nep-ifn New Economics Papers
on International Finance
Issue of 2009‒12‒19
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Exchange Rate Pass-Through and Inflation: A Nonlinear Time Series Analysis By Mototsugu Shintani; Akiko Terada-Hagiwara; Tomoyoshi Yabu
  2. Combining Mean Reversion and Momentum Trading Strategies in Foreign Exchange Markets By Alina Serban
  3. Managed Floats to Damp Shocks like 1982-5 and 2006-9: Field and Laboratory Evidence for Chinese Interest in a Single World Currency By Robin Pope, ,; Reinhard Selten,; Sebastian Kube,; Jürgen von Hagen
  4. Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data By Petreski, Marjan
  5. Exchange rate pass-through to domestic prices in the Central European countries By Mirdala, Rajmund
  6. Global Imbalances and the Financial Crisis: Products of Common Causes By Obstfeld, Maurice; Rogoff, Kenneth
  7. Impacto dos Swaps Cambiais na Curva de Cupom Cambial: uma análise segundo a regressão de componentes principais By Alessandra Pasqualina Viola; Margarida Sarmiento Gutierrez; Octávio Bessada Lion; Cláudio Henrique Barbedo
  8. Endogenous Growth Models in Open Economies: A Possibility of Permanent Current Account Deficits By Harashima, Taiji
  9. Macroeconomic Implications of Capital Inflows in India By Masood, Tariq; Ahmad, Mohd. Izhar
  10. The new multi-polar international monetary system By Dailami, Mansoor; Masson, Paul

  1. By: Mototsugu Shintani (Department of Economics, Vanderbilt University); Akiko Terada-Hagiwara (Economics and Reasearch Department, Asian Development Bank); Tomoyoshi Yabu (Faculty of Business and Commerce, Keio University)
    Abstract: This paper investigates the relationship between the exchange rate pass-through (ERPT) and inflation by estimating a nonlinear time series model. Using a simple theoretical model of ERPT determination, we show that the dynamics of ERPT can be well-approximated by a class of smooth transition autoregressive (STAR) models with inflation as a transition variable. We employ several U-shaped transition functions in the estimation of the time-varying ERPT to U.S. domestic prices. The estimation result suggests that declines in the ERPT during the 1980s and 1990s are associated with lowered inflation.
    Keywords: Import prices, inflation indexation, pricing-to-market, smooth transition autoregressive models, sticky prices
    JEL: C22 E31 F31
    Date: 2009–11
  2. By: Alina Serban (Department of Economics, West Virginia University)
    Abstract: The literature on equity markets documents the existence of mean reversion and momentum phenomena. Researchers in foreign exchange markets find that foreign exchange rates also display behaviors akin to momentum and mean reversion. This paper implements a trading strategy combining mean reversion and momentum in foreign exchange markets. The strategy was originally designed for equity markets, but it also generates abnormal returns when applied to uncovered interest parity deviations for ten countries. I find that the pattern for the positions thus created in the foreign exchange markets is qualitatively similar to that found in the equity markets. Quantitatively, this strategy performs better in foreign exchange markets than in equity markets. Also, it outperforms traditional foreign exchange trading strategies, such as carry trades and moving average rules.
    Keywords: Uncovered Interest Parity; Mean Reversion; Momentum; Foreign Exchange; Trading Strategies.
    JEL: F31 G11 G15
    Date: 2009
  3. By: Robin Pope, ,; Reinhard Selten,; Sebastian Kube,; Jürgen von Hagen
    Abstract: This paper’s field evidence is: (1) many official sectors rapidly forget the damage of the 1982-85 exchange rate liquidity crisis and reverted to what caused that crisis, namely a closed economy clean floats perspective; and (2) the 2006-2008/9 exchange rate liquidity shock would have been more drastic but for central bank currency swaps. This evidence is bolstered by a laboratory experiment that incorporates more aspects of real world complexity and more different sorts of official and private sector agents than are feasible in econometric or algebraic investigations and employs a new central bank cooperation-conflict model of exchange rate determination , and is within an umbrella theory of Pope, namely SKAT, the Stages of Knowledge Ahead Theory. SKAT allows for risk effects from stages omitted in normal models, including those from (a) difficulties of agents in evaluating alternatives in a complex environment in which the assumed maximization of expected utility is impossible; and (b) preference for safety and reliability is not trivialized. Our joint field plus laboratory evidence indicates that official sectors should maintain an international exchange rate oriented perspective, or better yet, a single world currency as recommended by Zhou Xiaochuan, head of the People’s Bank of China. To avoid rapid forgetting of havoc from isolationist clean floats and the value of stable exchange rates, a new syllabus, as under the SKAT umbrella, is fundamental in the education of official sector members in order to furnish them with a coherent alternative intellectual framework to current university education that excludes liquidity crises.
