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on International Finance |
| By: | Eiji Ogawa; Takeshi Kudo |
| Abstract: | In this paper, we conduct a simulation analysis to investigate how much depreciation of the US dollar is needed to reduce the current account deficits in the near future. We use some VAR models to estimate relationships between the exchange rate of the US dollar and the current accounts in the United States. We conclude that some scenarios of the US dollar depreciation would reduce the current account deficits to a level under 2% of GDP in the next several years. The results are regarded as robust for each of the scenarios thought they depend on our supposed VAR models. |
| Keywords: | US dollar depreciation, Current account sustainability, Investment-saving balance, International trade flows, Vector Autoregression (VAR) |
| JEL: | F32 F31 F47 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:hst:hstdps:d04-44&r=ifn |
| By: | Ellis Connolly (Reserve Bank of Australia); Marion Kohler (Reserve Bank of Australia) |
| Abstract: | In this paper we analyse the effect of news relating to the expected path of monetary policy on interest rate futures. Central banks’ transparency is in most respects much greater than it was a decade ago, and so central bank communication needs to be included as a potential source of news. We therefore consider four types of news: macroeconomic news, overseas news, monetary policy surprises and central bank communication. The effect of these types of news on daily changes in interest rate futures is estimated using an EGARCH model for a panel of six economies. We find that interest rate expectations respond to both macroeconomic and policy news, although the response to macroeconomic news is larger, especially once we include foreign news. Overall, the results suggest that the impact of the RBA’s communication policy is in line with other major central banks, and significantly influences (and informs) expectations of future monetary policy. |
| Keywords: | central bank communication, news, interest rate futures |
| JEL: | E58 E52 G14 |
| URL: | http://d.repec.org/n?u=RePEc:rba:rbardp:rdp2004-10&r=ifn |
| By: | Yin-Wong Cheung; Ulf G. Erlandsson |
| Abstract: | This article presents a systematic and extensive empirical study on the presence of Markov switching dynamics in three dollar-based exchange rates. A Monte Carlo approach is adopted to circumvent the statistical inference problem inherent to the test of regime-switching behavior. Two data frequencies, two sample periods, and various specifications are considered. Quarterly data yield inconclusive evidence - the test rejects neither random walk nor Markov switching. Monthly data, on the other hand, offer unambiguous evidence of the presence of Markov switching dynamics. The results suggest that data frequency, in addition to sample size, is crucial for determining the number of regimes. |
| Keywords: | exchange rate dynamics, regime switching, Monte Carlo Test, sampling frequency |
| JEL: | C22 F31 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:ces:ceswps:_1348&r=ifn |
| By: | Frédéric Karamé (EPEE et CEPII); Lise Patureau (EUREQua); Thepthida Sopraseuth (EPEE et CEPREMAP) |
| Abstract: | Meese and Rogoff [1983] show that macroeconomic models of the Seventies fail to outperform the random walk exchange rate forecasts. Macroeconomics thus provide useless information as far as out-of-sample exchange rate forecasting is concerned. However, since Meese and Rogoff's seminal paper, advances have been made in the theoretical modeling of international macroeconomic dynamics. New Open Economy Macroeconomics, developed in the wake of Obstfeld and Rogoff [1995]'s work, show that intertemporal general equilibrium models capture international stylized facts. In particular, Hairault, Patureau and Sopraseuth [2002] have shown that a small open economy model based on credit market frictions successfully accounts for exchange rate volatility. This paper aims at assessing the empirical performances of this model. First, the model statistically matches a large set of features observed in the data, in addition to exchange rate dynamics. Credit market frictions are found to be critical in making the model consistent with the data. Secondly, we find that, in the recent period only, the limited participation model succeeds in outperforming the random walk exchange rate forecasts in the medium run. |
| Keywords: | New Open Economy Macroeconomics, simulated method of moments, exchange rate forecasts |
| JEL: | F32 F41 |
| Date: | 2004–02 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:v04013&r=ifn |
| By: | Flávio Vilela Vieira; Márcio Holland |
