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on International Trade |
| By: | Wagner, Joachim (Leuphana University Lueneburg and CESIS, Stockholm) |
| Abstract: | A stylized fact from the emerging literature on the micro-econometrics of international trade and a central implication of the heterogeneous firm models from the new new trade theory is that exporters are more productive than non-exporters. However, many firms from the lower end of the productivity distribution are exporters. Germany is a case in point. A recent study reports that these low-productivity exporters are not marginal exporters defined according to the share of exports in total sales, or export participation over time, or the number of goods exported, or the number of countries exported to. This paper documents that low-productive exporters are competitive because they export high-quality goods. The quality of exports is much higher among exporters from the lower end of the productivity distribution than among highly productive exporters. |
| Keywords: | Exports; productivity; low-productive exporters; export quality |
| JEL: | F14 |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0341&r=int |
| By: | A. Kerem Cosar (University of Chicago, Booth School of Business); Banu Demir (Bilkent University, Department of Economics) |
| Abstract: | Poor domestic transportation infrastructure in developing countries is often cited as an important impediment for accessing international markets. Yet, evidence on how transportation infrastructure improvements affect the volume and composition of exports is scarce. Drawing on the large-scale public investment in expressways undertaken in Turkey during the 2000s, this paper contributes to our understanding of how internal trade costs affect regional exports and specialization. Two results emerge. First, we estimate that this road infrastructure project accounts for 15 percent of the export increase from interior regions, generating a 10-year discounted stream of additional export revenues that amount to between 9 and 14 percent of the value of the investment. Second, while the exports of all industries within a given region increase in response to improvements in connectivity to the international gateways of the country, the magnitude of this increase is larger the more time sensitive an industry is. Accordingly, we also observe an increase in the regional employment and revenue shares of such industries. Our results support the hypothesis that internal trade costs can be a determinant of international specialization and comparative advantage. |
| Keywords: | international trade, infrastructure, transportation costs, time-sensitive industries. |
| JEL: | F14 R11 R41 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:koc:wpaper:1406&r=int |
| By: | Shin-Kun Peng (Institute of Economics, Academia Sinica, Taipei, Taiwan; National Taiwan University); Raymond Riezman (University of Iowa); Ping Wang (Washington University in St. Louis) |
| Abstract: | We develop a dynamic model of intermediate goods trade in which the pattern and the extent of intermediate goods trade are endogenous. We consider a small open economy whose final good production employs an endogenous array of intermediate goods, from low technology (high cost) to high technology (low cost). The underlying intermediate goods technology evolves over time. We allow for endogenous markups and consider the effect of trade policy on both the intensive and extensive margins. We show that either domestic or foreign trade liberalization reduces the range of exports and the range of domestic intermediate goods production. Either type of trade liberalization reduces intermediate producer markups and increases fi nal good output and average productivity, with stronger positive productivity effects for newly imported intermediate inputs. However, domestic trade liberalization results in lower aggregate and average technology for domestic intermediate good producers. |
| Keywords: | Intermediate Goods Trade, Endogenous Technology Choice, Endogenous Markup, Extensive versus Intensive Margin Effect of Trade liberalization |
| JEL: | D92 F12 O24 O33 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:sin:wpaper:14-a003&r=int |
| By: | Pierluigi Montalbano; Silvia Nenci; Emiliano Magrini |
| Keywords: | international trade, EU-MED integration, Preferential trade agreement, impact evaluetion, matching econometrics |
| JEL: | C21 F10 F13 F15 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:rtr:wpaper:0188&r=int |
| By: | Melise Jaud; Madina Kukenova; Martin Strieborny |
