nep-ifn New Economics Papers
on International Finance
Issue of 2010‒01‒16
ten papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. Excess Comovements between the Euro/US dollar and British pound/US dollar exchange rates By Michael Kühl
  2. Are real exchange rates mean reverting? Evidence from a panel of OECD countries By Levent, Korap
  3. From Lombard Street to Avenida Paulista: Foreign Exchange Liquidity Easing in Brazil in Response to the Global Shock of 2008-09 By W. Christopher Walker; Yosuke Yasui; Mark R. Stone
  4. Consumption and real exchange rates in professional forecasts By Michael B Devereux; Gregor W Smith; James Yetman
  5. “Exchange Rate Volatility and International Trade Growth: Evidence from Bangladesh” By Md Shoaib Ahmed, Shoaib
  6. Financial crisis, exchange rate and stock market integration By Yushi Yoshida
  7. Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone By Przystupa, Jan
  8. Productive Government Purchases and the Real Exchange Rate By Parantap Basu; Robert Kollmann
  9. Getting Talk Back on Target: The Exchange Rate and the Inflation Rate By David Laidler
  10. The Transmission of Exchange Rate Changes to Agricultural Prices By Liefert, William; Persuad, Suresh

  1. By: Michael Kühl
    Abstract: The aim of this paper is to discuss excess comovements for the Euro/US dollar and British pound/US dollar exchange rates, i.e. we look for comovements of exchange rates which are stronger than implied by fundamentals. The results of the empirical analysis give evidence that excess comovements indeed exist. A long-run analysis on correlations can verify that the correlations dynamics of exchange rates, relative inflation rates, long-term interest rates, economic sentiments and money supply are linked. We found that money supply and prices play major roles. From the investigation of our exchange rate pair it becomes obvious that non-fundamental factors in exchange rates have an important meaning for modelling foreign exchange rates.
    Keywords: Foreign Exchange Market, DCC-GARCH, Excess Comovements
    JEL: E44 F31 G15
    Date: 2009–11–18
  2. By: Levent, Korap
    Abstract: In our article we employ some contemporaneous panel unit root tests (Maddala and Wu, 1999; Im et al., 2003) to examine whether the real exchange rates are mean reverting. Considering a panel of 26 OECD countries from 1987 to 2006 both using monthly and quarterly observations, we find that assuming a panel framework significantly increases the power of unit root tests. As a result, we find that the nonstationarity of the real exchange rate has strongly been rejected in favour of giving support to the purchasing power parity.
    Keywords: Real Exchange Rates ; Panel Unit Root Tests ; OECD Economies ;
    JEL: C22 F41 F31
    Date: 2009
  3. By: W. Christopher Walker; Yosuke Yasui; Mark R. Stone
    Abstract: The provision of foreign exchange liquidity by emerging market central banks during the global shock of 2008-09 departs from the domestic liquidity lender of last resort role described by Bagehot in his classic "Lombard Street." This paper documents and analyzes the foreign exchange liquidity providing measures of the Banco Central do Brasil (BCB) in response to varied market stresses. These measures appear to have reduced the relative onshore cost of dollar liquidity on impact and seemed to stabilize market expectations of exchange rate volatility. The results suggest that foreign exchange liquidity easing operations may become a standard central bank tool.
    Keywords: Brazil , Capital markets , Central bank policy , Currency swaps , Domestic liquidity , Emerging markets , Exchange rate policy , Financial crisis , Foreign exchange operations , Global Financial Crisis 2008-2009 , Liquidity management ,
    Date: 2009–11–24
  4. By: Michael B Devereux; Gregor W Smith; James Yetman
    Abstract: Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link - the consumption/real-exchange-rate anomaly or Backus-Smith puzzle - has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of 'hand-to-mouth' consumers may help to explain the evidence.
    Keywords: international risk sharing, Backus-Smith puzzle
    Date: 2009–12
  5. By: Md Shoaib Ahmed, Shoaib
    Abstract: This is a study to investigate the exchange rate volatility and it impacts on international trade growth: evidence from Bangladesh. To establish the empirical relationship between exchange rate volatility and impact on international trade growth in Bangladesh, different quantitative techniques are used by considering the data from May 2003 to December 2008. In the analysis co-integration and error correction methods have been used to do the analysis the relationship between exchange rate volatility and international trade growth in Bangladesh. From the investigation, the result shows that the exchange rate volatility has a negative and major effect both in short run and long run with Western European and North American countries. There is a negative and significant relationship has been observed between exchange rate volatility and the international trade growth.
    Keywords: Key words: Co-integration; Error Correction; Exchange Rate; Volatility; Export growth; Trade growth.
