nep-ifn New Economics Papers
on International Finance
Issue of 2010‒02‒27
thirteen papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  1. Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes By Frankel, Jeffrey; Xie, Daniel
  2. What Explains Real and Nominal Exchange Rate Fluctuations? Evidence from SVAR Analysis for India By Inoue, Takeshi; Hamori, Shigeyuki
  3. Modeling Sample Selection for Durations with Time-Varying Covariates, with an Application to the Duration of Exchange Rate Regimes By Boehmke, Frederick J.; Meissner, Christopher M.
  4. Official Central Bank Interventions in the Foreign Exchange Markets: A DCC Approach with Exogenous Variables By Nikolaos Antonakakis
  5. Long Memory and Volatility Dynamics in the US Dollar Exchange Rate By Guglielmo Maria Caporale; Luis A. Gil-Alana
  6. Central bank dollar swap lines and overseas dollar funding costs By Linda S. Goldberg; Craig Kennedy; Jason Miu
  7. Graduating to Globalisation: A Study of Southern Multinationals By Dilek Demirbas; Ajay Shah; Ila Patnaik
  8. Deep Financial Integration and Volatility By Sebnem Kalemli-Ozcan; Bent E. Sørensen; Vadym Volosovych
  9. Is the Chinese Currency Substantially Misaligned to Warrant Further Appreciation? By Duo Qin; Xinhua He
  10. "Aggregation, Heterogeneous Autoregression and Volatility of Daily International Tourist Arrivals and Exchange Rates" By Chia-Lin Chang; Michael McAleer
  11. Asymmetric Information, Portfolio Managers, and Home Bias By Wioletta Dziuda; Jordi Mondria
  12. "The Global Crisis and the Future of the Dollar: Toward Bretton Woods III?" By Joerg Bibow
  13. Financial Regulation, Integration and Synchronization of Economic Activity By Sebnem Kalemli-Ozcan; Elias Papaioannou; José Luis Peydró

  1. By: Frankel, Jeffrey (Harvard University); Xie, Daniel (Peterson Institute for International Economics, Washington, DC)
    Abstract: A new technique for estimating countries' de facto exchange rate regimes synthesizes two approaches. One approach estimates the implicit de facto basket weights in an OLS regression of the local currency value rate against major currency values. Here the hypothesis is a basket peg with little flexibility. The second estimates the de facto degree of exchange rate flexibility by observing how exchange market pressure is allowed to show up. Here the hypothesis is an anchor to the dollar or some other single major currency, but with a possibly substantial degree of exchange rate flexibility around that anchor. It is important to have available a technique that can cover both dimensions: inferring anchor weights and the flexibility parameter. We test the synthesis technique on a variety of fixers, floaters, and basket peggers. We find that real world data demand a statistical technique that allows parameters and regimes to shift frequently. Accordingly we here take the next step in estimation of de facto exchange rate regimes: endogenous estimation of parameter breakpoints, following Bai and Perron.
    JEL: F31 F41
    Date: 2010–02
  2. By: Inoue, Takeshi; Hamori, Shigeyuki
    Abstract: This study empirically analyzes the sources of the exchange rate fluctuations in India by employing the structural VAR model. The VAR system consists of three variables, i.e., the nominal exchange rate, the real exchange rate, and the relative output of India and a foreign country. Consistent with most previous studies, the empirical evidence demonstrates that real shocks are the main drives of the fluctuations in real and nominal exchange rates, indicating that the central bank cannot maintain the real exchange rate at its desired level over time.
    Keywords: Exchange Rate, India, RBI, SVAR, India, Foreign Exchange
    JEL: E31 F31
    Date: 2009–10
  3. By: Boehmke, Frederick J. (University of Iowa); Meissner, Christopher M. (University of California, Davis and NBER)
    Abstract: We extend existing estimators for duration data that suffer from non-random sample selection to allow for time-varying covariates. Rather than a continuous-time duration model, we propose a discrete-time alternative that models the effects of sample selection at the time of selection across all subsequent years of the resulting spell. Properties of the estimator are compared to those of a naive discrete duration model through Monte Carlo analysis and indicate that our estimator outperforms the naive model when selection is non-trivial. We then apply this estimator to the question of the duration of monetary regimes and find evidence that ignoring selection into pegs leads to faulty inferences.
    Date: 2009–09
  4. By: Nikolaos Antonakakis (Department of Economics, University of Strathclyde)
    Abstract: This paper assesses the impact of official central bank interventions (CBIs) on exchange rate returns, their volatility and bilateral correlations. By exploiting the recent publication of intervention data by the Bank of England, this study is able to investigate interventions by a total number of four central banks, while the previous studies have been limited to three (the Federal Reserve, Bundesbank and Bank of Japan). The results of the existing literature are reappraised and refined. In particular, unilateral CBI is found to be more successful than coordinated CBI. The likely implications of these ndings are then discussed.
