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on International Finance |
| By: | Morley, Bruce |
| Abstract: | Using the ARDL bounds testing approach to cointegration this paper provides evidence of a stable long run relationship between the exchange rate and stock prices for the UK, Japan and Swiss currencies with respect to the US dollar. The resultant error correction models suggest a positive relationship between stock prices and the exchange rate, which in an out-of-sample forecast outperforms the random walk. We compare these results with a similar model incorporating interest rates, suggested by Solnik (1987), however this does not in general improve the results. |
| Keywords: | Exchange Rates; Stock Prices; Forecast; Cointegration |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eid:wpaper:5/09&r=ifn |
| By: | Philipp Harms (RWTH Aachen University, Study Center Gerzensee); Matthias Hoffmann (Deutsche Bundesbank) |
| Abstract: | We argue that a higher share of the private sector in a country’s external debt raises the incentive to stabilize the exchange rate. We present a simple model in which exchange rate volatility does not affect agents’ welfare if all the debt is incurred by the government. Once we introduce private banks who borrow in foreign currency and lend to domestic firms, the monetary authority has an incentive to dampen the distributional consequences of exchange rate fluctuations. Our empirical results support the hypothesis that not only the level, but also the composition of foreign debt matters for exchange-rate policy. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:szg:worpap:0906&r=ifn |
| By: | Christian Wolff (Luxembourg School of Finance, University of Luxembourg); Ron Jongen (Erasmus School of Economics, Erasmus University Rotterdam); Willem F.C. Verschoor (Erasmus School of Economics, Erasmus University Rotterdam); Remco C.J. Zwinkels (Erasmus School of Economics, Erasmus University Rotterdam) |
| Abstract: | This paper analyzes the sources of the differential beliefs of market participants in the foreign exchange market and their relative role in forming exchange rate expectations. We find that there are distinct periods of high and low dispersion and document that dispersion arises because of a combined effect of market participants holding individual information and attach different weights to some elements of the common information set. In addition to these two effects, we also document evidence of the existence of different types of agents and find that chartist rules are predominantly used at the shorter spectrum of the forecast horizon and fundamentalist rules are predominantly used at the longer spectrum of the forecast horizon. Finally, our evidence suggests that the relationship between market volatility and trader dispersion tends to be significant and positive for different measures of both trader heterogeneity and market volatility. |
| Keywords: | Exchange rate expectations, heterogeneity, dispersion of beliefs, bounded rationality, tail behavior, survey data. |
| JEL: | F31 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:crf:wpaper:09-01&r=ifn |
| By: | Eduardo Levy-Yeyati; Federico Sturzenegger; Iliana Reggio |
| Abstract: | The literature has identified three main approaches to account for the way exchange rate regimes are chosen: i) the optimal currency area theory; ii) the financial view, which highlights the consequences of international financial integration; and iii) the political view, which stresses the use of exchange rate anchors as credibility enhancers in politically challenged economies. Using de facto and de jure regime classifications, we test the empirical relevance of these approaches separately and jointly. We find overall empirical support for all of them, although the incidence of financial and political aspects varies substantially between industrial and non-industrial economies. Furthermore, we find that the link between de facto regimes and their underlying fundamentals has been surprisingly stable over the years, suggesting that the global trends often highlighted in the literature can be traced back to the evolution of their natural determinants, and that actual policies have been little influenced by the frequent twist and turns in the exchange rate regime debate. |
| Keywords: | Exchange rates, Growth, Impossible trinity, Dollarization, Capital flows |
| JEL: | F30 F33 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cte:werepe:we098374&r=ifn |
| By: | Alejandro Justiniano; Bruce Preston |
| Abstract: | This paper explores optimal policy design in an estimated model of three small open economies: Australia, Canada and New Zealand. Within a class of generalized Taylor rules, we show that to stabilize a weighted objective of output, consumer price inflation and nominal interest variation optimal policy does not respond to the nominal exchange. This is despite the presence of local currency pricing and due, in large part, to observed exchange rate disconnect in these economies. Optimal policies that account for the uncertainty of model estimates, as captured by the parameters' posterior distrbution, similarly exhibit a lack of exchange rate response. In contrast to Brainard (1967), the presence of parameter uncertainty can lead to more or less aggressive policy responses, depending on the model at hand. |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedhwp:wp-09-21&r=ifn |
| By: | Jingliang Xiao; Glyn Wittwer |
| Abstract: | We use a dynamic CGE model of China with a financial module and sectoral detail to examine the real and nominal impacts of a nominal exchange rate appreciation alone, fiscal policy alone and a combined fiscal and monetary package to redress China's external imbalance. The exchange rate policy alone is ineffective in both the short run and long run at reducing China's current account surplus. Fiscal policy is less effective than a combination of fiscal and monetary policy in reducing the surplus. |
| Keywords: | dynamic financial CGE, foreign reserves, trade surplus, monetary policy, fiscal policy |
| JEL: | D58 E52 E62 F31 |
| Date: | 2009–11 |
| URL: | http://d.repec.org/n?u=RePEc:cop:wpaper:g-192&r=ifn |
| By: | GUISAN, Maria-Carmen |
| Abstract: | One aim of this paper is to relate the evolution of real exchange rate Euro-Dollar to the foreign trade balance, with analysis three European countries: Spain, Germany and France, for the period 1960-2007. A second question is to analyse the effects of changes of REER on the evolution of Exports and Imports. A third point is to evaluate the impact of those changes on industrial and non industrial production and economic growth. We estimate an econometric model for the case of Spain that explains the causes and consequences of the huge increase of the trade deficit during the period 2004-2009 and we insist on the convenience to develop economic policies aimed to get higher levels of industrial production per inhabitant to increase Exports and to moderate foreign trade deficit. |
| JEL: | C51 F1 O52 |
| Date: | 2009 |
| URL: | http://d.repec.org/n?u=RePEc:eaa:ecodev:100&r=ifn |