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on International Finance |
| By: | Tuomas A. Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Adina Popescu (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Michael Sager (Wellington Management, 75 State Street, Boston, MA 02109, USA and University of Warwick, Coventry CV4 7AL, UK.) |
| Abstract: | A core stylized fact of the empirical exchange rate literature is that half-life deviations of equilibrium real exchange rates from levels implied by Purchasing Power Parity (PPP) are very persistent. Empirical efforts to explain this persistence typically proceed along two distinct paths, resorting either to the presence of real shocks such as productivity differentials that drive equilibrium exchange rates away from levels implied by PPP, or the presence of non-linearities in the adjustment process around PPP. By contrast, we combine these two explanations in the context of an innovative panel estimation methodology. We conclude that both explanations are relevant to the behavior of exchange rates and that resulting half-lives are much shorter than estimated using linear PPP and more consistent with the observed volatility of nominal and real exchange rates. JEL Classification: F31, C23, L6-L9. |
| Keywords: | EPSTAR, exchange rate, PPP, Balassa-Samuelson, productivity. |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091073&r=ifn |
| By: | Forte, Antonio |
| Abstract: | In this paper I analyse the pass-through effect in four big areas using different approaches. On the one hand, I inspect this issue comparing the REER (real effective exchange rate) with the WARP (weighted average relative price) in the US, the UK, Japan and the Euro area. On the other hand, I try to support the findings of the first part with a double econometric analysis: I employ single equation and Var approaches in order to provide wide and robust results. The global conclusion is that in the major economies of the world the pass-through effect has been very light from January 1999 onward and that, especially in the Euro area, this result is linked with the firms behaviour. |
| Keywords: | Pass-Through effect; WARP; exchange rate |
| JEL: | E31 F41 F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16527&r=ifn |
| By: | Grace H.Y. Lee; M. Azali |
| Keywords: | Optimum Currency Area; Monetary Union; Vector autoregression; Exchange rate; East Asia Abstract: This paper assesses the empirical desirability of the East Asian economies to an alternative exchange rate arrangement (a monetary union) that can potentially enhance the exchange rate stability and credibility in the region. Specifically, the symmetry in macroeconomic disturbances of the East Asian economies is examined as satisfying one of the preconditions for forming an Optimum Currency Area (OCA). The Structural Vector Autoregression (VAR) method is employed to assess the nature of macroeconomic disturbances among the East Asian countries, as a preliminary guide in identifying potential candidates for forming an OCA. The preliminary findings of this study suggest that there exists scope among some small sub-regions for potential monetary integration. |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2009-19&r=ifn |
| By: | Milanovic, Branko |
| Abstract: | The results of new direct price level comparisons across 146 countries in 2005 have led to large revisions of PPP (purchasing power parity) exchanges rates, particularly for China and India. The recalculation of international and global inequalities, using the new PPPs, shows that inequalities are substantially higher than previously thought. Inequality between global citizens is estimated at 70 Gini points rather than 65 as before. The richest decile receives 57 percent of global income rather than 50 percent. |
| Keywords: | Global inequality; Purchasing power parity |
| JEL: | D31 I3 O57 |
| Date: | 2009–07–30 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:16538&r=ifn |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Livio Stracca (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | There is a broad consensus that the quality of the political system and its institutions are fundamental for a country’s prosperity. The paper focuses on political events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks. The findings of the paper there-fore suggest another important economic dimension and channel through which Italy may have been affected by EMU. Our analysis could also be potentially interesting for other countries with weak institutions considering adopting a currency based on stronger institutions. JEL Classification: F31, F33, G14. |
| Keywords: | Euro, Italy, political economy, exchange rates, asset prices, financial markets, shocks. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091064&r=ifn |
| By: | Koi Nyen Wong; Tuck Cheong Tang |
| Abstract: | This paper finds that exchange rate variability does affect the causation between FDI and electronics exports using Malaysia’s top five electronics exports by SITC (Standard International Trade Classification) product groups. The Granger causation runs from FDI to exports of automatic data processing equipment; and from the radio-broadcast receivers with sound recorders or reproducers exports to FDI. |
| Keywords: | Causality; electronics exports; foreign direct investment |
| JEL: | C22 F21 |
| Date: | 2009–08 |
| URL: | http://d.repec.org/n?u=RePEc:mos:moswps:2007-12&r=ifn |
| By: | Christian Thimann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | This paper presents a new concept - the global roles of currencies. The concept combines the domestic and international (cross-border) use of currencies and therefore captures the overall importance of different currencies in a globalised economy. The measure of a currency’s global role is based on the size and stage of development of the underlying economy, as well as the size and stage of development of its financial markets and the scope of financial instruments available in this currency. The paper applies the concept to 22 currencies of advanced and emerging economies. The results confirm the well-known ranking for the leading currencies – in particular the US dollar and the euro – but give considerably greater weight to currencies of emerging economies than the results obtained from the international debt market, which has so far been used as the basis for measuring the international role of currencies in capital markets. The paper also discusses this established measure in detail, arguing that in view of financial globalisation, an indicator based on currency shares in the international debt market alone represents a decreasing share of international financial market activity, as this market excludes government debt, other domestic debt and equities, which are increasingly of interest to international investors. The paper also presents an empirical application of the new global concept to examine cross-border portfolio holdings in debt and equity markets across advanced and emerging economies. It finds that the global role indicator is positively correlated with such holdings and, especially for emerging economies, fares better than the established international debt market indicator. The findings suggest a positive relationship between domestic financial development and international financial integration. JEL Classification: F31, F33, F37, G15, E58. |
