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on International Finance |
| By: | Michael Frömmel (Department of Financial Economics, Ghent University; Institute for Money and International Finance, Leibniz Universität Hannover); Norbert Kiss M. (Magyar Nemzeti Bank (central bank of Hungary)); Klára Pintér (Magyar Nemzeti Bank (central bank of Hungary)) |
| Abstract: | We investigate the relation between the EUR/HUF exchange rate on the one hand and news announcements and order flow on the other hand using intraday data. We extend the existing literature on foreign exchange market microstructure by considering a small open transition economy. We find that the intraday exchange rate – independent from whether we focus on the mean or the volatility – depends on both news announcements and order flow. We conclude that news on the EUR/HUF market are transmitted directly via immediate reactions to news announcements as well as indirectly via order flow. We decompose the news’ total effect on exchange rate and find that order flow accounts for approximately three quarters, compared to one quarter for direct news impact. Although the HUF has been pegged to the EUR, the exchange rate reacts qualitatively very similarly to exchange rates of major currencies as reported in the literature, but quantitatively we observe a remarkable difference: the share of the indirect channel is higher on the EUR/HUF market. Furthermore we extend the commonly used news by communication of central bankers and significantly improve the explanatory power of the regressions. Our results imply that macroeconomic and microstructure variables together can explain a non-negligible part of high frequency exchange rate movements and central bank communication is an important determinant of the EUR/HUF rate. |
| Keywords: | microstructure, order flow, exchange rate, macroeconomic news, central bank communication. |
| JEL: | F31 G14 G15 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:mnb:wpaper:2009/3&r=ifn |
| By: | Pablo Astorga (Latin American Centre, St. Antony's College, Oxford and Instituto Figuerola Universidad Carlos III, Marid, Spain.) |
| Abstract: | This paper analyses stability in real multilateral exchange rates in six leading Latin-American economies during the XXth century using a new data set. A univariate approach is complemented by an error-correction model including key fundamentals. Unit-root testing shows a very slow process of mean reversion – if any – in the series in levels; however, mean reversion is found after allowing for trends and structural breaks with half-life values ranges from 0.8 to 2.5 years. We also found reversion to a conditional mean defined by the co-integrating relationship, and that the equilibrium path is largely explained by fundamentals - especially terms of trade and trade openness. Exchange rate policy proved to have only a transitory effect in generating real depreciation. |
| Keywords: | Real Exchange Rates, Purchasing Power Parity, Economic Development, Latin America |
| JEL: | F41 N16 O11 |
| Date: | 2010–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:nuf:esohwp:_080&r=ifn |
| By: | Patrick A. Imam |
| Abstract: | In this paper we first explain why most microstates (countries with less than 2 million inhabitants) have gained independence only in the last 30 years. Despite the higher costs and risks microstates face, their ability to better accommodate local preferences combined with a more integrated world economy probably explains why the benefits of independence have risen. We explain why microstates at independence have chosen either dollarization, currency board arrangements, or fixed exchange rates rather than more flexible forms of exchange rate systems. We then, using the Geweke-Hajvassiliou-Keane multivariate normal simulator, model empirically the determinants of each of the different fixed exchange rate regimes in microstates and analyze the policy implications. |
| Date: | 2010–01–13 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/12&r=ifn |
| By: | Chen, Yu-Fu (BOFIT); Funke, Michael (BOFIT); Glanemann, Nicole (BOFIT) |
| Abstract: | Hong Kong’s currency is pegged to the US dollar in a currency board arrangement. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities revamped the one-sided currency board mechanism into a symmetric two-sided system with a narrow exchange rate band. This paper reviews the characteristics of the new currency board arrangement and embeds a theoretical soft edge target zone model typifying many intermediate regimes, to explain the notable achievement of speculative peace and credibility since May 2005. |
| Keywords: | currency board arrangement; target zone model; credibility; Hong Kong |
| JEL: | C61 E42 F31 F32 |
| Date: | 2010–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2009_021&r=ifn |
| By: | Josef T. Yap (Philippine Institute for Development Studies) |
| Abstract: | During the past five years or so, most East Asian economies including the Philippines experienced a rising level of foreign exchange reserves and rapidly appreciating currencies both in nominal and real terms. One cause has been the resurgence of capital flows, which makes the issue of how to manage them relevant. However, the experience with regard to capital flows among East Asian economies is mixed and the level of capital flows to the region is proportionally less than that prior to the 1997 crisis. Another reason is the rise in current account surpluses. The Philippines has experienced both a return of capital inflows and a more favorable current account balance, with the latter largely due to remittances from overseas workers. However, like many other regional currencies, the appreciation of the peso is not commensurate to movements of the BOP accounts. Currencies in the region are reacting primarily to the general weakness of the US dollar, and global uncertainties have contributed to weak investment which in turn is another major reason behind the current account surplus of several economies including the Philippines. Policy measures at the domestic level can focus on reviving private investment, particularly channeling overseas remittances to more productive investment. Meanwhile, East Asian financial and monetary cooperation can also result in a unified front aimed at overhauling the unipolar global financial system. |