| Abstract: | The paper aims to investigate on empirical and theoretical grounds the Brazilian exchange rate dynamics under floating exchange rates. The empirical analysis examines the short and long run behavior of exchange rate, interest rate (domestic and foreign) and country risk using econometric techniques such as variance decomposition, Granger causality, cointegration tests, error correction models, and a GARCH model to estimate the exchange rate volatility. The empirical findings suggest that one can argue in favor of a certain degree of endogeneity of the exchange rate and that flexible rates have not been able to insulate the Brazilian economy in the same patterns predicted by the literature due to its own specificities (managed floating with the use of international reserves and domestic interest rates set according to inflation target) and to externally determined variables such as the country risk. Another important outcome is the lack of a closer association of domestic and foreign interest rates since the new exchange regime has been adopted. That is, from January 1999 to May 2004, the US monetary policy has no significant impact on the Brazilian exchange rate dynamics, which has been essentially endogenous primarily when we consider the fiscal dominance expressed by the probability of default. |
| JEL: | F31 C22 F41 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:066&r=ifn |
| By: | Diego Bastourre; Jorge Carrera |
| Abstract: | This study intends to determine the kind of relationship existing between the exchange rate regime and real volatility. After carefully revising theoretical and empirical results of previous research, a new methodology is proposed that corrects deficiencies found in previous empirical papers. The results show non-neutrality of the exchange rate regime. Particularly, it is found that the more rigid the regime, the greater the real volatility. Even when a classification of the exchange rate regime is performed allowing a comparison between consistent pegging and consistent floating, the former has a higher volatility. Countries with "fear of floating" or "inability of pegging" behavior exhibit lower volatility than consistent pegs. |
| JEL: | C23 F41 F33 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:067&r=ifn |
| By: | Satish Chand |
| Abstract: | This paper uses quarterly data from September 1981 to December 2000 to quantify the extent to which the Australian real exchange rate is misaligned relative to its long-run equilibrium value. Our modelling suggest, that as of December 2000, the real exchange rate was seven percent below its equilibrium value; this figure is modest in comparison to purchasing power parity indicators that suggest considerably greater misalignment. Furthermore, once short-run dynamics are accounted for, even this anomaly disappears. |
| JEL: | E52 Z00 |
| Date: | 2001 |
| URL: | http://d.repec.org/n?u=RePEc:idc:wpaper:idec01-2&r=ifn |
| By: | Kem Reat Viseth |
| Abstract: | The tendency to substitute domestic for foreign currency (as a way of holding wealth and a means of transaction for goods and services) is common throughout the world, and particularly so in countries attempting to overcome thin financial institutions or errant monetary policy. This paper uses monthly data to analyze the phenomenon of currency substitution in Cambodia during the recent economic and financial reform process, 1993-2001. Results show that there is a significant long run relationship between the expected rate of depreciation in market exchange rates and holdings of US dollars. The implications of this result for macroeconomic policy and broader financial sector developments in Cambodia are also examined. |
| JEL: | E52 |
| Date: | 2001 |
| URL: | http://d.repec.org/n?u=RePEc:idc:wpaper:idec01-4&r=ifn |
| By: | Riemer P. Faber; Ad C.J. Stokman |
| Abstract: | This paper studies the effects of more than 40 years of European integration on prices. Up to now, most empirical research in this area has been micro-based. We follow a macro approach. On the basis of scaled HICP strong evidence is found for price convergence in Europe, especially in the 1960s and 1990s. For the DM zone convergence is found in all decades until the German re-unification. Next to cost convergence, trade and tax harmonization, we demonstrate that exchange rate stability has been an important factor behind this process. |
| JEL: | G21 L10 L41 |
| Date: | 2004–10 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:012&r=ifn |
| By: | Jaap Bos; Mindel van de Laar |