    Keywords: clean float, managed float, IMF imposed conditions, exchange rate regime, exchange rate volatility, experiment, SKAT the Stages of Knowledge Ahead Theory, monetary policy, transparent policy, exchange rate shocks, central bank cooperation, central bank conflict
    JEL: D80 F31
    Date: 2009–10
  4. By: Petreski, Marjan
    Abstract: The aim of this paper is to empirically investigate the relationship between exchange-rate regime and economic growth, building on underlying theoretical examination and shortcomings of empirical literature. Channels through which regime might influence growth could be distinguished at: i) level of uncertainty imposed by certain regime, which than affects trading and investment decisions; ii) regime as shock absorber; iii) its linkage to productivity growth, which usually interferes with financial development. Empirical research offers divergent result though and is criticized because of: measurement error in regimes’ classification; appropriateness of growth framework; endogeneity of exchange-rate regime and/or other regressors; Lucas critique; sample-selection bias and survivor bias. Applying dynamic system-GMM panel estimation on 169 countries over the period 1976-2006 and addressing all shortcoming of the empirical literature, this paper finds that the exchange-rate regime is not statistically significant in explaining growth. The conclusion is robust to dividing the sample on developing versus advanced countries and considering two sub-periods. In all specifications, the exchange-rate regime does not even approach conventional significance levels. Observation de-facto versus de-jure regime matters neither. No empirical grounds were established that coefficients in the regression suffer the Lucas critique. Hence, the main conclusion is that, as nominal variable, the exchange rate regime does not have explanatory power over growth. --
    Keywords: Exchange rate regime,economic growth
    JEL: E42 F31
    Date: 2009
  5. By: Mirdala, Rajmund
    Abstract: Exchange rate plays an important role in transmitting pressures from the external shocks to the domestic economy. Development of inflation in the domestic economy is significantly determined by the ability of exchange rate to transmit external price related pressures to the domestic market. Considering the new EU member countries obligation to adopt euro the loss of the monetary sovereignty should be analyzed not only in the view of the direct positive and negative effects of this decision but also in the view of many indirect effects. While the exchange rates of majority of the EMU candidate countries are strongly affected by the euro exchange rate on the international markets there is still room for them to float partially reflecting changes in the national economic development. Ability of the exchange rate to transfer external shocks to the national economy remains one of the most discussed areas relating to the current stage of the monetary integration process in the European single market. In the paper we analyze the ability of the exchange rate to weaken or eventually to strengthen the transmission of the external inflation pressures to the national economy in the Czech republic, Hungary, Poland and the Slovak republic. In order to meet this objective we estimate a vector autoregression (VAR) model correctly identified by the Cholesky decomposition of innovations that allows us to identify structural shocks hitting the model. Variance decomposition and impulse-response functions are computed in order to estimate the exchange rate pass-through from the foreign prices of import to the domestic consumer price indexes in the Visegrad countries. Ordering of the endogenous variables in the model is also considered allowing us to check the robustness of the empirical results.
    Keywords: exchange rate; inflation; VAR; Cholesky decomposition; variance decomposition; impulse-response function
    JEL: C32 E52
    Date: 2009–07
  6. By: Obstfeld, Maurice; Rogoff, Kenneth
    Abstract: This paper makes a case that the global imbalances of the 2000s and the recent global financial crisis are intimately connected. Both have their origins in economic policies followed in a number of countries in the 2000s and in distortions that influenced the transmission of these policies through U.S. and ultimately through global financial markets. In the U.S., the interaction among the Fed’s monetary stance, global real interest rates, credit market distortions, and financial innovation created the toxic mix of conditions making the U.S. the epicenter of the global financial crisis. Outside the U.S., exchange rate and other economic policies followed by emerging markets such as China contributed to the United States’ ability to borrow cheaply abroad and thereby finance its unsustainable housing bubble.