| Keywords: | International currencies, international finance, global capital markets. |
| Date: | 2009–03 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091031&r=ifn |
| By: | Prashanth Mahagaonkar (Max Planck Institute of Economics Jena and Schumpeter School of Business and Economics, Wuppertal); Rainer Schweickert (Kiel Institute for the World Economics); Aditya S. Chavali (Department of Economics, University of Glasgow) |
| Abstract: | A recent literature has pointed at potential negative effects of exchange rate volatility on innovation. In this paper, we propose that there may be a direct effect as well as an indirect effect via export activity. We test these hypotheses for sectoral R&D intensities using OECD panel data for manufacturing and services sectors for 14 OECD economies and the years 1987 - 2003. We find that the direct negative effect of volatility is pronounced in manufacturing sector but is dominated by the indirect effect via the export channel. Services do not face any effects of volatility on R&D intensities. While it is not clear which channel dominates our results confirm that there is a negative volatility affect related to openness on a sectoral level. |
| Keywords: | R&D intensity, Innovation, Real Exchange Rate, Volatility, Exports, OECD-Countries |
| JEL: | E32 F31 O32 |
| Date: | 2009–08–06 |
| URL: | http://d.repec.org/n?u=RePEc:jrp:jrpwrp:2009-056&r=ifn |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | A striking and unexpected feature of the financial crisis has been the sharp appreciation of the US dollar against virtually all currencies globally. The paper finds that negative US-specific macroeconomic shocks during the crisis have triggered a significant strengthening of the US dollar, rather than a weakening. Macroeconomic fundamentals and financial exposure of individual countries are found to have played a key role in the transmission process of US shocks: in particular countries with low FX reserves, weak current account positions and high direct financial exposure vis-à-vis the United States have experienced substantially larger currency depreciations during the crisis overall, and to US shocks in particular. JEL Classification: F31, F4, G1. |
| Keywords: | Financial crisis, exchange rates, global imbalances, shocks, United States, US dollar, transmission channels. |
| Date: | 2009–06 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091060&r=ifn |
| By: | Tuomas A. Peltonen (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Michael Sager (Wellington Management, 75 State Street, Boston, MA 02109, USA.) |
| Abstract: | We reappraise the relationship between productivity and equilibrium real exchange rates using a panel estimation framework that incorporates a large number of countries and importantly, a dataset that allows explicit consideration of the role of non-traded, as well as traded, sector productivity shocks in exchange rate determination. We find evidence of significant correlation between real exchange rates and productivity differentials in both sectors. But our finding of a significant role for the non-traded sector in exchange rate determination, and of a relatively larger correlation between exchange rates and productivity shocks of a given size emanating from this sector, represent clear contradictions of the widely cited Balassa-Samuelson hypothesis. Our findings remain valid in the face of a number of robustness tests, including the exchange rate regime and numéraire currency. JEL Classification: F31, O47, C23. |
| Keywords: | Exchange rate, productivity, Balassa-Samuelson, panel data, emerging market economies. |
| Date: | 2009–04 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091046&r=ifn |
| By: | Dimitrios Sideris (Bank of Greece and Panteion University) |
| Abstract: | The present paper has two aims. The first aim is to test whether six new member states of the European Union (the six Central and Eastern European Countries) form an optimum currency area (OCA) with the eurozone, in an attempt to assess their readiness for euro adoption. The second aim is to examine whether the introduction of the euro in 1999 and the decision of the countries to seek to join the euro area created any forces fostering their convergence, evidence which would be in line with the theory on the endogeneity of the OCA criteria. Our findings indicate that the introduction of the euro did promote integration of the six new member states and that, at present, they are quite well aligned with the eurozone. |
| Keywords: | EU enlargement; OCA; real exchange rates; cointegration; GPPP. |
| JEL: | C32 F33 F36 F42 |
| Date: | 2009–07 |
| URL: | http://d.repec.org/n?u=RePEc:bog:wpaper:99&r=ifn |
| By: | Marcel Fratzscher (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: | The paper analyses the effect of equity price shocks on current account positions for the G7 industrialized countries in 1974-2007. It uses a Bayesian VAR with sign restrictions for the identification of asset price shocks and to test empirically for their effect on current accounts. Such shocks are found to exert a sizeable effect, with a 10 percent equity price increase for instance in the United States relative to the rest of the world worsening the US trade balance by 0.9 percentage points after 16 quarters. However, the response of the trade balance to equity price shocks varies substantially across countries. The evidence suggests that the channels accounting for this hetero-geneity function both through wealth effects on private consumption and to some extent through the real exchange rate of countries. JEL Classification: E2, F32, F40, G1. |
| Keywords: | asset prices, current account, identification, Bayesian VAR, financial markets, industrialized economies. |
| Date: | 2009–02 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091014&r=ifn |