    JEL: C0 C22 C01
    Date: 2009–01–26
  6. By: Yushi Yoshida (Faculty of Economics, Kyushu Sangyo University)
    Abstract: After the financial crisis originating from the collapse of the US housing market in 2007, financial markets, including stock markets and foreign exchange markets, experienced drastic fluctuations during an adjustment stage. We examine how the financial crisis affected the linkage between foreign exchange markets and stock markets. First, by examining the daily stock market returns of both Japan and the United States for the sample covering the 2007-2008 financial crisis, we test whether there is a shift in correlation in a smooth-transition correlation GARCH model. We find strong evidence that there was an abrupt upward shift in correlation in June of 2001. There may have been another upward shift of correlation in June of 2008, although the evidence is statistically weak. Second, after adding the JPY/USD exchange rate into a model, we find little correlation between returns of exchange rate and the Japanese stock market, although evidence indicates that there is two-way causality effect between the exchange rate and the Japanese stock market in a VAR framework. This paper provides evidence that a large financial shock may bring financial markets around the world closer to one another.
    Keywords: Exchange rate, Financial crisis, Japan and US, Smooth transition, Stock market integration
    JEL: F31 F36 G15
    Date: 2009–12
  7. By: Przystupa, Jan
    Abstract: Taking into account a large number of types of nominal and real exchange rates, while estimating the real equilibrium exchange rate, one should always remember that there is no a single, universal equilibrium exchange rate. A point value or a path of that exchange rate depends on the adopted definitions and assumptions as well as on the method and purpose of the analysis. However, a value added of each estimation of the equilibrium exchange rate is an answer, whether the economic policy causes upset or stabilisation of the economy. Moreover, in the period of discussion on the exchange rate of accession to ERM-2, showing an interval of the exchange rate where all values of the exchange rate ensure at least suboptimal behaviour of the economy may help to make a decision on the date of accession to ERM-2 that will minimise costs of retention of the exchange rate within a definite currency band. For Poland, estimated by the NATREX method the long-run real equilibrium exchange rate ensures the internal equilibrium with annual growth rates of GDP amounting to 4.1%, comprised of growth of consumption by 4% p.a., investment by 8.7%, volume of exports by 8.5% and volume of imports by 8.1% p.a. Estimating on the ground of real exchange rates an approximate value of nominal exchange rates, one can state that the long-term equilibrium in the economy is ensured with the exchange rate of 3.80-3.90 zlotys for 1 euro. The current exchange rate will probably approach the equilibrium exchange rate at the turn of 2010 and 2011, and it will remain near that level over 5-6 quarters. This means that in that period cost of retention of the PLN exchange rate within a narrow band of fluctuations is relatively the least. The next period where the current exchange rate should approach the optimal exchange rate is 2014. Then, also in the medium term, the exchange rate of zloty should be comprised within the interval of 3.80-3.90 (assuming the stable exchange rate of USD/EUR=1.40)
    Keywords: equilibrium exchange rate; NATREX
    JEL: E52 F31
    Date: 2009–10–04
  8. By: Parantap Basu; Robert Kollmann
    Abstract: Empirical research documents that an exogenous rise in government purchases in a given country triggers a depreciation of its real exchange rate. This raises an important puzzle, as standard macro theories predict an appreciation of the real exchange rate. We argue that this prediction reflects the assumption that government purchases are unproductive. Using a simple model, we show that the real exchange rate may depreciate in response to a rise in government purchases, if those purchases increase domestic private sector productivity. A very small dose of public sector externality is sufficient to generate this result.
    Keywords: Productive government purchases, real exchange rate
    JEL: F41 F42 E62
    Date: 2010
  9. By: David Laidler (C.D. Howe Institute)
    Abstract: Recent efforts by the Bank of Canada to “talk down” the dollar in its public statements have led to public perceptions that the Bank is considering action to weaken it.In permitting this response to gather momentum, the Bank has stepped onto a slippery slope, because if talk seems to be failing, people might reasonably expect direct intervention in the exchange market to follow.
    Keywords: Bank of Canada, inflation rate, exchange rate
    JEL: E58 E31 F31 E4
    Date: 2009–12
  10. By: Liefert, William; Persuad, Suresh
    Abstract: Movements in countriesâ exchange rates can substantially change the prices of goods faced by producers and consumers and thereby affect incentives to produce, consume, and trade goods. Exchange rate changes, however, might not be completely transmitted (passed through) to domestic prices. Empirical evidence shows that price and exchange rate transmission for agricultural products is low in most developing economies, partly because of trade policies but also because of inadequate infrastructure and other market deficiencies. During the last 20 years, developed and developing countries generally have moved away from support policies that impede price and exchange rate transmission toward trade policies that allow transmission, such as tariffs. The Uruguay Round Agreement on Agriculture of 1994 strongly encouraged this development. Despite these policy changes, market deficiencies remain as a cause of incomplete transmission. Incomplete transmission weakens countriesâ integration into world agricultural markets and thereby reduces agricultural trade potential. Low transmission in developing countries also decreases their own benefits from trade, including the gains they could realize if there is further global agricultural liberalization.
    Keywords: Agricultural infrastructure, agricultural policy, agricultural trade, exchange rates, exchange rate transmission, imperfect markets, institutions, price transmission., Agribusiness, Agricultural and Food Policy, Agricultural Finance, Financial Economics,
    Date: 2009–07

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