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on Open MacroEconomics |
| By: | Yu-chin Chen (University of Washington); Kwok Ping Tsang (Virginia Tech) |
| Abstract: | The nominal exchange rate is both a macroeconomic variable equilibrating international markets and a financial asset that embodies expectations and prices risks associated with cross border currency holdings. Recognizing this, we adopt a joint macro-finance strategy to model the exchange rate. We incorporate into a monetary exchange rate model macroeconomic stabilization through Taylor-rule monetary policy on one hand, and on the other, market expectations and perceived risks embodied in the cross-country yield curves. Using monthly data between 1985 and 2005 for Canada, Japan, the UK and the US, we employ a state-space system to model the relative yield curves between country-pairs using the Nelson and Siegel (1987) latent factors, and combine them with monetary policy targets (output gap and inflation) into a vector autoregression (VAR) for bilateral exchange rate changes. We find strong evidence that both the financial and macro variables are important for explaining exchange rate dynamics and excess currency returns, especially for the yen and the pound rates relative to the dollar. Moreover, by decomposing the yield curves into expected future yields and bond market term premiums, we show that both expectations about future macroeconomic conditions and perceived risks are priced into the currencies. These findings provide support for the view that the nominal exchange rate is determined by both macroeconomic as well as financial forces. |
| Date: | 2009–12 |
| URL: | http://d.repec.org/n?u=RePEc:udb:wpaper:uwec-2009-24-r&r=opm |
| By: | OKIMOTO, Tatsuyoshi; SHIMOTSU, Katsumi |
| Abstract: | The paper investigates the possibility of decline in the persistence of real exchange rates, or deviations from PPP. To this end, we test the null hypothesis of no decline in the PPP deviation persistence between two subsamples using a fractional integration framework. In addition, our rolling-window estimates show that the real exchange rate of many countries have experienced a sharp drop in their persistence once we use samples starting from the mid-1980s. Finally, we examine the relationship between the dynamics of PPP deviation persistence and several economic variables and confirm that the speed of convergence of PPP deviations is highly related to economic/financial integration and world economic stabilization. |
| Keywords: | deviations from PPP, economic stabilization, financial integration |
| JEL: | C14 C22 F31 F36 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:hit:econdp:2010-06&r=opm |
| By: | Mustafa Caglayan (Department of Economics, The University of Sheffield Author-Person=pca30); Omar S. Dahi (Hampshire College); Firat Demir (University of Oklahoma) |
| Abstract: | We investigate the effects of real exchange rate uncertainty and financial depth on manufactures exports from 28 emerging economies to the North and South over 1978-2005. We estimate a dynamic panel model using system GMM approach and show that for the majority of countries in our sample exchange rate uncertainty affects both South-South and South-North trade negatively. Furthermore, for several cases we discover that this effect is unidirectional, that is South-South or South-North. In addition, we find that while financial depth plays a trade-enhancing role, exchange rate shocks can negate this effect. We also show that trade among developing economies is likely to enhance export growth. |
| Keywords: | Trade flows, Exchange rate uncertainty, South-South trade, Financial depth, Dynamic panel data |
| JEL: | F15 F31 G15 E44 O14 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:shf:wpaper:2010011&r=opm |
| By: | Nicola Cetorelli; Linda S. Goldberg |
| Abstract: | Global banks played a significant role in transmitting the 2007-09 financial crisis to emerging-market economies. We examine adverse liquidity shocks on main developed-country banking systems and their relationships to emerging markets across Europe, Asia, and Latin America, isolating loan supply from loan demand effects. Loan supply in emerging markets across Europe, Asia, and Latin America was affected significantly through three separate channels: 1) a contraction in direct, cross-border lending by foreign banks; 2) a contraction in local lending by foreign banks' affiliates in emerging markets; and 3) a contraction in loan supply by domestic banks, resulting from the funding shock to their balance sheets induced by the decline in interbank, cross-border lending. Policy interventions, such as the Vienna Initiative introduced in Europe, influenced the lending-channel effects on emerging markets of shocks to head-office balance sheets. |
| Keywords: | Capital market ; Emerging markets ; International finance ; International liquidity ; Banks and banking, International ; Banks and banking, Foreign ; Financial crises ; Loans, Foreign |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fednsr:446&r=opm |
| By: | George Alessandria; Joseph P. Kaboski; Virgiliu Midrigan |
| Abstract: | This paper examines the role of inventories in the decline of production, trade, and expenditures in the US in the economic crisis of late 2008 and 2009. Empirically, the authors show that international trade declined more drastically than trade-weighted production or absorption and there was a sizeable inventory adjustment. This is most clearly evident for autos, the industry with the largest drop in trade. However, relative to the magnitude of the US downturn, these movements in trade are quite typical. The authors develop a two-country general equilibrium model with endogenous inventory holdings in response to frictions in domestic and foreign transactions costs. With more severe frictions on international transactions, in a downturn, the calibrated model shows a larger decline in output and an even larger decline in international trade, relative to a more standard model without inventories. The magnitudes of production, trade, and inventory responses are quantitatively similar to those observed in the current and previous US recessions. |
| Keywords: | Inventories ; Global financial crisis ; International trade |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedpwp:10-18&r=opm |
| By: | Kathryn M.E. Dominguez (Gerald R. Ford School of Public Policy, University of Michigan); Rasmus Fatum (School of Business, University of Alberta); Pavel Vacek (School of Business, University of Alberta) |
| Abstract: | Many developing countries have increased their foreign reserve stocks dramatically in recent years, often motivated by the desire for precautionary self-insurance. One of the negative consequences of large accumulations for these countries is the risk of valuation losses. In this paper we examine the implications of systematic reserve decumulation by the Czech authorities aimed at mitigating valuation losses on euro-denominated assets. The policy was explicitly not intended to influence the value of the koruna relative to the euro. Initially the timing and size of reserve sales was not predictable, eventually sales occurred on a daily basis (in three equal installments within the day). This project examines whether these reserve sales, both during the regime of discretionary timing as well as when sales occurred every day, had unintended consequences for the domestic currency. Our findings using intraday exchange rate data and time-stamped reserve sales indicate that when decumulation occurred every day these sales led to significant appreciation of the koruna. Overall, our results suggest that the manner in which reserve sales are carried out matters for whether reserve decumulation influences the relative value of the domestic currency. |
| Keywords: | foreign exchange reserves; exchange rate determination; high-frequency volatility modeling |
| JEL: | E58 F31 F32 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:kud:epruwp:10-06&r=opm |