    Keywords: Central bank interventions; Foreign exchange; Multivariate GARCH; Conditional correlations
    JEL: C32 E58 F31 G15
    Date: 2010–02
  5. By: Guglielmo Maria Caporale; Luis A. Gil-Alana
    Abstract: This paper focuses on nominal exchange rates, specifically the US dollar rate vis-à-vis the Euro and the Japanese Yen at a daily frequency. We model both absolute values of returns and squared returns using long-memory techniques, being particularly interested in volatility modelling and forecasting given their importance for FOREX dealers. Compared with previous studies using a standard fractional integration framework such as Granger and Ding (1996), we estimate a more general model which allows for dependence not only at the zero but also at other frequencies. The results show differences in the behaviour of the two series: a long-memory cyclical model and a standard I(d) model seem to be the most appropriate for the US dollar rate vis-à-vis the Euro and the Japanese Yen respectively.
    Keywords: Fractional integration, Long memory, Exchange rates, Volatility
    JEL: C22 O40
    Date: 2010
  6. By: Linda S. Goldberg; Craig Kennedy; Jason Miu
    Abstract: Following a scarcity of dollar funding available internationally to financial institutions, in December 2007 the Federal Reserve began to establish or expand Temporary Reciprocal Currency Arrangements with fourteen other central banks. These central banks had the capacity to use the swap facilities to provide dollar liquidity to institutions in their jurisdictions. This paper presents the developments in the dollar swap facilities through the end of 2009. The facilities were a response to dollar funding shortages outside the United States and were effective at making dollars more broadly available to financial institutions overseas during a period of market dysfunction. Formal research, as well as more descriptive accounts, suggests that the dollar swap lines among central banks were effective at reducing the dollar funding pressures abroad and the stresses in money markets. While these findings are compelling, it is still difficult to draw definitive lessons on particular facilities given the numerous changes over time in market conditions and policy responses.
    Keywords: Banks and banking, Central ; Swaps (Finance) ; Foreign exchange ; Dollar, American ; Liquidity (Economics) ; Currency convertibility ; Federal Reserve System
    Date: 2010
  7. By: Dilek Demirbas; Ajay Shah; Ila Patnaik
    Abstract: FDI by firms in developing countries is a recent phenomenon and demands a study of relationship between firm productivity and different modes of globalisation activities. This paper attempts to understand this relationship through ordered probit models, examining two key hypotheses using firm level panel data from India. First, it is tested whether there are characteristic differences between domestic firms, exporting firms and firms engaging with FDI. [NIPFP WP No. 2010-65].
    Keywords: Outbound FDI, multinationals, Panel data, India, Ordered Probit models, firms, globalisation, developing countries, productivity,
    Date: 2010
  8. By: Sebnem Kalemli-Ozcan (University of Houston and NBER); Bent E. Sørensen; Vadym Volosovych
    Abstract: We investigate the relationship between financial integration and output volatility at micro and macro levels. Using a very large firm-level dataset (AMADEUS) from 16 European countries, we construct a measure of "deep" financial integration at the regional level based on observations of foreign ownership at the firm-level. We find a significant positive effect of foreign ownership on the volatility of firms' outcomes in static as well as dynamic empirical frameworks. This effect survives aggregation and carries over to regional output, leading to a positive association between deep financial integration and aggregate fluctuations. To identify the causal effect of financial integration on volatility we exploit variation in the transposition dates of the European Union-wide legislative acts from the Financial Services Action Plan (FSAP). We find that high trust regions located in countries who harmonized their capital markets sooner have increased levels of financial integration and volatility.
    Keywords: firm volatility, foreign ownership, regional integration, social capital, macro volatility
    JEL: E32 F15 F36 O16
    Date: 2010–02
  9. By: Duo Qin (Queen Mary, University of London); Xinhua He (Chinese Academy of Social Sciences)
    Abstract: This study provides quarterly time-series estimates of the misalignment in the REER of the Renminbi (RMB). The estimation is based on a commonly used economic approach, but with a wider and more up-to-date coverage of data and a more extensive use of econometric modelling techniques. Our estimates corroborate and explain most of the previous estimates. More importantly, our estimates demonstrate that there is no significant undervaluation in the REER of the RMB though downward misalignment exists in the trilateral rates between the RMB, US$ and euro. The finding refutes the claim that RMB appreciation is the primary and necessary solution to the current global trade imbalance.
