|
on International Finance |
| By: | Roland Beck (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ebrahim Rahbari (London Business School, Economics Department, Regent’s Park, London, NW1 4SA, United Kingdom.) |
| Abstract: | We analytically derive optimal central bank portfolios in a minimum variance framework with two assets and "transaction demands" caused by sudden stops in capital inflows. In this model, the transaction demands become less important relative to traditional portfolio objectives as debt to reserve ratios decrease. We empirically estimate optimal dollar and euro shares for 24 emerging market countries and find that optimal reserve portfolios are dominated by anchor currencies and, at current debt to reserve ratios, introducing transactions demand has a relatively modest effect. We also find that euro and dollar bonds act as "safe haven currencies" during sudden stops. Dollars are better hedges for global sudden stops and for regional sudden stops in Asia and Latin America, while the euro is a better hedge for sudden stops in Emerging Europe. We reproduce qualitatively the recent decline in the share of the dollar in emerging market reserves and find that the denomination of foreign currency debt has very little importance for optimal reserve portfolios. JEL Classification: F31, F32, F33, G11. |
| Keywords: | Foreign exchange reserves, currency composition, sudden stops. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080916&r=ifn |
| By: | Zbigniew Polanski (Narodowy Bank Polski and Warsaw School of Economics, ul. Swietokrzyska 11/21, 00-919 Warsaw, Poland.); Adalbert Winkler (Frankfurt School of Finance and Management, Sonnemannstrasse 9-11, 60314 Frankfurt am Main, Germany.) |
| Abstract: | This paper reviews selected aspects of economic relations between the EU and Russia, focusing on the impact that the last two waves of EU enlargement have had on Russia, as well as the role of the euro in Russia. The analysis suggests that if EU enlargement has had any diversion effects on trade between the EU and Russia at all, they have been minimal, while robust growth in both the EU and Russia, as well as high oil and gas prices, has boosted trade. Likewise, FDI to and from Russia has increased, with the direct impact of enlargement again difficult to disentangle from other factors. Use of the euro by Russian residents and authorities in international transactions has increased, albeit at an uneven pace. While, in general, the US dollar remains the major foreign currency used by Russian residents, the euro has gained importance as an anchor and reserve currency in Russian exchange rate policies. This has happened in the context of an overall monetary policy strategy aiming at a gradual shift from an exchange rate-oriented monetary policy to inflation targeting. JEL Classification: F14, F15, F21, F36. |
| Keywords: | Economic integration, trade diversion, foreign direct investment, international currencies. |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbops:20080093&r=ifn |
| By: | Long, Dara; Samreth, Sovannroeun |
| Abstract: | In this paper, we re-examine the validity of both short and long run monetary models of exchange rate for the case of the Philippines by using new approach called Autoregressive Distributed Lag (ARDL) to cointegration. From our analysis, some findings are obtained. First, there are robust short and long run relationships between variables in the monetary exchange rate model. Second, the stability of the estimated parameters is confirmed by CUSUM and CUMSUQ stability tests. Third, the Purchasing Power Parity (PPP) condition is not hold for the Philippines. Last, all the monetary restrictions are rejected. Therefore, this result seems to suggest that the estimation result of the monetary model of exchange rate, in which monetary restrictions are assumed to be satisfied beforehand, might suffer from a number of deficiency; it is not appropriate to estimate the exchange rate model before the monetary restrictions are confirmed as also mentioned in Haynes and Stone (1981). |
| Keywords: | Exchange rate model; ARDL approach to cointegration |
| JEL: | F31 F33 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9822&r=ifn |
| By: | Enrique Martinez-Garcia; Jens Søndergaard |