| Abstract: | We show that exported products exit the US market sooner if they violate the Heckscher-Ohlin notion of comparative advantage. Crucially, this pattern is stronger when exporting country has a well-developed banking system, measured by a high ratio of bank credit over the GDP. Banks thus push firms away from exports that are facing an uphill battle on a competitive foreign market due to a suboptimal use of the domestic factor endowment. Our results imply a disciplining role for bank credit in terminating inefficient trade flows. This constitutes a new channel through which finance improves resource allocation in the real economy. |
| Keywords: | resource misallocation, finance, comparative advantage, export survival |
| JEL: | F11 G21 G30 O16 |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:wsr:wpaper:y:2014:i:130&r=int |
| By: | Irawan, Tony (University of Wuppertal); Welfens, Paul J. J. (University of Wuppertal) |
| Abstract: | The EU and the US have started negotiations on a Transatlantic Trade and Investment Partnership Agreement (TTIP) which could bring a considerable increase of exports and output as well as changes in the composition of output and employment. Thus export simulation studies in combination with input output analysis and employment analysis is useful. In the analysis presented the focus is mainly on sectoral output and employment effects where the key sectors are the automotive sector, chemical industry, information and communication technology production, pharmaceuticals and machinery and equipment. Backward sector links are analyzed and found to be quite important in the automotive sector, the chemical industry, the machinery and equipment sector in both Germany and the US; in Germany also in ICT production. However, most of the observed sectors have weak forward linkage. Input output analysis is also used to identify employment effects in various sectors: the pure employment effect of a 20% export expansion in Germany amounts to about 800 000 new jobs. Looking only at the US and German perspective turns out to be misleading – the high imports of intermediate inputs of German firms from EU partner countries suggests that a comparison EU-US is analytically required for some key issues and that considering the effects on EU partners is also useful. There is a host of key policy issues, including the issue of extended sustainability reporting. |
| Keywords: | employment, input output analysis, labor, foreign direct investment, trade, TTIP |
| JEL: | F15 F16 F21 J21 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:iza:izapps:pp78&r=int |
| By: | Juyoung Cheong (School of Economics, The University of Queensland); Do Won Kwak (School of Economics, The University of Queensland); Kam Ki Tang (School of Economics, The University of Queensland) |
| Abstract: | Despite recent theoretical literature highlighting the cross effects between preferential trade agreements (PTAs), like the domino effect and the competitive liberalization theory, little has been done to quantify their impact on bilateral trade flows. This paper investigates how preexisting PTAs dilute (shield) the trade creation (diversion) effect of new PTAs. Countries having pre-existing PTAs enjoy smaller gains in intra-bloc trade because of the dilution effect, and experience smaller losses or even gains in extra-bloc trade because of the shielding effect. The findings support the proposition that PTAs could be used to fend off future trade diversion. |
| Date: | 2014–02–08 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:500&r=int |
| By: | Erol H. Cakmak (TED University Ankara Turkey); Hasan Dudu (European Commission – JRC - IPTS) |
| Abstract: | In this study, we analyse the effects of trade liberalization, world price increase of basic staple and productivity growth in agricultural activities on Turkey by using a dynamic CGE model calibrated to 2008 data. The simulation results suggest that Turkish economy is capable of accommodating the adverse effects of trade liberalization. There are significant welfare gains if trade liberalization is accompanied by the CAP payments in the accession scenario. Trade policy turns out to be a strong instrument to stabilize the domestic prices and avoid the adverse effects of world price increase. Productivity increase in agri-food production has prominent effects on welfare and trade. |
| Keywords: | Trade Liberalization, Dynamic CGE Model, Agriculture, Turkey |
| JEL: | C68 D58 Q17 Q27 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:ipt:iptwpa:jrc84201&r=int |
| By: | Nils Herger (Study Center Gerzensee); Steve McCorriston (University of Exeter Business School) |
| Abstract: | By using data on cross-border acquisitions (CBAs), this paper explores the distribution of the strategies pursued when multinational enterprizes integrate a foreign subsidiary into their organisational structure. Based on a measure of vertical relatedness, each of the 165,000 acquisitions in our sample covering 31 source and 58 host countries can be classified as horizontal, vertical, or conglomerate. Three novel features of CBAs are highlighted. First, horizontal and vertical CBAs are relatively stable over time. Second, substantial parts of CBAs involve conglomerate acquisitions. Third, the wave-like growth of CBAs arises primarily from changes in conglomerate activity, which responds to international valuation differences between financial markets. |
