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on International Finance |
| By: | Raphael Auer; Thomas Chaney |
| Abstract: | This paper extends the Mussa and Rosen (1978) model of quality-pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of competition react to cost changes brought about by exchange rate fluctuations. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods. We test these predictions using highly disaggregated price and quantity U.S. import data. We find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods. Therefore, exchange rate passthrough rates that are measured using aggregate data will tend to overstate the actual extent of pass-through. |
| Keywords: | Foreign exchange rates ; Econometric models ; International trade |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:23&r=ifn |
| By: | Hui-Boon Tan (Nottingham University Business School - Malaysia Campus); Lee-Lee Chong (Faculty of Management, Malaysia Multimedia University) |
| Abstract: | This study highlights the importance of choice of exchange rate system to macroeconomic stability of small- open countries based on the outcomes of the recent exchange rate regime switches of three small Asian countries during the post Asian financial crisis period. The three selected countries are Indonesia, Malaysia and Thailand, which have high similarities in their economic structures, but have reacted very differently in mitigating the economic distortion of the 1997 financial crisis, in particular in the adoption of exchange rate system. By focussing on macroeconomic volatilities of these countries, our results show that the amplified volatilities due to the crisis were not stabilised by switching the system to a more flexible regime. For instance, Thailand and Indonesia had switched their system from a managed-float to an independent-float, and as a result, the volatilities were increased instead of reduced after the switch. The volatilities, however, were effectively stabilised after the countries made the second switch - from the independent-float back to the managed-float with pre-announcement. For Malaysia, a switch from the managed-float to the pegged system successfully reduced the volatilities. The exchange rate misalignments of the countries, except Indonesia, were also reduced when the countries switched from a flexible to a more fixed system. These empirical findings thus strongly support central banks of small-open economies to adopt a more fixed, such as the managed-float system, rather than a flexible, such as the independentfloat. However, the managed-float system needs to couple with efficient management to ensure a smooth and stable regime. |
| Keywords: | Exchange rate regimes; Macroeconomic volatility; Financial crisis; Exchange rate misalignment |
| JEL: | E42 E44 F31 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nom:nubsmc:2008-03&r=ifn |
| By: | Mario Cerrato; Hyunsok Kim; Ronald MacDonald |
| Abstract: | The breakdown of the Bretton Woods system and the adoption of generalised floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility lead economists to search for economic models able to describe observed exchange rate behavior. In the present paper we propose more general STAR transition functions which encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another, and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data-sets, one for developing countries, and official nominal exchange rates, and the second for emerging market economies using black market exchange rates and the third for OECD economies. |
| Keywords: | unit root tests, threshold autoregressive models, purchasing power parity. |
| JEL: | C16 C22 F31 |
| Date: | 2008–12 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_05&r=ifn |
| By: | Tobias Adrian; Erkko Etula; Hyun Song Shin |
| Abstract: | We present evidence that fluctuations in the aggregate balance sheets of financial intermediaries forecast exchange rate returns - at weekly, monthly, and quarterly frequencies, both in and out of sample, and for a large set of countries. We estimate prices of risk using a cross-sectional, arbitrage-free asset pricing approach and show that balance sheets forecast exchange rates because of the latter's association with fluctuations in risk premia. We provide a rationale for an intertemporal equilibrium pricing theory in which intermediaries are subject to balance sheet constraints. |
| Keywords: | Intermediation (Finance) ; Asset pricing ; Foreign exchange rates ; International finance ; Financial institutions ; Investment banking |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:361&r=ifn |
| By: | Yoichi Matsubayashi (Graduate School of Economics, Kobe University) |