| Abstract: | In this paper, we question whether there is a catch-up effect or announcement effect in Foreign Direct Investment (FDI) from the European Union (EU) to the ten EU accession countries. We study FDI outflows from the Netherlands, a small open economy with few historical ties to Eastern Europe, and compare FDI in the transition countries in Central and Eastern Europe to FDI in other regions - most notably to transition countries in Central Asia. In our analysis we try to impose as little structure as possible on the data and allow for heterogeneity within the different regions. In an effrt to improve on past studies in the same area, we use a very broad sample of countries, we present country-specific results and test how robust regional dummies are, we check for omitted variable bias and we try to correct for possiblenon-linearity in the gravity relationships. We find that many of the differences in results of previous studies can be attributed to these specification! problems. There is no evidence that an overall catch-up effect or announcement effect exists. Rather, economic fundamentals explain differences in inward investment in the region. FDI and trade are mostly complementary and there is no evidence that there is crowding out between regions. |
| JEL: | E32 G21 G28 G31 |
| Date: | 2004–09 |
| URL: | http://d.repec.org/n?u=RePEc:dnb:dnbwpp:008&r=ifn |
| By: | Bruce A. Blonigen; Ronald B. Davies; Glen R. Waddell; Helen T. Naughton |
| Abstract: | Theoretical models of foreign direct investment (FDI) have only recently begun to model the role of third countries, and the empirical FDI literature has almost exclusively examined bilateral FDI data without recognizing the potential interdependence between FDI decisions to alternative host countries. This paper uses spatial econometric techniques to examine the spatial correlation between FDI to alternative (neighboring) regions. The sign of such correlations can provide evidence for or against alternative theories for FDI motivations. Using data on OECD countries from 1980-2000, we find evidence consistent with export platform FDI in Europe. |
| JEL: | F21 F23 |
| Date: | 2004–12 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:10939&r=ifn |
| By: | Marcelo Braga Nonnemberg; Mario Jorge Cardoso de Mendonça |
| Abstract: | The objective of this study is to shed light on the determinants of foreign direct investiment (FDI) in developing countries. In order to undertake it, we performe a econometric model based in panel data analysis for 38 developing countries (including transition economies) for the 1975-2000 period. Among the major conclusions we have that the FDI is correlated to level of schooling, economy's degree of openness, risk and variables related to macroeconomic performance like inflation, risk and average rate of economic growth. The results also show that the FDI has been closely associated with stock market performance. Lastly, a causality test between FDI and GDP is performed. There is evidence of the existence of causality in sense that GDP leading to FDI, but not vice versa. |
| JEL: | F21 F43 F41 |
| Date: | 2004 |
| URL: | http://d.repec.org/n?u=RePEc:anp:en2004:061&r=ifn |
| By: | Kashyap Vattipalli (ICFAI) |
| Abstract: | The Japanese banks played a major role in the economic development of Japan during the post-war period between 1945 and 1973. They financed start-up companies and actively funded their expansion. They were prime financiers since there were restrictions on other options of financing such as equities and bonds. But this changed in the 1970s when reforms in the financial sector took place. These reforms eased the restrictions on bond and equity issuance. Financial markets were deregulated and this allowed the major Japanese companies to reduce their dependence on banks. They were able to substitute cheap bond financing for expensive bank credit. This reduced the role of banks as prime financiers. To overcome this situation, banks reorganised their portfolios and started lending to riskier segments like consumer lending and the real-estate industry. This resulted in an asset price bubble, which finally burst in 1989 resulting in huge non-performing loans for Japanese banks. This case enables the reader to understand the effects of reckless lending and how the continued presence of non-performing loans in the banking sector had a deleterious effect on the Japanese economy. |
| Keywords: | Japanese banking crisis ; Foreign Exchange and Trade Control Act ; Liberalisation ; Asset price bubble ; Government bonds ; Bond Issuance Committee ; Basle capital accord ; Deposit Insurance Corporation ; Financial Supervisory Agency ; Yakuza and Jusen ; Keiretsu and Zaibatsu ; Big bang reforms ; Non-performing loans ; Capital market deregulation ; Capital adequacy ratio |
| JEL: | A |
| Date: | 2004–11–25 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpgt:0411001&r=ifn |
| By: | Henk. L.M. Kox (CPB, Netherlands); Arjan Lejour (CPB, Netherlands); Raymond Montizaan |