| Date: | 2014–02 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:1402&r=int |
| By: | Wagner, Joachim (Leuphana University Lueneburg and CESIS, Stockholm) |
| Abstract: | Abstract: This study uses tailor made enterprise level data from various sources for firms from manufacturing industries to test for the link between credit constraints, measured by a credit rating score provided by a leading credit rating agency, and imports in Germany for the first time. We find empirical evidence that a better credit rating score is positively related to extensive margins of import – firms with a better score have a higher probability to import, they import more goods and they source from more countries of origin. The intensive margin of imports – the share of imports in total sales – is found not to be related to credit constraints. |
| Keywords: | Credit constraints; imports; Germany |
| JEL: | F14 |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0344&r=int |
| By: | Juyoung Cheong (School of Economics, The University of Queensland); Do Won Kwak (School of Economics, The University of Queensland); Kam Ki Tang (School of Economics, The University of Queensland) |
| Abstract: | This paper proposes a within estimator for three-level data, such as time-variant bilateral trade flows. The estimator helps to address the computational difficulties in estimating, for instance, the gravity model of bilateral trade that needs to control for unobserved country-pair and country-time heterogeneity using fixed effects. Unlike the traditional within transformation that removes cross-sectional heterogeneity, the proposed transformation method removes all three types of heterogeneity, each of which varies in two dimensions of three-level data. We demonstrate the properties of the estimator using empirical examples and Monte Carlo simulations. Simulation results show that the proposed estimators with the adjusted standard errors consistently estimate coefficient parameters and perform correct inference when no data are missing or the missing data are random. When missing data are not random, the proposed within transformation can reduce bias to various degrees, depending on the order of demeaning and sources of bias. As an empirical application, we investigate the WTO effect puzzle by applying the proposed estimator to show that WTO membership has a definite positive effect on bilateral trade flows. |
| Date: | 2014–02–11 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:501&r=int |
| By: | Dachs, Bernhard; Ebersberger, Bernd; Kinkel, Steffen; Som, Oliver |
| Abstract: | We investigate the effects of production offshoring on the innovation activities of manufacturing firms in the home country. The analysis is based on a dataset of more than 3000 manufacturing firms from seven European countries. We find that offshoring firms on average employ a higher share of R&D and design personnel, introduce new products more frequently to the market, and invest more frequently in advanced process technologies compared to non-offshoring firms. Concerns that offshoring may hurt innovation because of the lost links between production and product development are not supported by the evidence. -- |
| Keywords: | offshoring,R&D,home country effects,investment,product innovation,process innovation |
| JEL: | F23 O31 O33 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:fisidp:39&r=int |
| By: | Andersson, Martin (CIRCLE, Lund University); Gråsjö, Urban (University West); Karlsson, Charlie (Jönköping International Business School, and Centre of Excellence for Science and Innovation Studies (CESIS)) |
| Abstract: | Multinational firms (MNFs) have been shown to have a set of defining characteristics. Compared to domestic firms, they have a larger fraction of skilled workers, higher R&D to sales ratios and established networks to knowledge sources in several different countries. As illustrated by the so-called ‘anchor-tenant’ hypothesis, they can be described as “knowledge spillover agents”. MNF affiliates, as defined in this paper, are firms that are part of large domestic and foreign MNFs. In this paper we test whether the local presence of MNF affiliates generate spillover effects on the local industry. The empirical analysis focuses on as¬sessing whether the productivity of the regional manufacturing industry of non-affiliated firms is higher in regions with a large fraction of MNF affiliates. The analysis uses data on Swedish firms and is conducted on regional level as well as on firm level. The regressions show that local presence of MNFs in a region has a positive effect on Gross Regional Product (GRP) from non-MNFs. The paper also shows that regions where the low-productive non-MNFs are located appear to benefit the most from local presence of MNFs. The MNFs have, on the other hand, no effect on non-MNF productivity in regions where the high-productive non-MNFs are located. |