| Abstract: | The purpose of this study is to analyze fluctuations in the current account of the U.S. by deconstructing structural and non-structural components with a new method. At the beginning of the 1980s, most components of the U.S. current account were structural. After the Plaza agreement in 1985, the U.S structural current account gradually improved. Since the end of the 1990s, the structural current account deficit increased to nearly 3% of GDP. These movements are generally associated with the structural components of private savings and residential investments. The upheaval in the US sub-prime home-loan market since 2007 sharply contracted housing investment and weakened consumption. Some simulations explored herein suggest a high possibility that these dynamics in domestic demand may considerably ameliorate the external imbalances of the U.S. and deteriorate of the dollar. |
| Keywords: | Structural current account, Intertemporal optimization, Permanent income, Housing Investment, Equilibrium exchange rate |
| JEL: | F32 F41 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:0829&r=ifn |
| By: | Yoichi Matsubayashi (Graduate School of Economics, Kobe University) |
| Abstract: | This paper empirically investigates the impact of exchange rate shocks on corporate investment. An intertemporal optimization model is developed in which an individual corporation in an open economy adjusts its capital stock according to the Tobinfs q, which represents the future stream of the profit rate and changes by the real exchange rate. By explicitly considering the marginal q, the transmission mechanism from real exchange rate shocks to investment dynamics via expected profitability is examined based on the Vector Autoregressive model. Empirical evidence suggests that the depreciation of the Japanese yen increases the expected profitability of the firm and stimulates corporate investment, especially in the machinery sector. This characteristic basically corresponds to the structure of external exposure and offers an important finding from the viewpoint of Japanese macroeconomic fluctuations. |
| Keywords: | Intertemporal Optimization, Marginal q, Pass-Through, Export Exposure |
| JEL: | F40 E22 C32 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:koe:wpaper:0828&r=ifn |
| By: | Rime, Dagfinn; Sarno, Lucio; Sojli, Elvira |
| Abstract: | This paper adds to the research efforts that aim to bridge the divide between macro and micro approaches to exchange rate economics by examining the linkages between exchange rate movements, order flow and expectations of macroeconomic variables. The basic hypothesis tested is that if order flow reflects heterogeneous expectations about macroeconomic fundamentals, and currency markets learn about the state of the economy gradually, then order flow can have both explanatory and forecasting power for exchange rates. Using one year of high frequency data collected via a live feed from Reuters for three major exchange rates, we find that: i) order flow is intimately related to a broad set of current and expected macroeconomic fundamentals; ii) more importantly, order flow is a powerful predictor of daily movements in exchange rates in an out-of-sample exercise, on the basis of economic value criteria such as Sharpe ratios and performance fees implied by utility calculations. |
| Keywords: | exchange rates; forecasting; macroeconomic news; microstructure; order flow |
| JEL: | F31 F41 G10 |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:7225&r=ifn |
| By: | Ronald MacDonald; Lukas Menkhoff; Rafael R. Rebitzky |
| Abstract: | IThis paper sheds new light on a long-standing puzzle in the international finance literature, namely, that exchange rate expectations appear inaccurate and even irrational. We find for a comprehensive dataset that individual forecasters’ performance is skill-based. ‘Superior’ fore-casters show consistent ability as their forecasting success holds across currencies. They seem to possess knowledge on the role of fundamentals in explaining exchange rate behavior, as indicated by better interest rate forecasts. Superior forecasters are more experienced than the median forecaster and have fewer personnel responsibilities. Accordingly, foreign exchange markets may function in less puzzling and irrational ways than is often thought. |
| Keywords: | Foreign exchange market; individual exchange rate forecasts; interest rate forecasts; forecaster experience |
| JEL: | F31 G14 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:gla:glaewp:2009_13&r=ifn |
| By: | Bartram, Söhnke M.; Brown, Gregory W.; Minton, Bernadette |
| Abstract: | Theory predicts sizeable exchange rate (FX) exposure for many firms. However, empirical research has not documented such exposures. To examine this discrepancy, we extend prior theoretical results to model a global firm’s FX exposure and show empirically that firms pass through part of currency changes to customers and utilize both operational and financial hedges. For a typical sample firm, pass-through and operational hedging each reduce exposure by 10% to 15%. Financial hedging with foreign debt, and to a lesser extent FX derivatives, decreases exposure by about 40%. The combination of these factors reduces FX exposures to observed levels. |
