|
on International Finance |
| By: | Kenneth S. Rogoff; Vania Stavrakeva |
| Abstract: | Are structural models getting closer to being able to forecast exchange rates at short horizons? Here we argue that over-reliance on asymptotic test statistics in out-of-sample comparisons, misinterpretation of some tests, and failure to sufficiently check robustness to alternative time windows has led many studies to overstate even the relatively thin positive results that have been found. We find that by allowing for common cross-country shocks in our panel forecasting specification, we are able to generate some improvement, but even that improvement is not entirely robust to the forecast window, and much of the gain appears to come from non-structural rather than structural factors. |
| JEL: | C52 C53 F31 F47 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14071&r=ifn |
| By: | Thabo Mokoena (South African Reserve Bank, Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria) |
| Abstract: | This paper attempts to provide evidence indicating that the Purchasing Power Parity (PPP) puzzle is becoming less of a puzzle. It present the results of Augmented Dickey-Fuller (ADF) test, nonlinear tests of nonstationarity, and Bayesian unit root tests, applied to ten SADC countries. The Bayesian tests were found to be biased in favour of a trend stationary model in all cases. It is argued that nonlinear approaches to exchange rate adjustments are likely to provide a firmer basis for inference and stronger support for the PPP in the long-term. This is more so at 1 per cent and 5 per cent levels of significance. |
| Keywords: | Purchasing Power Parity, Nonlinear Nonstationarity Tests, Bayesian Unit Root Test |
| JEL: | C11 C22 F31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200822&r=ifn |
| By: | Alok Johri; Amartya Lahiri |
| Abstract: | Three well known facts that characterize exchange rate data are: (a) the high correlation between bilateral nominal and real exchange rates; (b) the high degree of persistence in real exchange rate movements; and (c) the high volatility of real exchange rates. This paper attempts a joint, albeit partial, rationalization of these facts in an environment with no staggered contracts and where prices are preset for only one quarter. There are two key innovations in the paper. First, we augment a standard two-country open economy model with learning-by-doing in production at the firm level. This induces monopolistically competitive firms to endogeneize the productivity effect of their price setting behavior. Specifically, firms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity benefits of higher production. Second, we introduce habits in leisure. This makes the labor supply decision dynamic and adds an additional source of propagation. We show that the calibrated model can quantitatively reproduce significant fractions of the aforementioned facts. Moreover, as in the data, the model also produces a positive correlation between the terms of trade and the nominal exchange rate. |
| Keywords: | Real exchange rate movements, endogenous price stickiness, learning-by-doing |
| JEL: | F1 F2 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:mcm:deptwp:2008-04&r=ifn |
| By: | Zehra Aftab (Pakistan Institute of Development Economics, Islamabad); Sajawal Khan (Pakistan Institute of Development Economics, Islamabad) |
| Abstract: | Earlier studies that investigated the J-Curve phenomenon for Pakistan employed aggregate trade data. These studies suffered from the “aggregation bias” problem. In order to overcome this constraint, this paper tests the effects of real exchange rate depreciation in the Pakistani Rupee on the bilateral trade balance between Pakistan and her 12 respective trade partners. These countries, together, account for almost half of Pakistan’s total trade. In order to differentiate between the long-run equilibrium and short-run disequilibrium dynamics, and also to deal with non-stationary data, the ARDL approach is used. The results do not provide any support for the standard J-curve phenomenon. |
| Keywords: | J-Curve, Trade Balance, Marshall-Lerner Condition |
| JEL: | F12 F14 F31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:pid:wpaper:2008:45&r=ifn |
| By: | Gregorios Siourounis |
| Abstract: | This paper investigates the empirical relationship between capital flows and nominal ex-change rates for five major countries. It is well known that no theory based on current account or interest rates has ever been shown to work empirically at short to medium horizons. Recent international finance theory, however, suggests that currencies are influenced by capital flows as much as by current account balances and log-term interest rates. Using unrestricted VAR's we document the following: a) Incorporating net cross-border equity flows into linear exchange rate models can improve their in-sample performance. Using net cross-border bond flows, however, has no such effect; b) Positive shocks to home equity returns (relative to foreign markets) are associated with short-run home currency appreciation and equity inflow. Positive shocks to home interest rates (relative to foreign countries) cause currency movements that are not consistent with uncovered interest rate parity (UIP); c) An equity-augmented linear model supports exchange rate predictability and outperforms a random walk in several cases. Such superior forecast performance, however, depends on the exchange rate and the forecast horizon. |
| Keywords: | Net equity flows, net bond flows, equity returns, interest rates, and nominal exchange rates. |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:uop:wpaper:00028&r=ifn |
| By: | Adamcik, Santiago |