| Keywords: | Multinational firms; affiliates; productivity; R&D; knowledge; spillovers; skilled workers; region |
| JEL: | F23 J24 O33 R11 |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:cesisp:0343&r=int |
| By: | Ishido, Hikari |
| Abstract: | This paper analyzes "institutional connectivity", or the degree of seamless trade in services centering on the distribution sector. Foreign equity participation in mode 3 (commercial presence) of trade in services and business firms’ investment performance has been studied closely. Net economic benefits of transparent institutional connectivity in the wholesale sector have also been revealed statistically in the case of Japan’s bilateral FTAs with other APEC members. Given these results, APEC could work on establishing its own harmonized "service trade commitment table" with only the foreign capital participation as its simple policy restriction. This would surely enhance an APEC-wide, institutional supply chain connectivity. |
| Keywords: | Asia, Japan, Trade policy, International economic integration, Service industries, TPP (Trans-Pacific Partnership), AFAS (ASEAN Framework Agreement on Services), Trade in services, Supply chain |
| JEL: | F13 F15 |
| Date: | 2014–01 |
| URL: | http://d.repec.org/n?u=RePEc:jet:dpaper:dpaper439&r=int |
| By: | Burger, Martijn J.; Ianchovichina, Elena I. |
| Abstract: | This paper investigates the factors associated with foreign direct investment"surges"and"stops,"defined as sharp increases and decreases, respectively, of gross foreign direct investment inflows to the developing world and differentiated based on whether these events are led by waves in greenfield investments or mergers and acquisitions. Greenfield-led surges and stops occur more frequently than mergers and acquisitions-led ones and different factors are associated with the onset of the two types of events. Global liquidity is the only factor significantly associated with a surge, regardless of its kind, while decline in global economic growth and a surge in the preceding year are the only predictors of a stop. Greenfield-led surges and stops are more likely in low-income and resource-rich countries than elsewhere. Global growth, financial openness, and domestic economic and financial instability enable mergers and acquisitions-led surges. These results differ from those in the literature on surges and stops and are particularly relevant in countries where foreign direct investments dominate capital flows. |
| Keywords: | Currencies and Exchange Rates,Emerging Markets,Debt Markets,Economic Theory&Research,Achieving Shared Growth |
| Date: | 2014–02–01 |
| URL: | http://d.repec.org/n?u=RePEc:wbk:wbrwps:6771&r=int |
| By: | Bontems, Philippe; Gozlan, Estelle |
| Abstract: | In this paper, we address two questions: (i) how should a government pursuing both environmental and redistributive objectives design domestic taxes when redistribution is costly, and (ii) how does trade liberalization affect this optimal tax system, and modify the economy's levels of pollution and inequalities ? Using a general equilibrium model under asymmetric information with two goods, two factors (skilled and unskilled labor) and pollution, we fully characterize the optimal mixed tax system (nonlinear income tax and linear commodity and production taxes/subsidies). We provide simulations highlighting the linkages between pollution, labor income redistribution and increasing globalization with our endogenous fiscal system. In the redistributive case (i.e. in favor of the unskilled workers) and when the dirty sector is intensive in unskilled labor, we show that (i) trade liberalization involves a clear trade-off between the reduction of inequalities and the control of pollution when the source of externality is mainly production ; this is not necessarily true with a consumption externality; (ii) under openness to trade, the source of the externality matters for redistribution, while it is not the case in autarky. Finally we discuss the impact of an increasing willingness to redistribute income and of a technological shock affecting emissions intensity. |
| Keywords: | quality signalling, vertical relationship, information disclosure. |
| JEL: | F13 F18 H21 H23 |
| Date: | 2014–02–05 |
| URL: | http://d.repec.org/n?u=RePEc:ide:wpaper:27907&r=int |
| By: | Chia Chiun Ko (School of Economics, The University of Queensland); Paul Frijters (School of Economics, The University of Queensland) |