| Abstract: | This paper re-examines the ability of sticky-price models to generate volatile and persistent real exchange rates. We use a DSGE framework with pricing-to-market akin to those in Chari, et al. (2002) and Steinsson (2008) to illustrate the link between real exchange rate dynamics and what the model assumes about physical capital. We show that adding capital accumulation to the model facilitates consumption smoothing and significantly impedes the model's ability to generate volatile real exchange rates. Our analysis, therefore, caveats the results in Steinsson (2008) who shows how real shocks in a sticky-price model without capital can replicate the observed real exchange rate dynamics. Finally, we find that the CKM (2002) persistence anomaly remains robust to several alternative capital specifications including set-ups with variable capital utilization and investment adjustment costs (see, e.g., Christiano, et al., 2005). In summary, the PPP puzzle is still very much alive and well. |
| Keywords: | Globalization ; Foreign exchange ; International finance ; Forecasting ; Mathematical models |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:17&r=ifn |
| By: | Jun, Jongbyung (Suffolk University, Department of Economics) |
| Abstract: | The noise-trading or coordination channel hypothesis implies that sterilized intervention in the foreign exchange market is effective if certain conditions are satisfied, but ineffective otherwise. The hypothesis is tested with a three-regime threshold model and daily data on actual intervention by US and German central banks. The main finding is that if central banks choose the optimal timing in light of the trend-chasing behaviors of noise traders, such strategic intervention is effective in moving the exchange rate in the desired direction. |
| Keywords: | Central bank intervention; Threshold model; Coordination channel |
| JEL: | C22 E58 F31 |
| Date: | 2008–01–15 |
| URL: | http://d.repec.org/n?u=RePEc:suf:wpaper:2008-1&r=ifn |
| By: | Landon, Stuart; Smith, Constance |
| Abstract: | Aggregate and sector-level investment equations that incorporate the exchange rate are estimated for a panel of 17 OECD countries using an error correction methodology. A real currency depreciation is found to have a significant negative effect on aggregate investment in both the short run and the long run. This effect is negative in all sectors in the short run, is significant in six of nine sectors, and is particularly persistent in service sectors, sectors that do not generally benefit directly from an expansion of demand following a currency depreciation. Movements in another explanatory variable, the real wage, have an insignificant impact on investment in the short run in most sectors, but a rise in the real wage has a significant negative long run effect on aggregate investment and on investment in six of nine sectors. A simulation shows that movements in the real exchange rate and the real wage can explain a large proportion of cross-country differences in investment. |
| Keywords: | investment; exchange rate |
| JEL: | E22 F3 |
| Date: | 2007–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9958&r=ifn |
| By: | Yue, Eddie; He, Dong |
| Abstract: | This article outlines our thoughts on the following three issues. First, will the renminbi become an international currency in the foreseeable future? Second, what does the international use of the renminbi mean for Hong Kong? Third, should the Hong Kong dollar exchange rate be repegged to the renminbi? We argue that the renminbi is likely to become a major international currency in the future, but the process will most likely be a gradual one, reflecting the particular approach that the authorities in the Mainland have taken to capital account liberalization. We also argue that Hong Kong is well positioned to benefit from the process of the renminbi becoming an international currency. At the same time, we continue to believe in the appropriateness of the link of the Hong Kong dollar exchange rate to the U.S. dollar. |
| JEL: | E58 F36 |
| Date: | 2008–08 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9953&r=ifn |
| By: | Antoine Berthou (CES, University Paris 1 and Paris School of Economics, 106-112, Bd de l’Hôpital - 75647 Paris Cedex 13, France.) |
| Abstract: | The reaction of exports to real exchange rate movements can differ according to the nature of the destination country. We derive and estimate a gravity equation for 20 OECD exporting countries and 52 developed and developing importing countries. We test how trade costs dampen the effect of real exchange rate movements on bilateral exports, and show that the elasticity on the real exchange rate is reduced when (i) the destination country has a low quality of institutions, (ii) this country is more distant, and (iii) the efficiency of customs is low in both the importing and exporting countries. These results are highly consistent with the existence of an hysteresis effect of real exchange rate movements on trade, as suggested by Baldwin and Krugman (1989). JEL Classification: F10, F32, D73. |
| Keywords: | Trade, Exchange Rate Movements, Institutions. |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20080920&r=ifn |