nep-ifn New Economics Papers
on International Finance
Issue of 2011‒08‒15
five papers chosen by
Ajay Shah
National Institute of Public Finance and Policy

  2. What Drives Different Types of Capital Flows and Their Volatilities in Developing Asia? By Mercado, Rogelio; Park, Cyn-Young
  3. The Political Economy of Reducing the US Dollar’s Role as a Global Reserve Currency By Yap, Josef T.
  4. China’s new exchange rate regime, optimal basket currency and currency diversification By Zhang, Zhichao; Shi, Nan; Zhang, Xiaoli
  5. Exchange rate pass-through and inflation targeting in Peru By Winkelried, Diego

  1. By: Paul Castillo; Luis Maertens Odria; Gabriel Rodríguez (Departamento de Economía - Pontificia Universidad Católica del Perú)
    Abstract: This paper analyzes whether the exchange rate pass-through into prices changed when the inflation targeting scheme was adopted in Peru. Firstly, a small dynamic stochastic general equilibrium model is simulated, which shows that adopting this scheme induces an increase in exchange rate volatility. Furthermore, applying the theory of the currency denomination of international trade, it is demonstrated that increased exchange rate volatility reduces the share of firms that set their prices in foreign currency (dollars). Given that the pass-though has a direct relationship with this share, it is shown that adopting inflation targeting generates a pass-through contraction. Secondly, we empirically test whether the Peruvian Central Bank’s decision to adopt inflation targeting in January 2002 actually had an effect on the pass-through estimating a time-varying vector autoregressive model which allows for an asymmetrical estimation of the pass-through. It provides parameters for both the pre and post inflation targeting regimes based on the assumption that the transition from one regime to the other is smooth. An analysis of the generalized impulse response functions reveals that the decision to adopt inflation targeting significantly decreased the exchange rate pass-throughs into import, producer, and consumer prices. The results are consistent with economic theory and are robust to the specification of parameters of the model.
    Keywords: Inflation targeting/exchange rate pass-through into prices/ TV-VAR models
    JEL: E52 E58 F31
    Date: 2011
  2. By: Mercado, Rogelio (Economics Department, De La Salle University-Manila); Park, Cyn-Young (Asian Development Bank)
    Abstract: Understanding the determinants of capital inflows is essential to designing an effective policy framework to manage volatile capital flows and their disruptive potential. This paper aims to identify factors that explain the size and volatility of various types of capital flows to developing Asia with regard to other emerging market economies. The estimates for a panel dataset show that per capita income growth, trade openness, and change in stock market capitalization are important determinants of capital inflows to developing Asia. Trade openness increases the volatility of all types of capital inflows, while change in stock market capitalization, global liquidity growth, and institutional quality lowers the volatility. A regional factor plays an important role in determining the size and volatility of capital inflows in emerging Europe and merging Latin America, suggesting that regional economic cooperation and policy coordination may be an important element in designing a policy framework to manage capital inflows in merging economies.
    Keywords: capital flows; volatility of capital flows; panel data; developing Asia; push and pull factors
    JEL: F21 F32 F36
    Date: 2011–07–01
  3. By: Yap, Josef T. (Asian Development Bank Institute)
    Abstract: Many have argued that the major source of the existing global macroeconomic imbalances are the twin deficits of the United States (US). However, there is still a debate about whether the global imbalances indeed pose a significant threat to the world economy. This paper analyzes whether current efforts in East Asia in terms of financial and monetary cooperation and rebalancing of economic growth could significantly mitigate the adverse impacts of a global system that will still be dominated by the US dollar in the foreseeable future. It also explains why the People’s Republic of China is unlikely to make significant unilateral adjustments to reduce global macroeconomic imbalances.
    Keywords: east asia; global macroeconomic imbalances; rebalancing economic growth; financial and monetary cooperation
    JEL: F31 F33
    Date: 2011–08–04
  4. By: Zhang, Zhichao; Shi, Nan; Zhang, Xiaoli
    Abstract: We build an optimising framework to analyse a class of economies that adopt an ECU-type basket currency while in transition to increased flexibility of the exchange rate regime. Instead of conventional basket pegging, such an economy uses an ECU-type currency index as a benchmark for monitoring and assessing exchange rate movements. This provides an anchoring device for the nation’s exchange rate regime and allows the home currency’s exchange rate to fluctuate. Under the assumption that the central bank is chiefly interested in maintaining stability, the optimal structure of the basket currency is based on its contribution to minimizing the volatility of the country’s external account. A currency invariance index is applied to capture the effect of the country’s exit from exclusive linkage with the US dollar. The approach is illustrated by Chinese exchange rate policy. We find it advisable and viable for China to form a basket currency with a diversified portfolio of currencies. While the portfolio’s weighting scheme could favour the dollar, euro and Japanese yen, we show that the composition of the basket is open to a wide range of possibilities. Moreover, contrary to general fears, there is considerable potential for China to engage in currency diversification, which will not necessarily affect the dollar’s position.
    Keywords: Exchange rate regime; Basket currency; Currency diversification
    JEL: E58 P45 F31
    Date: 2011–08–05
  5. By: Winkelried, Diego (Central Reserve Bank of Peru.)
    Abstract: It has been widely documented that the exchange rate pass-through to domestic inflation has decreased significantly in most of the industralised world. As microeconomic factors cannot completely explain such a widespread phenomenon, a macroeconomic explanation linked to the inflationary environment - that a low and more stable inflation rate leads to a decrease in the pass-through - have gained popularity. Using a structural VAR framework, this paper presents evidence of a similar decline in the pass-through in Peru, a small open economy that gradually reduced inflation to international levels in order to adopt a fully-fledged inflation targeting scheme in 2002. It is argued that the establishment of a credible regime of low inflation has been instrumental in driving the exchange rate pass-through down.
    Keywords: Exchange rate pass-through, inflation targeting,structural VAR.
    JEL: C32 E31 E47 F31
    Date: 2011–07

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