| Abstract: | This paper examines the welfare loss of import restrictions on bananas in Australia and whether the import restrictions have turned into a particular form of export promotion. We set up a model in which there is free domestic entry, with banana producers accepting losses in normal years, off-set by large profits in years when cyclones destroy a large proportion of the banana plants because of sufficiently low elasticity of demand. Using the cyclones of 2006 and 2011 as exogenous events, we identify the elasticity of demand for bananas in Australia to be around -0.5. We indeed find limited evidence for an ‘over-shooting’ in terms of the supply response after these cyclones, leading to positive exports years after cyclones have hit and re-planted banana plants have become productive. Combining the elasticity estimates with information on turnover, we get an estimated welfare loss of 600 million dollars per year due to banana import restrictions. |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:qld:uq2004:502&r=int |
| By: | Rabah Arezki; Klaus Deininger; Harris Selod |
| Abstract: | We review evidence regarding the size and evolution of the "land rush" in the wake of the 2007-2008 boom in agricultural commodity prices and study determinants of foreign land acquisition for large-scale agricultural investment. Using data on bilateral investment relationships to estimate gravity models of transnational land-intensive investments confirms the central role of agro-ecological potential as a pull factor but contrasts with standard literature insofar as quality of the destination country’s business climate is insignificant and weak tenure security is associated with increased interest for investors to acquire land in that country. Policy implications are discussed. |
| Keywords: | Land Acquisition, Large-Scale Agriculture, Foreign Investments, Agro-Ecological Potential, Land Availability, Land Governance, Property Rights |
| JEL: | F21 O13 Q15 Q34 |
| Date: | 2014 |
| URL: | http://d.repec.org/n?u=RePEc:oxf:oxcrwp:120&r=int |
| By: | Matthew T Cole (Florida International University); Ronald B Davies (University College Dublin) |
| Abstract: | Until recently, government procurement bidding processes have generally favored domestic firms by awarding the contract to a domestic firm even if a foreign firm tenders a lower bid, so long as the difference between the two is sufficiently small. This has been replaced by an agreement abolishing this practice. However, the presence of other trade barriers, such as tariffs, can continue to disadvantage foreign firms. We analyze the bidding strategies in such a game and show that when domestic profits are valued, tariffs will be used to discriminate against foreign firms. Furthermore, we find that optimal tariffs can be more protectionist than the optimal price preference, resulting in lower expected domestic welfare and total surplus. |
| Keywords: | Government Procurement; Tariffs; Price Preference |
| JEL: | F13 H57 F12 |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:ucn:wpaper:201401&r=int |
| By: | Tovonony Razafindrabe |
| Abstract: | This paper develops an estimated multi-country open economy dynamic stochastic gen- eral equilibrium (DSGE) model with incomplete Exchange Rate Pass-Through (ERPT) for the Euro-area. It is designed to model global international linkages and to assess inter- national transmission of shocks under an endogenous framework and incomplete ERPT assumption. On the one hand, we relax the small open economy framework (SOEF) but derive a canonical representation of the equilibrium conditions to maintain analytical tractability of the complex international transmission mechanism underlying the model. Namely, the model considers economies of di¤erent size that are open and endogenously related. On the other hand, in order to take into account international linkages, possible cointegration relationships within domestic variables and between domestic and foreign variables, and the role of common unobserved and observed global factors such as the oil price, we use the Global VAR model to estimate the steady state of observed endoge- nous variables of the multi-country DSGE model. Namely, steady states are computed as long-horizon forecasts from a reduced-form cointegrating GVAR model. ERPT analysis conducted from the estimated multi-country DSGE model for the Euro-area in relation with its …ve main trade partners which are the United Kingdom, the United States, China, Japan and Switzerland yields the following results. First, exchange rate volatility contributes to a large part of import price in‡ation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from in‡ation objective of the foreign trade partners contributes to another source of the Euro-area import price variability. Third, nominal rigidity induces a persistent but a lower impact of the exchange rate changes on import in‡ation. |
| Date: | 2014–02–07 |
| URL: | http://d.repec.org/n?u=RePEc:ipg:wpaper:2014-083&r=int |
