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on International Finance |
| By: | Marcello Pericoli (Bank of Italy); Marco Taboga (Bank of Italy) |
| Abstract: | We introduce a two-country no-arbitrage term-structure model to analyse the joint dynamics of bond yields, macroeconomic variables, and the exchange rate. The model allows to understand how exogenous shocks to the exchange rate affect the yield curves, how bond yields co-move in different countries, and how the exchange rate is influenced by the interactions between macroeconomic variables and time-varying bond risk premia. Estimating the model with US and German data, we obtain an excellent fit of the yield curves and we are able to account for up to 75 per cent of the variability of the exchange rate. We find that time-varying risk premia play a non-negligible role in exchange rate fluctuations due to the fact that a currency tends to appreciate when risk premia on long-term bonds denominated in that currency rise. A number of other novel empirical findings emerge. |
| Keywords: | exchange rate, term structure, UIP |
| JEL: | C5 E4 G1 |
| Date: | 2009–01 |
| URL: | http://d.repec.org/n?u=RePEc:bdi:wptemi:td_699_09&r=ifn |
| By: | Yu-chin Chen (University of Washington); Kwok Ping Tsang (Virginia Tech) |
| Abstract: | This paper uses information contained in the cross-country yield curves to test the asset-pricing approach to exchange rate determination, which models the nominal exchange rate as the discounted present value of its expected future fundamentals. Research on the term structure of interest rates has long argued that the yield curve contains information about future economic activity such as GDP growth and inflation. Bringing this lesson to the international context, we extract the Nelson-Siegel (1987) factors of relative level, slope, and curvature from cross-country yield differences to proxy expected movements in future exchange rate fundamentals. Using monthly data between 1985-2005 for the United Kingdom, Canada, Japan and the US, we show that the yield curve factors indeed can explain and predict bilateral exchange rate movements and excess currency returns one month to two years ahead. Out-of-sample analysis also shows the yield curve factors to outperform a random walk in forecasting short-term exchange rate returns. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2009-04&r=ifn |
| By: | Giuliana Passamani |
| Abstract: | The aim of the paper is to analyze the foreign transmission mechanism between each of the Visegrad-4 countries and the eurozone, through an empirical analysis of the basic international parity conditions linking Czech, Hungarian, Polish and Slovakian inflations and interest rates with the ones of the current euro area members. The focus of the analysis is to show the differences among these catching-up economies, with particular attention to their process of convergence towards the eurozone economy. For reasons due to the availability of data, the sample covers the last decade. We use the cointegrated VAR model to define longrun stationary relations as well as common stochastic trends. The methodology adopted is properly apt to uncover the dynamic structure underlying the stochastic behaviour of prices, interest rates and exchange rate. Of particular interest is the empirical finding that the parities do not hold on their own, as expected, but that weaker form of the same parities, or linear combinations of them, hold in our data set, with some differences for each country. Also the process of convergence is different: the Czech Republic seems to have reached a relative convergence, while for the other countries we have that the process show a tendency towards convergence. |
| Keywords: | Visegrad_4 countries, PPP, UIP, RIP, Cointegrated VAR, Convergence |
| JEL: | E31 E43 F31 |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:trn:utwpde:0825&r=ifn |
| By: | Honkapohja, Seppo (Bank of Finland) |
| Abstract: | The current financial crisis, which has lasted almost one and a half years, is the 19th such crisis in the post-war period in advanced economies. Recent literature classifies the Nordic crises in Norway, Sweden and Finland in late 1980's and early 1990’s among the Big Five crises that have happened before the current crisis, which is now of a global nature. This paper outlines the developments of the Nordic crises, reasons behind them and crisis management by the authorities. Relatively more emphasis is placed on the Finnish crisis, as it was the deepest one. The paper concludes by considering the lessons that can be drawn from the Nordic crises. |
| Keywords: | financial deregulation; bank lending; overheating; financial crisis |
| JEL: | E44 G21 |
| Date: | 2009–01–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofrdp:2009_005&r=ifn |