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on International Finance |
| By: | Ivan Paya (Universidad de Alicante); David A. Peel (University Management School) |
| Abstract: | Hegwood and Papell (2002) conclude on the basis of analysis in a linear framework that long-run purchasing power parity (PPP)\ does not hold for sixteen real exchange rate series, analyzed in Diebold, Husted, and Rush (1991) for the period 1792-1913, under the Gold Standard. Rather, purchasing power parity deviations are mean-reverting to a changing equilibrium -a quasi PPP (QPPP) theory. We analyze the real exchange rate adjustment mechanism for their data set assuming a nonlinear adjustment process allowing for both a constant and a mean shifting equilibrium. Our results confirm that real exchange rates at that time were stationary, symmetric, nonlinear processes that revert to a non-constant equilibrium rate. Speeds of adjustment were much quicker when breaks were allowed. |
| Keywords: | Purchasing Power Parity, ESTAR, Bootstrapping. |
| JEL: | F31 C15 C22 C51 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2004-24&r=ifn |
| By: | Ivan Paya (Universidad de Alicante); David A. Peel (University Management School) |
| Abstract: | Nonlinear models of deviations from PPP have recently provided an important, theoretically well motivated, contribution to the PPP puzzle. Most of these studies use temporally aggregated data to empirically estimate the nonlinear models. As noted by Taylor (2001), if the true DGP is nonlinear, the temporally aggregated data could exhibit misleading properties regarding the adjustment speeds. We examine the effects of different levels of temporal aggregation on\ estimates of ESTAR models of real exchange rates. Our Monte Carlo results show that temporal aggregation does not imply the disappearance of nonlinearity and that adjustment speeds are significantly slower in temporally aggregated data than in the true DGP. Furthermore, the autoregressive structure of some monthly ESTAR estimates found in the literature is suggestive that adjustment speeds are even faster than implied by the monthly estimates. |
| Keywords: | ESTAR, Real Exchange Rate, Purchasing Power Parity, Aggregation. |
| JEL: | F31 C22 C51 |
| Date: | 2004–06 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2004-25&r=ifn |
| By: | Marwan Elkhoury (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | This paper is an empirical research of a monetary policy rule for a small open economy model, taking Switzerland as a case-study. A time-varying parameter model of a monetary policy reaction function is proposed to integrate various trade-offs to be made about various macroeconomic variables -- inflation, the output gap and the real exchange rate gap. The Kalman filter estimations of the time-varying parameters shows how rational economic agents combine past and new information to make new expectations about the state variables. The uncertainty created by the time-varying parameter model, and estimated by the conditional forecast error and conditional variance, is decomposed into two components, the uncertainty related to the time-varying parameters and the uncertainty related to the purely monetary shock. Most of the monetary shock uncertainty comes from the time-varying parameters and not from the pure monetary shock. The Lucas and Friedman hypotheses about the impact of uncertainty on output are revisited, using a conditional variance to test them. Both hypothesis are confirmed, using the one-step ahead conditional variance of the monetary shock. An inverse relation between the magnitude of the response on output to the nominal shock and the variance of this shock is found, as Lucas had predicted. Moreover, there is a direct negative impact of uncertainty which reduces output in the long-term. |
| Keywords: | time-varying parameter model; Taylor rule; Kalman Filter. |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp01-2006&r=ifn |
| By: | Razin, Assaf; Sadka, Efraim |
| Abstract: | This paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determining the volume of FDI flows (provided that they occur). We develop a two-country tax competition model which yield an asymmetric Nash-equilibrium with high corporate tax rate and high level of public good provision in the rich source country for FDI outflows and with low corporate tax rate and low level of public good provision in the poor host country for FDI inflows. This is akin to the asymmetry among the EU 15 and EU 10 in the enlarged European Union, as of 2004. We also demonstrate that the notion that the mere international tax differentials are a key factor behind the direction and magnitude of FDI flows, the traditional race to the bottom argument in tax competition are too simple. |
| Keywords: | enlarged European Union; source-host country foreign direct investment; tax competition |
| JEL: | F15 F2 H3 |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:5511&r=ifn |
| By: | Helge Berger (Free University Berlin, Germany and CESifo, Munich, Germany); Jakob de Haan (University of Groningen, The Netherlands and CESifo, Munich, Germany); Jan-Egbert Sturm (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)) |
| Abstract: | We examine the role of money in the policies of the ECB, using introductory statements of the ECB President at the monthly press conferences during 1999-2004. Over time, the relative amount of words devoted to the monetary analysis has decreased. Our analysis of indicators of the monetary policy stance suggests that developments in the monetary sector, while somewhat more important in the later half of the sample, only played a minor role most of the time. Our estimates of ECB interest rate decisions suggest that the ECB’s words (monetary-sector based policy intensions) are not an important determinant of its actions. |