| By: | Yongding, Yu (Asian Development Bank Institute) |
| Abstract: | Since the formal launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. The progress in renminbi trade settlement is especially impressive. However, Hong Kong, China’s offshore renminbi deposits failed to make significant progress as expected. The question of how far renminbi internationalization can go has become a common concern in the international financial community. This paper argues that the sheer size of the People’s Republic of China’s (PRC) trade and the convenience of using the renminbi for transaction settlements is one contributing factor, but that exchange rate arbitrage and interest rate arbitrage matter also. As well, a fundamental constraint for renminbi internationalization is the PRC’s capital controls. Before fully opening up its capital account and making the renminbi freely convertible, however, the PRC needs first to put its own house in order, most importantly making the renminbi exchange rate flexible. While the renminbi can and will become a major international currency eventually, the road to internationalization is bound to be long and bumpy. |
| Keywords: | renminbi; trade settlement; capital account liberalization; capital controls; store of value |
| JEL: | F31 F33 |
| Date: | 2014–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:ris:adbiwp:0461&r=int |
| By: | Hou, Feng Picot, Garnett |
| Abstract: | The annual level of immigration is one of the most critical components of a country's immigration policy. It is difficult to directly compare the costs and benefits of changing immigration levels because immigration can serve multiple goals. However, some narrowly-defined effects can be empirically assessed. This study considers solely the potential influence of immigration levels on immigrant entry earnings. This study focuses on the effect of immigration levels on one aspect of immigrants' labour market outcomes their entry earnings, i.e., earnings during the first two full years in Canada. An increase in labour supply - that is, a larger immigrant entering cohort - could increase competition for the types of jobs sought by entering immigrants and place downward pressure on wages for immigrants arriving in that cohort. |
| Keywords: | Ethnic diversity and immigration, Labour, Wages, salaries and other earnings, Labour market and income |
| Date: | 2014–02–13 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp3e:2014356e&r=int |
| By: | Jean-Louis Combes (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Alexandru Minea (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I); Mousse Ndoye SOW (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I) |
| Abstract: | We revisit the link between crises and exchange rate regimes (ERR). Using a panel of 90 developed and developing countries over the period 1980-2009, we find that corner ERR are not more prone to crises compared to intermediate ERR. This finding holds for different types of crises (banking, currency and debt), and is robust to a wide set of alternative specifications. Consequently, we clearly break down the traditional bipolar view: countries that aim at preventing crisis episodes should focus less on the choice of the ERR, and instead implement sound structural macroeconomic policies. |
| Keywords: | exchange rate regimes;economic crises;bipolar view |
| Date: | 2014–02–10 |
| URL: | http://d.repec.org/n?u=RePEc:hal:wpaper:halshs-00944372&r=int |
| By: | Alpaslan, Baris; Demirel, Baki |
| Abstract: | Most emerging market economies in the 1990s witnessed a wide variety of crises. Following those crises, emerging market economies have given up monetary policies using exchange rates as a nominal anchor and inflation targeting has become a new policy of such countries. The overshooting effect of exchange rates in these markets and therefore arising problems are an important cause of this political change. The aim of this paper is to evaluate exchange rate pass-through effects on prices in Asian Pacific, Latin American and Turkish economies which implemented inflation targeting, but have different dollarization and inflation episodes. Panel VAR approach was used in the analysis. Our findings show that exchange rate pass-through effect in Asian Pacific countries is lower than that of Latin America and Turkey. |
| Keywords: | Pass-through Effect, Inflation Targeting, Emerging Market Economies. |
| JEL: | E42 E52 E58 |
| Date: | 2014–02–16 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53726&r=int |
| By: | Byrne, Joseph P; Korobilis, Dimitris; Ribeiro, Pinho J |
| Abstract: | An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction. |
| Keywords: | Exchange Rate Forecasting; Taylor Rules; Time-Varying Parameters; Bayesian Methods. |
| JEL: | C53 E52 F31 F37 G17 |
| Date: | 2014–02–14 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:53684&r=int |