    Keywords: current account deficit; financial crisis; financial reform; global imbalances; housing bubble
    JEL: E44 E58 F32 F33 F42 G15
    Date: 2009–12
  7. By: Alessandra Pasqualina Viola; Margarida Sarmiento Gutierrez; Octávio Bessada Lion; Cláudio Henrique Barbedo
    Abstract: The purpose of this paper is to verify, based on the portfolio balance exchange rate determination theory, the impact of the foreign exchange swaps offered by the Central Bank of Brazil on the attributes of the local foreign exchange interest rate term structure. For this, it is used the Principal Component Regression. As a complementary analysis the volatility of the local foreign exchange interest rate term structure and the volatility of the foreign exchange spot were studied. The results concerning the foreign exchange swaps were in accordance with those expected by the theory, and show that they do change the local foreign exchange interest rate term structure. On the other hand, the swaps known as reversal foreign exchange swaps showed results that point out that the offer of this product by the Central Bank had no impact on the level of the local foreign exchange interest rate market. Keywords: Local foreign exchange, Local foreign exchange interest rate term structure, Principal Components Analyses, Principal Component Regression, Exchange Rate Determination Theories.
    Date: 2009–11
  8. By: Harashima, Taiji
    Abstract: The paper examines the impacts of heterogeneity in the degree of relative risk aversion on the balance on current account in the framework of endogenous growth, and concludes that, like heterogeneity in demographic changes, heterogeneity in the degree of relative risk aversion generates persisting current account imbalances. The imbalance continues permanently, but its ratio to outputs stabilizes. With evidence in many empirical studies that the degree of relative risk aversion in Japan is relatively higher than that in the U.S., the paper argues that the persisting bilateral trade deficit of the U.S. with Japan is partially generated by this mechanism.
    Keywords: Current account; Trade deficits; Capital flows; Endogenous growth; Risk aversion
    JEL: F21 F41 F43 E10 O40
    Date: 2009–12–16
  9. By: Masood, Tariq; Ahmad, Mohd. Izhar
    Abstract: The study attempts to analyse the behaviour of some macroeconomic variables in response to total capital inflows in India using quarterly data for the period 1994Q1-2007Q4. Time trend of all variables except nominal effective exchange rate-both export and trade based and current account balance shows instability over the period of study. Current account balance is the only variable which is stationary in level form all other variables are stationary in first difference form. Cointegration test confirms the long run equilibrium relation between total capital inflows (TCI) and real effective exchange rate-both trade based and export based and between TCI and nominal effective exchange rate-export based. Granger causality test confirms the bidirectional causality between real effective exchange rate-export based and TCI and between foreign exchange reserve & TCI and unidirectional causality from TCI to real effective exchange rate-trade based.
    Keywords: International Capital Inflows; Time Series Econometrics
    JEL: F30 C22
    Date: 2009–03–06
  10. By: Dailami, Mansoor; Masson, Paul
    Abstract: Backed by rapid economic growth, growing financial clout, and a newfound sense of assertiveness in recent years, the BRIC countries - Brazil, Russia, India, and China - are a driving force behind an incipient transformation of the world economy away from a US-dominated system toward a multipolar one in which developing countries will have a major say. It is, however, in the international monetary arena that the notion of multipolarity - more than two dominant poles - commands renewed attention and vigorous debate. For much of its history, the quintessential structural feature of the international monetary system has been unipolarity - as American hegemony of initiatives and power as well as its capacity to promote a market-based, liberal order came to define and shape international monetary relations. As other currencies become potential substitutes for the US dollar in international reserves and in cross-border claims, exchange rate volatility may become more severe. There are also risks that the rivalry among the three economic blocs may spill over into something more if not kept in check by a strong global governance structure. While the transition will be difficult and drawn out, governments should take immediate steps to prevent financial volatility by enhancing cooperation on monetary policies, currency market intervention and financial regulation.
    Keywords: Currencies and Exchange Rates,Debt Markets,Emerging Markets,Fiscal&Monetary Policy,Economic Theory&Research
    Date: 2009–12–01

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