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on International Finance |
| By: | Menzie Chinn (University of Wisconsin); Jeffrey Frankel (Harvard University) |
| Abstract: | The euro has arisen as a credible eventual competitor to the dollar as leading international currency, much as the dollar rose to challenge the pound 70 years ago. This paper uses econometrically-estimated determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, rate of return, and liquidity in the relevant home financial center (as measured by the turnover in its foreign exchange market). There is a tipping phenomenon, but changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around .9). The equation correctly predicts out-of-sample a (small) narrowing in the gap between the dollar and euro over the period 1999-2007. This paper updates calculations regarding possible scenarios for the future. We exclude the scenario where the United Kingdom joins euroland. But we do take into account of the fact that London has nonetheless become the de facto financial center of the euro, more so than Frankfurt. We also assume that the dollar continues in the future to depreciate at the trend rate that it has shown on average over the last 20 years. The conclusion is that the euro may surpass the dollar as leading international reserve currency as early as 2015. |
| Keywords: | Foreign exchange market, Euro, Dollar, Reserve currency |
| JEL: | E42 F0 F02 F31 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200831&r=ifn |
| By: | Bettina Becker; Stephen G. Hall |
| Abstract: | We propose a common factor approach to analyse convergence, which we implement using principal components analysis. This technique has not been used to analyse convergence of time series but is shown to provide a useful new tool. We show how it is in many ways a more natural way of approaching the convergence debate. We apply these ideas to a dataset of bilateral Euro and US-Dollar exchange rates of the new member countries of the European Union. Our empirical application gives sensible results about the convergence process of the new member countries’ exchange rates to the Euro. |
| Keywords: | Convergence; exchange rates; transition economies; principal components analysis |
| JEL: | F31 C22 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:lec:leecon:09/2&r=ifn |
| By: | Yin-Wong Cheung; Menzie D. Chinn; Eiji Fujii |
| Abstract: | We examine whether the Chinese exchange rate is misaligned and how Chinese trade flows respond to the exchange rate and to economic activity. We find, first, that the Chinese currency, the renminbi (RMB), is substantially below the value predicted by estimates based upon a cross-country sample, when using the 2006 vintage of the World Development Indicators. The economic magnitude of the mis-alignment is substantial -- on the order of 50 percent in log terms. However, the misalignment is typically not statistically significant, in the sense of being more than two standard errors away from the conditional mean. However, this finding disappears completely when using the most recent 2008 vintage of data; then the estimated undervaluation is on the order of 10 percent. Second, we find that Chinese multilateral trade flows respond to relative prices -- as represented by a trade weighted exchange rate -- but the relationship is not always precisely estimated. In addition, the direction of the effects is sometimes different from what is expected a priori. For instance, Chinese ordinary imports actually rise in response to a RMB depreciation; however, Chinese exports appear to respond to RMB depreciation in the expected manner, as long as a supply variable is included. In that sense, Chinese trade is not exceptional. Furthermore, Chinese trade with the United States appears to behave in a standard manner -- especially after the expansion in the Chinese manufacturing capital stock is accounted for. Thus, the China-US trade balance should respond to real exchange rate and relative income movements in the anticipated manner. However, in neither the case of multilateral nor bilateral trade flows should one expect quantitatively large effects arising from exchange rate changes. And, of course, these results are not informative with regard to the question of how a change in the RMB/USD exchange rate would affect the overall US trade deficit. Finally, we stress the fact that considerable uncertainty surrounds both our estimates of RMB misalignment and the responsiveness of trade flows to movements in exchange rates and output levels. In particular, the results for trade elasticities are sensitive to econometric specification, accounting for supply effects, and for the inclusion of time trends. |
| JEL: | F3 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14673&r=ifn |
