Bern); George S.Tavlas (Bank of Greece)
    Abstract: The theory of optimum-currency-areas was conceived and developed in three highly influential papers, written by Mundell (1961), McKinnon (1963) and Kenen (1969). Those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally- tailored monetary policy and the adjustment of an exchange rate of a national currency. We trace the development of optimum currency- area theory, which, after a flurry of research into the subject in the 1960s, was relegated to intellectual purgatory for about 20 years. We then discuss factors that led to a renewed interest into the subject, beginning in the early 1990s. Milton Friedman plays a pivotal role in our narrative; Friedman’s work on monetary integration in the early 1950s presaged subsequent optimum-currency-area contributions; Mundell’s classic formulation of an optimal currency area was aimed, in part, at refuting Friedman’s ‘‘strong’’ case for floating exchange rates; and Friedman’s work on the role of monetary policy had the effect of helping to revive interest in optimum-currency-area analysis. The paper concludes with a discussion of recent analytical work, using New Keynesian models, which has the promise of fulfilling the unfinished agenda set-out by the original contributors to the optimum-currency-area literature, that is, providing a consistent framework in which a country’s characteristics can be used to determine its optimal exchange-rate regime
    Keywords: Optimum-currency-areas; Exchange-rate regimes; New Keynesian models
    JEL: F33 F41
    Date: 2009–09
  2. By: Saidón, Mariana
    Abstract: This paper analyzes the impact of the real exchange rate on the behavior of the GDP in Argentina in the period that goes from 1989 to 2007. In this paper, an econometric model based on the Vector Error Correction method, which proves the (lack of) relevance of different predictions made by alternate schools of domestic macroeconomic thought is proposed. The model links four non-stationary and cointegrated variables: the two mentioned variables are: the gross domestic product and the real exchange rate, and a liquid monetary aggregate (excluding time deposits) and the terms of trade. The responses of GDP to real exchange rate shocks and the terms of trade showed a similar behavior towards both the generalized impulses and other impulses arising from a Cholesky decomposition: initially, a real exchange rate shock has a negative impact on the activity that gradually decreases, and after six months it becomes positive, when it begins to gradually recover strength. The terms of trade have a positive impact after the shock and that impact loses strength over the time until it becomes negative and, cumulatively, explosive. Money- Supply shocks have a positive impact initially but there is no strong evidence regarding medium and long-term effects.
    Keywords: real exchange rate; GDP; Gross Domestic Product; VEC; Vector Error Correction; Argentina; generalized impulses
    JEL: N1 N16 B22 C1 C32 B2
    Date: 2009–03–31
  3. By: Robert A. Blecker; Arslan Razmi
    Keywords: exports, exchange rates
    Date: 2009–03
  4. By: Popov, Sergey V.; Wiczer, David G.
    Abstract: Sovereign default is often associated with disturbances in a country’s trade relations. Often the defaulter’s currency depreciates while trade volume falls drastically. This paper develops a model to incorporate real depreciation along with sovereign bankruptcy. The exchange rate is determined in equilibrium as the relative price of imports. We demonstrate that a default episode can imply up to a 30% real depreciation. This matches the depreciations observed in crisis events for developing countries. We argue that much of the exchange rate movement is explained by market clearing adjustments to trade disruptions in the aftermath of default.
    Keywords: Endogenous default; endogenous exchange rate; trade balance.
    JEL: F34 F11 F17
    Date: 2009–11–24

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