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on International Finance |
| By: | Burnside, A Craig; Eichenbaum, Martin; Rebelo, Sérgio |
| Abstract: | The carry trade strategy involves selling forward currencies that are at a forward premium and buying forward currencies that are at a forward discount. We compare the payoffs to the carry trade applied to two different portfolios. The first portfolio consists exclusively of developed country currencies. The second portfolio includes the currencies of both developed countries and emerging markets. Our main empirical findings are as follows. First, including emerging market currencies in our portfolio substantially increases the Sharpe ratio associated with the carry trade. Second, bid-ask spreads are two to four times larger in emerging markets than in developed countries. Third and most dramatically, the payoffs to the carry trade for both portfolios are uncorrelated with returns to the U.S. stock market. |
| Keywords: | carry trade; exchange rate; uncovered interest parity |
| JEL: | F3 F41 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6148&r=ifn |
| By: | Jian Wang |
| Abstract: | This paper examines how much the central bank should adjust the interest rate in response to real exchange rate fluctuations. The paper first demonstrates in a two-country Dynamic Stochastic General Equilibrium (DSGE) model, that the home bias in consumption is important to duplicate the exchange rate volatility and exchange rate disconnect documented in the data. When home bias is high, the shock to Uncovered Interest-rate Parity (UIP) can substantially drive up exchange rate volatility while leaving the volatility of real macroeconomic variables, such as GDP, almost untouched. The model predicts the volatility of the real exchange rate relative to that of GDP increases with the extent of home bias. This relation is strongly supported by the data. Then a second-order accurate solution method is employed to solve the model and compare the conditional welfare under different policy regimes. The results suggest that the monetary authority should not seek to vigorously stabilize exchange rate fluctuations. In particular, when the central bank does not take a strong stance against the inflation rate, exchange rate stabilization may induce substantial welfare loss. The model also suggests no welfare gain from the international monetary cooperation, which extends Obstfeld and Rogoff s (2002) findings to a DSGE model. |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddwp:0701&r=ifn |
| By: | Javier Díaz-Cassou (Banco de España); Alicia García-Herrero (Banco de España); Luis Molina (Banco de España) |
| Abstract: | Using empirical analysis, complemented with case studies, this paper studies under which circumstances IMF programs manage to catalyze private capital flows into the countries concerned. While we found no catalysis in general, the situation differs very much depending on the type of capital flow and the program's objective. On the first, the Fund seems to be doing a better job at attracting FDI than shorter-term flows, particularly cross-border bank lending. On the second, programs oriented towards crisis prevention or with longer-term objectives, also perform better in terms of catalysis. In turn, programs oriented towards crisis resolution actually discourage private capital flows. This worrisome finding, given the importance of crisis resolution for the Fund, is mitigated for FDI inflows in the case studies analysed.Finally, all case studies point to the role of conditionality –as opposed to signalling and liquidity– as the strongest channel through which IMF catalyzes private flows. |
| Keywords: | imf, catalytic role, private capital flows |
| JEL: | F32 F33 F34 |
| Date: | 2006–08 |
| URL: | http://d.repec.org/n?u=RePEc:bde:wpaper:0617&r=ifn |
| By: | Mendoza, Enrique G; Quadrini, Vincenzo; Ríos-Rull, José-Víctor |
| Abstract: | Large and persistent global financial imbalances need not be the harbinger of a world financial crash. Instead, we show that these imbalances can be the outcome of financial integration when countries differ in financial markets deepness. In particular, countries with more advanced financial markets accumulate foreign liabilities in a gradual, long-lasting process. Differences in financial deepness also affect the composition of foreign portfolios: countries with negative net foreign asset positions maintain positive net holdings of non-diversifiable equity and FDI. Abstracting from the potential impact of globalization on financial development, liberalization leads to sizable welfare gains for the more financially-developed countries and losses for the others. Three empirical observations motivate our analysis: (1) financial deepness varies widely even amongst industrial countries, with the United States ranking at the top; (2) the secular decline in the U.S. net foreign asset position started in the early 1980s, together with a gradual process of international capital markets liberalization; (3) net exports and current account balances are negatively correlated with indicators of financial development. |
| Keywords: | international imbalances; portfolio composition; precautionary savings |
| JEL: | F36 F4 |
| Date: | 2007–02 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6149&r=ifn |
| By: | María I. Campos; José L. Torres; Esmeralda Villegas |
| Abstract: | This paper studies the credibility of the Venezuela crawling-band exchange rate regime during the period July, 1996-February, 2002. We show that, introducing some modifications, the credibility analysis widely applied to target zone regimes can also be used in studying the credibility of crawling- band regimes. In analyzing the credibility of the Venezuela crawling band, first we use the so-called simple credibility tests developed by Svensson (1991). Additionally, we estimate the expected rate of realignment using the drift- adjustment method. Both the credibility tests and the drift-adjustment method give similar results, showing that the crawling-band system was highly credible during the period. |
| Date: | 2006–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:col:001065:002764&r=ifn |
| By: | Pierre-Richard Agénor; Peter J. Montiel |
| Abstract: | This paper develops a simple static model with credit market imperfections and flexible prices for monetary policy analysis in a fixed-exchange rate economy. Lending rates are set as a premium over the cost of borrowing from the central bank. The premium itself depends on firms' net worth. In the basic framework, banks' funding sources are perfect substitutes and the provision of liquidity by the central bank is perfectly elastic at the prevailing refinance rate. The model is used to perform a variety of experiments, such as changes in the refinance and reserve requirement rates, central bank auctions, shifts in the premium and contract enforcement costs, and changes in public spending and world interest rates. The analysis is then extended to examine credit targeting and sterilization policies. |
| Date: | 2006 |
| URL: | http://d.repec.org/n?u=RePEc:man:cgbcrp:76&r=ifn |