| By: | Michael B. Devereux (University of British Columbia, CEPR, and NBER); Gregor W. Smith (Queen's University); James Yetman (Bank for International Settlements) |
| Abstract: | Standard models of international risk sharing with complete asset markets predict a positive association between relative consumption growth and real exchange-rate depreciations across countries. The striking lack of evidence for this link — the consumption/real exchange-rate anomaly or Backus-Smith puzzle — has prompted research on risk-sharing indicators with incomplete asset markets. That research generally implies that the association holds in forecasts, rather than realizations. Using professional forecasts for 28 countries for 1990-2008 we find no such association, thus deepening the puzzle. Independent evidence on the weak link between forecasts for consumption and real interest rates suggests that the presence of ‘hand-to-mouth’ consumers may help to explain the evidence. |
| Keywords: | international risk-sharing, Backus-Smith puzzle |
| JEL: | F41 F47 F37 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:qed:wpaper:1195&r=ifn |
| By: | Fatma Marrakchi Charfi (Facult 0064es Sciences Economiques et de Gestion de Tunis. Universit 0064e Tunis El Manar) |
| Abstract: | Tunisia has experienced a performance when pursuing a constant real exchange rate rule. The limitations of this rule are beginning to emerge in the context of a more open economy, which desire to relax capital controls. This paper estimates the equilibrium real exchange rate of the dinar vis 0076is the euro and the $US from 1983 to 2000, using quarterly data, based on the following fundamental variables: terms of trade, net capital inflows and the differential of productivity. Results show that Tunisian dinar was overvalued before the 1986 devaluation, becomes close to its equilibrium value over the 90s. In the beginning of this century (2000), authorities permit a larger fluctuation of the real effective exchange rate. |
| Keywords: | Equilibrium real exchange rate, Misalignment, Cointegration |
| JEL: | C22 F31 F37 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:voj:wpaper:200842&r=ifn |
| By: | Kazuko Shirono |
| Abstract: | This paper examines the role of Japan against that of China in the exchange rate regime in East Asia in light of growing interest in forming a currency union in the region. The analysis suggests that currency unions with China tend to generate higher average welfare gains for East Asian countries than currency unions with Japan or the United States. Overall, Japan does not appear to be a dominant player in forming a currency union in East Asia, and this trend is likely to continue if China's relative presence continues to rise in the regional trade. |
| Keywords: | Exchange rate regimes , East Asia , Japan , China, People's Republic of , Currencies , Monetary unions , Trade , Economic cooperation , Economic models , Trade models , Data analysis , |
| Date: | 2009–01–14 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:09/3&r=ifn |
| By: | Altar, Moisa; Albu, Lucian Liviu (Institute of Economic Forecasting); Dumitru, Ionut; Necula, Ciprian |
| Abstract: | The paper presents some results revealing the existence of the Balassa-Samuelson effect in Romania as well as some estimates of its impact on inflation, appreciation of the real exchange rate and rising competitiveness of the Romanian economy. * Study within the CEEX Programme – Project No. 220/2006 “Economic Convergence and Role of Knowledge in Relation to the EU Integration”; Instiutul European din Romania – PAIS III; Studiul nr. 2/2005. |
| Keywords: | Balassa-Samuelson effect, exchange rate, inflation, competitiveness |
| JEL: | F33 O23 O24 O47 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ror:wpince:090106&r=ifn |
| By: | Altar, Moisa; Albu, Lucian Liviu (Institute of Economic Forecasting); Dumitru, Ionut; Necula, Ciprian |
| Abstract: | Equilibrium real exchange rate provides useful information on the harmonisation of convergence criteria with exchange rate stability criteria; a requirement for accession to the European Monetary Union. This study applies econometric procedures for identifying the equilibrium real exchange rate in Romania and its tendency. * Study within the CEEX Programme – Project No. 220/2006 “Economic Convergence and Role of Knowledge in Relation to the EU Integration”; Instiutul European din Romania – PAIS III; Studiul nr. 2/2005. |
| Keywords: | Capital account, exchange rate, European integration |
| JEL: | F33 F43 O23 O57 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:ror:wpince:090105&r=ifn |
| By: | Bianca Clausen |
| JEL: | B00 B30 B40 |
| Date: | 2008–02 |
| URL: | http://d.repec.org/n?u=RePEc:kln:iwpdip:dp02/08&r=ifn |