| Keywords: | Foreign Exchange, Short-Term Capital Movements, International Finance, Philippines |
| JEL: | F31 F32 F37 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1816&r=ifn |
| By: | Andreas Benedictow and Pål Boug (Statistics Norway) |
| Abstract: | Previous studies on the relationship between exchange rates and traded goods prices typically find evidence of incomplete pass-through, usually explained by pricing-to-market behaviour. Although economic theory predicts that incomplete pass-through may also be linked to presence of non-tariff barriers to trade, variables reflecting such a link is rarely included in existing empirical models. In this paper, we estimate a pricing-to-market model for Norwegian import prices on textiles and wearing apparels, controlling explicitly for the removal of non-tariff barriers to trade and the shift in imports from high-cost to low-cost countries through a Törnqvist price index based measure of foreign prices. We show that this measure of foreign prices unlike standard measures used in the literature is likely to produce unbiased estimates of the degree of pass-through, and thereby also the extent of pricing-to-market behaviour. Finally, we demonstrate that the estimated import price equation is reasonably stable and exhibits no serious forecasting failures. These findings contradict the hypothesis that pass-through has changed alongside trade policy shifts during the second half of the 1990s and the monetary policy regime shift in 2001. |
| Keywords: | Trade liberalisation; import prices; pricing-to-market; exchange rate pass-through; vector autoregressive models. |
| JEL: | C22 C32 C43 E31 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:ssb:dispap:605&r=ifn |
| By: | Josef T. Yap (Philippine Institute for Development Studies) |
| Abstract: | In response to the 1997 East Asian financial crisis many schemes were initiated to reform the international financial architecture. The proposed reforms had two wideranging objectives- (i) to prevent currency and banking crises and better manage them when they occur; and (ii) to support adequate provision of net private and public flows to developing countries, particularly low-income ones. Unfortunately the progress has been uneven, asymmetric, and patchy. This is largely because the structural problems related to the supply side of capital flows have not been addressed, particularly the unipolar character of the global financial system. As a result, many East Asian economies face many of the same conditions that prevailed immediately prior to the crisis- huge capital inflows heavily tilted towards hot money, rapid appreciation of currencies in real terms, surging stock prices, and little policy space to implement countercyclical measures in the event of a crisis. The difference is that many countries have accumulated a large amount of foreign exchange reserves but at the expense of domestic investment and economic growth. In order to resolve the problems that are posed by volatile capital flows it is important to accelerate East Asian cooperation and integration, particularly with regard to the objective of using regional savings for regional infrastructure projects. Political rapprochement between China and Japan is a necessary condition both to move regional cooperation and integration forward and to overhaul the unipolar global financial system. |
| Keywords: | international financial architecture, disaster myopia, capital flows, real effective exchange rate |
| JEL: | F42 F3 |
| Date: | 2010–01 |
| URL: | http://d.repec.org/n?u=RePEc:eab:develo:1815&r=ifn |
| By: | Nikolay Nenovsky |
| Abstract: | This article offers an attempt at typologisation of the evolution of monetary regimes in post-communist countries (1990-2008), which is exceptionally varied by character. Two large groups have emerged: type 1 – countries, which started their reforms with a regime of fixed exchange rate and dominating external sources of money supply, and type 2 – countries starting their reforms with a floating exchange rate and predominating internal sources of money supply. The first type is much more successful and appropriate for managing the problems of transition. Some other elements of typologisation have also been suggested based on specific definitions of monetary system and monetary regime. The article also presents various approaches, which can explain the evolution of monetary regimes observed in the former socialist countries. |
| Keywords: | monetary regimes; post-communist countries; comparative economics |
| JEL: | E5 P2 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eaf:wpaper:12009en&r=ifn |
| By: | Alvaro Piris |
| Abstract: | Strong growth in investment made a key contribution to the economic recovery in Argentina earlier this decade. The paper uses firm-level data to assess changes in financing constraints and the linkages between real investment at the firm level and macroeconomic developments in the real exchange rate and real interest rates. It concludes that several factors explain the performance of investment, including the real exchange rate, the cost of borrowing as well as an easing of financing constraints. |
| Keywords: | Argentina , Bank credit , Capital , Corporate sector , Economic models , Economic recovery , Financial crisis , Fiscal policy , Interest rates , Investment , Real effective exchange rates , |
| Date: | 2010–01–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:10/3&r=ifn |