|
on International Finance |
| By: | Miguel Fuentes (Instituto de Economía. Pontificia Universidad Católica de Chile.) |
| Abstract: | In this paper I study the pass-through of nominal exchange rate changes to the price of imported goods in four developing countries. The results indicate that 75% of changes in the exchange rate are passed-through to the domestic currency price of imported goods within one quarter. Complete pass-through is attained within one year. There is no evidence that exchange rate pass-through to the price of imported goods has declined over time even in those countries that have managed to reduce inflation significantly and open their economies to foreign competition. |
| Keywords: | Exchange Rate Pass-Through, Local Currency Pricing, Macroeconomics of Developing Countries |
| JEL: | F31 F41 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:ioe:doctra:320&r=ifn |
| By: | Richard H. Cohen (College of Business and Public Policy, University of Alaska Anchorage); Carl Bonham (Department of Economics and University of Hawaii Economic Research Organization, University of Hawaii at Manoa) |
| Abstract: | This paper contributes to the literature on the modeling of survey forecasts using learning variables. We use individual industry data on yen-dollar exchange rate predictions at the two week, three month, and six month horizons supplied by the Japan Center for International Finance. Compared to earlier studies, our focus is not on testing a single type of learning model, whether univariate or mixed, but on searching over many types of learning models to determine if any are congruent. In addition to including the standard expectational variables (adaptive, extrapolative, and regressive), we also include a set of interactive variables which allow for lagged dependence of one industry’s forecast on the others. Our search produces a remarkably small number of congruent specifications-even when we allow for 1) a flexible lag specification, 2) endogenous break points and 3) an expansion of the initial list of regressors to include lagged dependent variables and use a General-to-Specific modeling strategy. We conclude that, regardless of forecasters’ ability to produce rational forecasts, they are not only “different,” but different in ways that cannot be adequately represented by learning models. |
| Keywords: | Learning Models, Exchange Rate, Survey Forecasts |
| Date: | 2007–07–25 |
| URL: | http://d.repec.org/n?u=RePEc:hai:wpaper:200718&r=ifn |
| By: | Pierre L. Siklos (Wilfrid Laurier University); Diana N. Weymark (Vanderbilt University) |
| Abstract: | This paper applies a new measure of the effectiveness of sterilized interventions to data for 16 economies. The measure is defined as the difference between ex ante(xaEMP) and ex post exchange market pressure(xpEMP). xaEMP is calculated on the basis of a counterfactual that no intervention takes place and this is the rationally expected policy. xpEMP is the degree of exchange market pressure that remains based on the actual intervention policy in place. Based on a sample of 12 emerging markets, and Hong Kong, Korea, Japan, and Singapore, we conclude that sterilized interventions have persistent exchange rate effects. However, we also show empirically that this success also took place during a period of substantial growth in foreign exchange reserves. |
| Keywords: | exchange market pressure, foreign exchange intervention, emerging markets |
| JEL: | F31 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:142007&r=ifn |
| By: | Jamshidian, Farshid |
| Abstract: | The contract is described and market examples given. Essential theoretical developments are introduced and cited chronologically. The principles and techniques of hedging and unique pricing are illustrated for the two simplest nontrivial examples: the classical Black-Scholes/Merton/Margrabe exchange option model brought somewhat up-to-date from its form three decades ago, and a lesser exponential Poisson analogue to illustrate jumps. Beyond these, a simplified Markovian SDE/PDE line is sketched in an arbitrage-free semimartingale setting. Focus is maintained on construction of a hedge using Ito's formula and on unique pricing, now for general homogenous payoff functions. Clarity is primed as the multivariate log-Gaussian and exponential Poisson cases are worked out. Numeraire invariance is emphasized as the primary means to reduce dimensionality by one to the projective space where the SDE dynamics are specified and the PDEs solved (or expectations explicitly calculated). Predictable representation of a homogenous payoff with deltas (hedge ratios) as partial derivatives or partial differences of the option price function is highlighted. Equivalent martingale measures are utilized to show unique pricing with bounded deltas (and in the nondegenerate case unique hedging) and to exhibit the PDE or closed-form solutions as numeraire-deflated conditional expectations in the usual way. Homogeneity, change of numeraire, and extension to dividends are discussed. |
| Keywords: | Hedging; self-financing trading strategy; numeraire invariance; predictable representation; unique pricing; arbitrage-free; martingale; homogeneous payoff; Markovian; It\^o's formula; SDE; PDE; geometric Brownian motion; exponential Poisson process. |
| JEL: | G13 |
| Date: | 2007–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4471&r=ifn |
| By: | Cedric Tille (Federal Reserve Bank of New York); Eric van Wincoop (University of Virginia, NBER) |
| Abstract: | The sharp increase in both gross and net capital flows over the past two decades has led to a renewed interest in their determinants. Most existing theories of international capital flows are in the context of models with only one asset, which only have implications for net capital flows, not gross flows. Moreover, there is no role for capital flows as a result of changing expected returns and risk-characteristics of assets as there is no portfolio choice. In this paper we develop a method for solving dynamic stochastic general equilibrium open-economy models with portfolio choice. We show why standard first- and secondorder solution methods no longer work in the presence of portfolio choice, and extend them giving special treatment to the optimality conditions for portfolio choice. We apply the solution method to a particular two-country, two-good, two-asset model and show that it leads to a much richer understanding of both gross and net capital flows. The approach highlights time-varying portfolio shares, resulting from time-varying expected returns and risk characteristics of the assets, as a potential key source of international capital flows. |