| Abstract: | The paper sketches the basic patterns and facts about service trade, foreign direct investment and regulation in the EU. We conclude that the last decade trade in services has increased substantially, in particular in business services. This is also the case for foreign direct investment (in services). The level of regulation within the EU has decreased. Product-market regulation and FDI restrictions have been lowered. The process of deregulation proceeds with different speed, and this is the cause of an increased variance in the level of regulation over Europe. The level of regulation in the EU is relatively high in comparison with other OECD countries. The pace of deregulation in Europe during the 1990s was higher than in the United States, causing a process of convergence. Nonetheless, the level of product market regulation for non-manufacturing sectors is in the EU still considerably higher than in the USA. |
| Keywords: | European Union, EU, internal market, services, service trade, direct investment, FDI, market regulation |
| JEL: | F15 F23 L8 L5 |
| Date: | 2004–12–06 |
| URL: | http://d.repec.org/n?u=RePEc:wpa:wuwpit:0412002&r=ifn |
| By: | Andrew Hughes Hallett (Department of Economics, Vanderbilt University and CEPR); Gert Peersman (Department of Financial Economics, Ghent University, Gent, Belgium and Bank of England); Laura Piscitelli (Bank of England) |
| Abstract: | There is a presumption in the literature that price or exchange rate uncertainty, or uncertainty in the monetary conditions underlying them, will have a negative effect on investment. Some argue that this negative effect will be extended by imperfect competition. However, models of "irreversible" investment show that the situation is more complicated than that. In these models, investment expenditures are affected by the scrapping price available on world markets; and also by the opportunity cost of waiting rather than investing. The impact of uncertainty is therefore going to depend on the type of industry, and hence on the industrial structure of the economy concerned. In addition, it may depend on the persistence of any price "misalignments" away from competitive equilibrium. In this paper, we put these theoretical predictions to the test. We estimate investment equations for 13 different industries using data for 9 OECD countries over the period 1970-2000. We find the impact of price uncertainty is negative or insignificant in all but one case. But the impact of (nominal) exchange rate uncertainty is negative in only 6 cases. It is positive in 4 cases, and insignificant in 3 others. In addition, there are conflicting effects from the real exchange rate. The net effect depends on whether the source of the uncertainty is in domestic markets or in foreign markets. |
| Keywords: | invetment expenditures, price and exchange rate uncertainty, PMGE estimators |
| JEL: | E22 F21 |
| Date: | 2004–01 |
| URL: | http://d.repec.org/n?u=RePEc:van:wpaper:0406&r=ifn |
| By: | Maurel Mathilde (ROSES) |
| Abstract: | Candidate countries of central and eastern Europe (CEECs) are suppose to join the EU in 2004, June, which imply that they will face important challenges in the conduct of macroeconomic policy, in order to be able to enter the ERM-II system and eventually enter the EMU (European Monetary Union). Abandoning an independent monetary policy might entail significant costs for countries, which have succeeded in recovering and are in a process of catching-up. However those costs have probably been exaggerated, and their estimation biased by the traditional optimal currency area criteria. The main criticism against a too strong emphasis on the latter rest on two arguments. The first one is that assessing the trade-off for joining the EMU does not deliver the same conclusion ex ante and ex post. Meanwhile, the degree of financial integration will likely increase dramatically, which in turns will decrease the opportunity cost of loosing the monetary policy for absorbing country specific shocks. In a world of capital mobility, the room left for an independent monetary policy is very narrow, maybe close to zero in small, emerging countries, more vulnerable to speculative attacks than countries in the core. The second argument is more empirical. While the link between the exchange rate regime and the fundamentals is rather weak, the political agenda of joining the EU and subsequently the EMU seems to explain the choice of the exchange rate regime. |
| Keywords: | Exchange rate arrangements, accession to the EMU, EU enlargement, international capital flows |
| JEL: | F15 F41 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:j04027&r=ifn |
| By: | José De Sousa (LESSOR et ROSES); Julie Lochard (ROSES) |
| Abstract: | The positive effect of a common currency on trade is empirically well-documented, but the reason of this effect remains unclear. In this paper, we argue that part of the currency union effect on trade is indirect. Currency unions foster foreign direct investment (FDI), which promotes trade due to complementary effects between trade and FDI. Using data for 22 OECD countries, we find that half of the euro impact on trade is driven by additional FDI. |
| Keywords: | Currency union, trade, FDI |
| JEL: | F15 F21 F33 |
| Date: | 2004–11 |
| URL: | http://d.repec.org/n?u=RePEc:mse:wpsorb:j04111&r=ifn |