    Keywords: Real exchange rate misalignment
    JEL: F31 F41
    Date: 2010–02
  10. By: Chia-Lin Chang (Department of Applied Economics, National Chung Hsing University); Michael McAleer (Erasmus School of Economics, Erasmus University Rotterdam and Tinbergen Institute)
    Abstract: Tourism is a major source of service receipts for many countries, including Taiwan. The two leading tourism countries for Taiwan, comprising a high proportion of world tourist arrivals to Taiwan, are Japan and USA, which are sources of short and long haul tourism, respectively. As it is well known that a strong domestic currency can have adverse effects on international tourist arrivals, daily data from 1 January 1990 to 31 December 2008 are used to model the world price and US$ / New Taiwan $ and Yen/ New Taiwan $ exchange rates, and tourist arrivals from the world, USA and Japan to Taiwan, as well as their associated volatility. The sample period includes the Asian economic and financial crises in 1997, and part of the global financial crisis of 2008-09. Inclusion of the exchange rate allows approximate daily price effects on world, US and Japanese tourist arrivals to Taiwan to be captured. The Heterogeneous Autoregressive (HAR) model does not reproduce the theoretical hyperbolic decay rates associated with fractionally integrated (or long memory) time series models, but it can nevertheless approximate quite accurately and parsimoniously the slowly decaying correlations associated with such models. The HAR model is used to approximate long memory properties in daily exchange rates and international tourist arrivals, to test whether alternative short and long run estimates of conditional volatility are sensitive to the approximate long memory in the conditional mean, to examine asymmetry and leverage in volatility, and to examine the effects of temporal and spatial aggregation. The empirical results show that the conditional volatility estimates are not sensitive to the approximate long memory nature of the conditional mean specifications. The QMLE for the GARCH(1,1), GJR(1,1) and EGARCH(1,1) models for world, US and Japanese tourist arrivals to Taiwan, and the world price and US$ / New Taiwan $ and Yen/ New Taiwan $ exchange rates, are statistically adequate and have sensible interpretations. Asymmetry (though not leverage) is found for several alternative HAR models for the world, US and Japanese tourist arrivals to Taiwan. For policy purposes, these empirical results suggest that an arbitrary choice of data frequency or spatial aggregation will not lead to robust findings as they are generally not independent of the level of aggregation used.
    Date: 2010–02
  11. By: Wioletta Dziuda; Jordi Mondria
    Abstract: We propose a model of delegated asset management in which individual investors are more informed about the domestic market than the foreign market and face uncertainty about quality of portfolio managers. The model shows that asymmetric information of individual investors results in home bias even if professional fund managers are equally well informed about all markets. Additionally, the model generates predictions about the size and the quality of mutual funds that are consistent with empirical studies: there are fewer mutual funds investing domestically, but their quality and market value are higher.
    Keywords: Asymmetric Information, Portfolio Managers, and Home Bias
    JEL: F30 D82 G11
    Date: 2010–02–12
  12. By: Joerg Bibow
    Abstract: This paper investigates the United States dollar's role as the international currency of choice as a key contributing factor in critical global developments that led to the crisis of 2007-09, and considers the future role of the dollar as the global economy emerges from that crisis. It is argued that the dollar is likely to retain its hegemonic status for a few more decades, but that United States spending powered by public rather than private debt would provide a more sustainable motor for global growth. In the process, the "Bretton Woods II" regime depicted by Dooley, Folkerts-Landau, and Garber (2003) as sustainable despite featuring persistent U.S. current account deficits may turn into a "Bretton Woods III" regime that sees U.S. fiscal policy and public debt as "minding the store" in maintaining U.S. and global growth.
    Keywords: Reserve Currency; Global Monetary Order; Global Financial Crisis
    JEL: E12 E61 E62 F02 F33
    Date: 2010–02
  13. By: Sebnem Kalemli-Ozcan (University of Houston and NBER); Elias Papaioannou; José Luis Peydró
    Abstract: We investigate the effect of financial integration on the degree of international business cycle synchronization. For identfication, we use a confidential database on banks' bilateral exposure over the past three decades and employ a novel bilateral country-pair panel instrumental vari- ables approach. First, we show that conditional on global shocks and country-pair fixed factors countries that become more financially integrated over time have less synchronized growth pat- terns, in line with the standard theories of output fluctuations. Second, to isolate the one-way impact of financial integration on output co-movement and account for measurement error in the financial integration measure, we exploit variation in the transposition dates of the European Union-wide legislative acts (the "Directives") from the Financial Services Action Plan (FSAP). These laws are designed to harmonize regulation of financial markets in the European Union. We find that increases in financial integration stemming from regulatory-legislative harmoniza- tion policies in capital markets are followed by more divergent output cycles, even when we condition on monetary unification. Our results contrast with those of the previous empirical studies. We reconcile the different results by showing that the earlier estimates suffer from the standard identification problems.
    Keywords: Banking Integration, Co-movement, Fluctuations, Financial Legislation
    JEL: E32 F15 F36 G21 O16
    Date: 2010–02

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