| Abstract: | This paper discusses that a lot of the debate on selecting an exchange rate regime misses the time. It begins explaining the standard theory of choice between exchange rate regimes, and then explores the fragilities in this theory, specifically when this is applied to emerging economies. Next presents a extent of institutional characteristics that might have influence upon a country to choose either fixed or floating rates , and then turns to the converse question of whether the selection of exchange rate regime may make for the development of some helpful institutional traits. The conclusion is that the election of exchange rate regime is likely to be of second order significance to the development of good fiscal, financial, and monetary institutions in causing macroeconomic achievement in emerging market. A greater dedication in strong institution's development instead of focalizing in the exchange rate regimes could make economies healthier and less propense to the crises, as was observed of late years. |
| Keywords: | Regimenes de Tipo de Cambio; Economias Emergentes; Inflacion;Currency Board; Soft Pegs; Hard Pegs |
| JEL: | F4 F3 E5 E4 |
| Date: | 2008–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9329&r=ifn |
| By: | Thabo Mokoena (South African Reserve Bank, Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Renee van Eyden (Department of Economics, University of Pretoria) |
| Abstract: | This paper utilises various recently developed econometric methods to obtain better approximations to the half-life for real exchange rates of ten South African Development Community (SADC) countries and to generate confidence intervals for half-life deviations from the purchasing power parity (PPP). The robust methods of Stock (1991), Elliott and Stock (2001), and Hansen (1999) imply that point estimates of less than 36 months exist, making them compatible with PPP. However, the results of ADF and ADF-GLS tests render the SADC real exchange rates as nonstationary processes, a result that is patently at odds with mean-reversion, implying at the same time the possibility of infinite half-lives. Therefore the empirical results appearing in this paper do not convincingly resolve the half-life version of the PPP puzzle and leaves room for future research in the directions of non-parametric methods and median unbiased confidence intervals. |
| Keywords: | PPP, Half-life, Real Exchange Rates |
| JEL: | C12 C15 C23 F30 F31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pre:wpaper:200823&r=ifn |
| By: | Lane, Philip R.; Shambaugh, Jay C |
| Abstract: | Recently, there have been numerous advances in modelling optimal international portfolio allocations in macroeconomic models. A major focus of this literature has been on the role of currency movements in determining portfolio returns that may hedge various macroeconomic shocks. However, there is little empirical evidence on the foreign currency exposures that are embedded in international balance sheets. Using a new database, we provide stylized facts concerning the cross-country and time-series variation in aggregate foreign currency exposure and its various subcomponents. In panel estimation, we find that richer, more open economies take longer foreign-currency positions. In addition, we find that an increase in the propensity for a currency to depreciate during bad times is associated with a longer position in foreign currencies, providing a hedge against domestic output fluctuations. We view these new stylized facts as informative in their own right and also potentially useful to the burgeoning theoretical literature on the macroeconomics of international portfolios. |
| Keywords: | exchange rates; Financial globalization; international portfolios |
| JEL: | F31 F32 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6887&r=ifn |
| By: | António Caleiro (Department of Economics, University of Évora) |
| Abstract: | About twenty years ago, an article by van der Ploeg analysed the implications of the J-curve effect for the political business cycle in a small open economy [van der Ploeg (1989c)]. It was then shown that a sudden jump on the exchange rates in the election day should be observed if the government, in order to maximise its popularity, explores a J-curve effect. As a way of celebrating this work, that should have been more influential, it is presented in the paper a simulation study, which confirms that exchange rate overvaluation result a la van der Ploeg. |
| Keywords: | Exchange rates, J-Curve, Partisan Business Cycles, Political Business |
| JEL: | E31 E32 F31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:evo:wpecon:02_2008&r=ifn |
| By: | Paul R. Bergin; Ching-Yi Lin |
| Abstract: | This paper finds that currency unions and direct exchange rate pegs raise trade through distinct channels. Panel data analysis of the period 1973-2000 indicates that currency unions have raised trade predominantly at the extensive margin, the entry of new firms or products. In contrast, direct pegs have worked almost entirely at the intensive margin, increased trade of existing products. A stochastic general equilibrium model is developed to understand this result, featuring price stickiness and firm entry under uncertainty. Because both regimes tend to reliably provide exchange rate stability over the horizon of a year or so, which is the horizon of price setting, they both lead to lower export prices and greater demand for exports. But because currency unions historically are more durable over a longer horizon than pegs, they encourage firms to make the longer-term investment needed to enter a new market. The model predicts that when exchange rate uncertainty is completely and permanently eliminated, all of the adjustment in trade should occur at the extensive margin. |
| JEL: | F4 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14126&r=ifn |