| Keywords: | international capital flows, portfolio allocation, home bias. |
| JEL: | F32 F36 F41 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:122007&r=ifn |
| By: | Yin-wong Cheung (University of California, Santa Cruz); Menzie D. Chinn (University of Wisconsin, Madison and NBER); Eiji Fujii (University of Tsukuba) |
| Abstract: | We evaluate whether the Renminbi (RMB) is misaligned, relying upon conventional statistical methods of inference. A framework built around the relationship between relative price and relative output levels is used. We find that, once sampling uncertainty and serial correlation are accounted for, there is little statistical evidence that the RMB is undervalued. The result is robust to various choices of country samples and sample periods, as well as to the inclusion of control variables. |
| Keywords: | absolute purchasing power parity, exchange rates, real income, capital controls, currency misalignment. |
| JEL: | F31 F41 |
| Date: | 2007–06 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:112007&r=ifn |
| By: | Yin-wong Cheung (University of California, Santa Cruz); Kon S. Lai (California State University, Los Angeles) |
| Abstract: | This study investigates whether greater nominal exchange rate flexibility aids real exchange rate adjustment based on data from dual exchange rates in developing countries. Specifically, we analyze whether the more flexible parallel market rate produces faster real exchange rate adjustment than the less flexible official rate does. Half-life estimates of adjustment speeds are obtained from fractional time series analysis. We find no systematic evidence that greater exchange rate flexibility tends to produce either faster or slower real exchange rate adjustment, albeit there is substantial cross-country heterogeneity in speed estimates. With official rates pegged to the dollar, many developing countries use parallel exchange markets as a back-door channel to facilitate real exchange rate adjustment. The evidence suggests, however, that these parallel markets often fail to speed up real rate adjustment. |
| Keywords: | Real exchange rate; Fractional time series; Half life; Adjustment speed |
| JEL: | C22 F31 |
| Date: | 2007–05 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:092007&r=ifn |
| By: | Michael B. Devereux (University of British Columbia); Charles Engel (University of Wisconsin) |
| Abstract: | Both empirical evidence and theoretical discussion has long emphasized the impact of ¡¥news¡¦ on exchange rates. In most exchange rate models, the exchange rate acts as an asset price, and as such responds to news about future returns on assets. But the exchange rate also plays a role in determining the relative price of non-durable goods. In this paper we argue that these two roles may conflict with one another when nominal goods prices are sticky. If news about future asset returns causes movements in current exchange rates, then when nominal prices are slow to adjust, this may cause changes in current relative goods prices that have no efficiency rationale. In this sense, anticipations of future shocks to fundamentals can cause current exchange rate misalignments. We outline a series of models in which an optimal policy eliminates news shocks on exchange rates. |
| Date: | 2007–03 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:062007&r=ifn |
| By: | Tony Latter (Hong Kong Institute for Monetary Research) |
| Abstract: | This paper examines the way in which Hong Kong¡¦s currency board has operated since its re-introduction in 1983. It discusses currency board design and the extent to which Hong Kong has conformed to particular principles. The core of the paper is an assessment of the rules-versus-discretion question. From 1983 to 1988 the currency board convertibility obligation applied, in effect, to physical cash only. Arbitrage could not be relied upon to ensure that the market rate converged to 7.80, so intervention ¡V mostly in the foreign exchange market ¡V played a significant role. In 1988 the authorities acquired the means to apply currency board principles also to the reserve balance of the banking system, but over the next ten years they did not exploit that to full advantage in the currency board context. They gave no convertibility promise for the reserve balance and seldom allowed foreign exchange transactions to trigger currency-board-type adjustment. They concentrated instead on managing bank liquidity or interest rates, very often via money market intervention, albeit subject to the overriding goal of a stable exchange rate. But the range which defined that stability was never revealed. Although this exercise of discretion and the departures from strict currency board principles were not obviously damaging, they may have complicated official procedures unnecessarily, and may have raised doubts as to the authorities¡¦ longterm commitment to 7.80. In other words, rather than helping to settle markets, the tactics may at times have disturbed them. Reforms in 1998 included a weak-side convertibility undertaking for banks¡¦ reserve money at 7.80 (after transition), but left strong-side intervention to the discretion of the Monetary Authority. It was only in 2005 that a firm strong-side undertaking was introduced at 7.75, with the weak side bound being moved to 7.85 in order to provide symmetry. Now, only one minor element of discretion ¡V for intrazone intervention ¡V remains. Whereas discretionary interventions were probably very necessary in the early years after 1983, the authorities could have moved more quickly after 1988 to reach the almost completely rule-based status of today. But the stability of the exchange rate over the entire period speaks for itself, and it is not obvious that stricter adherence to currency board principles would have delivered a materially different outcome. |
| Date: | 2007–01 |
| URL: | http://d.repec.org/n?u=RePEc:hkm:wpaper:022007&r=ifn |