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on International Finance |
| By: | Lee, Hwa-Taek; Yoon, Gawon |
| Abstract: | Real exchange rates are quite persistent. Standard unit root tests are not very powerful in drawing a conclusion regarding the validity of purchasing power parity [PPP]. Rather than asking if PPP holds throughout the whole sample period, we examine if PPP holds sometimes by employing Hamilton-type (1989) Markov regime switching models. There are various reasons that the persistence of real exchange rates changes over time. When at least one of multiple regimes is stationary, PPP holds locally within the regime. Employing 5 real exchange rates spanning more than 100 years, we find strong evidence that the strength of PPP is changing over time. We make comparisons to an early work throughout the article. The new model selection criterion, provided by Smith et al. (2006), called the Markov switching criterion devised especially for discriminating Markov regime switching models, unambiguously indicates a preference for the Hamiltontype Markov regime switching model employed in this article. Also, the evidence for PPP is not much different during the Bretton-Woods and current float periods whether PPP holds or not. |
| Keywords: | Regime switching, real exchange rates, Markov switching criterion, purchasing power parity |
| JEL: | C22 F31 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:cauewp:6132&r=ifn |
| By: | Binder, Michael; Offermanns, Christian J. |
| Abstract: | In this paper we revisit medium- to long-run exchange rate determination, focusing on the role of international investment positions. To do so, we develop a new econometric framework accounting for conditional long-run homogeneity in heterogeneous dynamic panel data models. In particular, in our model the long-run relationship between effective exchange rates and domestic as well as weighted foreign prices is a homogeneous function of a country’s international investment position. We find rather strong support for purchasing power parity in environments of limited negative net foreign asset to GDP positions, but not outside such environments. We thus argue that the purchasing power parity hypothesis holds conditionally, but not unconditionally, and that international investment positions are an essential component to characterizing this conditionality. Finally, we adduce evidence that whether deterioration of a country’s net foreign asset to GDP position leads to a depreciation of that country’s effective exchange rate depends on its rate of inflation relative to the rate of inflation abroad as well as its exposure to global shocks. |
| Keywords: | Exchange Rate Determination, International Financial Integration, Dynamic Panel Data Models |
| JEL: | C23 F31 F37 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:zbw:bubdp1:6144&r=ifn |
| By: | Philip Lane; Jay C. Shambaugh |
| Abstract: | Our goal in this project is to gain a better empirical understanding of the international financial implications of currency movements. To this end, we construct a database of international currency exposures for a large panel of countries over 1990-2004. We show that trade-weighted exchange rate indices are insufficient to understand the financial impact of currency movements. Further, we demonstrate that many developing countries hold short foreign-currency positions, leaving them open to negative valuation effects when the domestic currency depreciates. However, we also show that many of these countries have substantially reduced their foreign currency exposure over the last decade. Last, we show that our currency measure has high explanatory power for the valuation term in net foreign asset dynamics: exchange rate valuation shocks are sizable, not quickly reversed and may entail substantial wealth shocks. |
| JEL: | F31 F32 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13433&r=ifn |
| By: | Gita Gopinath; Oleg Itskhoki; Roberto Rigobon |
| Abstract: | A central assumption of open economy macro models with nominal rigidities relates to the currency in which goods are priced, whether there is so-called producer currency pricing or local currency pricing. This has important implications for exchange rate pass-through and optimal exchange rate policy. We show, using novel transaction level information on currency and prices for U.S. imports, that even conditional on a price change, there is a large difference in the pass-through of the average good priced in dollars (25%) versus non-dollars (95%). This finding is contrary to the assumption in a large class of models that the currency of pricing is exogenous and is evidence of an important selection effect that results from endogenous currency choice. We describe a model of optimal currency choice in an environment of staggered price setting and show that the empirical evidence strongly supports the model's predictions of the relation between currency choice and pass-through. We further document evidence of significant real rigidities, with the pass-through of dollar pricers increasing above 50% in the long-run. Lastly, we numerically illustrate the currency choice decision in both a Calvo and a menu-cost model with variable mark-ups and imported intermediate inputs and evaluate the ability of these models to match pass-through patterns documented in the data. |
| JEL: | E31 F3 F41 |
| Date: | 2007–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13432&r=ifn |