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on International Finance |
| By: | Yu-chin Chen (University of Washington); Kwok Ping Tsang (Virginia Tech) |
| Abstract: | The nominal exchange rate is both a macroeconomic variable equilibrating international markets, and a financial asset that embodies expectations and prices risks about cross border currency-holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we summarize information in the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and inflation) into a Vector Autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound relative to the dollar. By decomposing the yield curves into expected future yields and bond market term premia, we show that both expectations and perceived risks are priced into the currency market. These findings provide support for the view that the nominal exchange rate is determined by both macroeconomic as well as financial forces. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2009-24&r=ifn |
| By: | Rosella Castellano (University of Macerata); Roy Cerqueti (University of Macerata); Rita L. D'Ecclesia (University of Rome Sapienza) |
| Abstract: | <p><font size="2" face="CMR10"><font size="2" face="CMR10"><p align="left">In this paper we propose an exchange rate model as solution of a disutility based drift control problem. Assuming the exchange rate is a function of the fundamental, we suppose that Government Authorities control the fundamental's dynamics aimed at minimizing the</p><p align="left">discounted expected disutility derived by the distance between the fundamental and some specific stochastic target. The theoretical model is solved using the dynamic programming approach and introducing the concept of viscosity solution. We contribute to research on exchange rate control policies by deriving the optimal interventions aimed at stabilizing</p><p align="left">the exchange rate and preserving macroeconomic stability. We also show that, under</p><p align="left">particular conditions, it is possible to derive the optimal width of the currency band.</p></font></font></p> |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:mcr:wpdief:wpaper00056&r=ifn |
| By: | Sophie Bereau; Antonia Lopez Villavicencio; Valerie Mignon |
| Abstract: | The aim of this paper is to investigate the link between currency misalignments and economic growth. Relying on panel cointegration techniques, we calculate real exchange rate (RER) misalignments as deviations of actual RERs from their equilibrium values for a set of advanced and emerging economies. Estimating panel smooth transition regression models, we show that RER misalignments have a differentiated impact on economic growth depending on their sign: whereas overvaluations negatively affect economic growth, real exchange rate undervaluations significantly enhance it. This result indicates that undervaluations may drive the exchange rate to a level that encourages exports and promotes growth. |
| Keywords: | Growth; exchange rate misalignments; nonlinearity; PSTR models |
| JEL: | F31 O47 C23 |
| Date: | 2009–09 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2009-17&r=ifn |
| By: | Nicolas Berman; Philippe Martin; Thierry Mayer |
| 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: | Gravity; heterogeneity; exchange rate; trade |
| JEL: | F12 |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2009-32&r=ifn |