| Keywords: | ECB, communication, monetary policy |
| JEL: | E58 E52 E43 |
| Date: | 2006–01 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:06-125&r=ifn |
| By: | Jose Pedro Pontes |
| Abstract: | This paper presents a non-monotonic relationship between foreign direct investment and trade based on the idea that, although FDI eliminates trade costs on the final good, the investing firm has to bear increased trade costs on an intermediate good. |
| Keywords: | Foreign Direct Investment; Trade; Firm Location. |
| JEL: | F23 L12 R30 |
| URL: | http://d.repec.org/n?u=RePEc:ise:isegwp:wp32006&r=ifn |
| By: | Tommaso Mancini-Griffoli; Laurent L. Pauwels (IUHEI, The Graduate Institute of International Studies, Geneva) |
| Abstract: | The debate on whether a common currency increases trade has persisted for years. Recently, the introduction of the Euro has been hailed as a possible natural experiment to test this theory. But the ensuing empirical literature has inadequately dealt with the very few observations in the post-break period, by recurring to formal residuals-based tests constructed on asymptotic results that cannot be verified. We extend the very recent Andrews' (2003) end-of-sample instability test to panel data in order to rigorously investigate whether the introduction of the Euro has affected trade in the EU. The test features a distribution built with empirical subsampling techniques, robust to very few post break observations. We also use recently developed methods to deal with nonstationarity in our regressors. As in the literature, we find a structural break in trade between Euro-Area countries when using a traditional gravity equation. The break begins in 1999 Q1, but is short-lived as it lasts only 10 quarters (2 1/2 years). We then take the additional step to explain this break. We test a micro-founded augmented gravity equation to capture supply-side effects stemming from macroeconomic policies accompanying the Euro. Namely, we show that the break can be explained by a marked decrease in real interest rates across the Euro-Area preceding and following the introduction of the Euro. Alternatively, we find equally conclusive evidence for the role of institutional integration deployed at the time of the Euro in fostering trade. Lastly, we find no evidence of a break in trade between non Euro Area EU15 countries and between non Euro Area EU 15 and Euro Area countries. |
| Keywords: | Gravity equation; International Trade; Common Currency; Instability tests in Panel data; Euro Area. |
| Date: | 2006–02 |
| URL: | http://d.repec.org/n?u=RePEc:gii:giihei:heiwp04-2006&r=ifn |
| By: | Hanno Lustig |
| Date: | 2005–10–12 |
| URL: | http://d.repec.org/n?u=RePEc:cla:uclaol:368&r=ifn |
| By: | Agnes Benassy-Quere; Edouard Turkisch |
| Abstract: | In this paper, we provide an assessment of the rotation rule decided by the European Council for the functioning of the ECB Governing council after EMU enlargement. Desired interest rates by each member of the Governing council are calculated on the basis of Fisher, truncated Taylor and Taylor rules successively, and on the basis of a convergence of both GDP per capita and price levels within the EU in 30 years. Then, various decision rules are simulated. We show that moving from the “old” rule (where each member of the Governing council has a vote at each meeting) to the “new” one (where, at a given meeting, only 15 national governors have a vote) does not have much impact on the decisions made by the Governing council in an enlarged Eurozone. However, should rotations be relatively infrequent, the system could end up close to a constituency system. In this case, core Euro12 countries could be better off in a Euro25 than in the Euro12, because they would be in the position of imposing lower interest rates. However, core Euro12 would be worse off in a Euro22 compared to a Euro12 because high inflation countries would be able to impose higher interest rates. On the whole, in a Euro25, the (fast) rotation system which was decided by the European Council appears acceptable by all Euro members because it is never the worst system. However, full centralisation (where the choice of the interest rate is left to the Executive board) would deliver the same results, with much lower transaction costs. |
| Keywords: | ECB; EMU; enlargement; monetary policy; voting |
| JEL: | E58 |
| Date: | 2005–12 |
| URL: | http://d.repec.org/n?u=RePEc:cii:cepidt:2005-20&r=ifn |
| By: | Ángel León (Universidad de Alicante); Gonzalo Rubio (Universidad del País Vasco); Gregorio Serna (Universidad de Castilla-La Mancha) |
| Abstract: | This paper proposes a GARCH-type model allowing for time-varying volatility, skewness and kurtosis. The model is estimated assuming a Gram-Charlier series expansion of the normal density function for the error term, which is easier to estimate than the non-central t distribution proposed by Harvey and Siddique (1999). Moreover, this approach accounts for time-varying skewness and kurtosis while the approach by Harvey and Siddique (1999) only accounts for nonnormal skewness. We apply this method to daily returns of a variety of stock indices and exchange rates. Our results indicate a significant presence of conditional skewness and kurtosis. It is also found that specifications allowing for time-varying skewness and kurtosis outperform specifications with constant third and fourth moments. |
| Keywords: | Conditional volatility, skewness and kurtosis; Gram-Charlier series expansion; Stock indices. |
| JEL: | G12 G13 C13 C14 |
| Date: | 2004–03 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2004-13&r=ifn |