| Keywords: | Competition; hedging; FX exposure; derivatives; international finance |
| JEL: | F4 F3 G3 |
| Date: | 2009–01–01 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:14041&r=ifn |
| By: | Marcel Fratzscher |
| Abstract: | The paper assesses the extent to which the Group of Seven (G7) has been successful in its management of major currencies since the 1970s. Using an event-study approach, the paper finds evidence that the G7 has been overall effective in moving the US dollar, yen and euro in the intended direction at horizons of up to three months after G7 meetings, but not at longer horizons. While the success of the G7 is partly dependent on the market environment, it is also to a significant degree endogenous to the policy process itself. The findings indicate that the reputation and credibility of the G7, as well as its ability to form and communicate a consensus among individual G7 members, are important determinants for the G7's ability to manage major currencies. The paper concludes by analyzing the factors that help the G7 build reputation and consensus, and by discussing the implications for global economic governance. |
| Keywords: | Group of Seven countries ; Foreign exchange rates ; International economic relations ; Monetary policy |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:24&r=ifn |
| By: | Shawkat M. Hammoudeh (Lebow College of Business, Drexel University); Yuan Yuan (Lebow College of Business, Drexel University); Michael McAleer (School of Economics and Commerce, University of Western Australia) |
| Abstract: | This paper examines the inclusion of the dollar/euro exchange rate together with important commodities in two different BEKK, or multivariate conditional covariance, models. Such inclusion increases the significant direct and indirect past shock and volatility effects on future volatility between the commodities, as compared with their effects in the all-commodity basic model (Model 1), which includes the highly-traded aluminum, copper, gold and oil. Model 2, which includes copper, gold, oil and exchange rate, displays more direct and indirect transmission than does Model 3, which replaces the business cycle-sensitive copper with the highly energy-intensive aluminum. Optimal portfolios should have more Euro than commodities, and more copper and gold than oil. The multivariate conditional volatility models reveal greater volatility spillovers than their univariate counterparts. |
| Keywords: | multivariate GARCH, shocks, volatility, transmission, portfolio weights |
| JEL: | C51 E27 Q43 |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:pad:wpaper:0096&r=ifn |
| By: | Marlene Amstad; Andreas M. Fischer |
| Abstract: | This paper estimates monthly pass-through ratios from import prices to consumer prices in real time. Conventional time series methods impose restrictions to generate exogenous shocks on exchange rates or import prices when estimating pass-through coefficients. Instead, a natural experiment based on data releases defines our shock to foreign prices. Our estimation strategy follows an event-study approach based on monthly releases in import prices. Projections from a dynamic common factor model with daily panels before and after monthly releases of import prices define the shock. This information shock allows us to recover a monthly pass-through ratio. We apply our identification procedure to Swiss prices and find strong evidence that the monthly pass-through ratio is around 0.3. Our real-time estimates yield higher pass-through ratios than time series estimates. |
| Keywords: | Monetary policy ; Econometric models ; Foreign exchange rates ; Prices |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddgw:26&r=ifn |
| By: | Juan-Angel Jimenez-Martin (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense); Alfonso Novales Cinca (Dpto. de Fundamentos de Análisis Económico II, Universidad Complutense) |
| Abstract: | This paper introduces state-uncertainty preferences into the Lucas (1982) economy, showing that this type of preferences helps to explain the exchange rate risk premium. Under these preferences we can distinguish between two factors driving the exchange rate risk premium: “macroeconomic risk” and “the risk associated with variation in the private agents’ perception on the level of uncertainty”. State-uncertainty preferences amount to assuming that a given level of consumption will yield a higher level of utility the lower is the level of uncertainty perceived by consumers. Furthermore, empirical evidence from three main European economies in the transition period to the euro provides empirical support for the model |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:ucm:doicae:0908&r=ifn |