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on Open Economy Macroeconomic |
| By: | Charles Engel |
| Abstract: | This paper surveys recent theoretical and empirical contributions on foreign exchange rate determination. The paper first considers monetary models under uncovered interest parity and rational expectations. Then the paper considers deviations from UIP/rational expectations: foreign exchange risk premium, private information, near-rational expectations, and peso problems. |
| JEL: | F31 F41 G15 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19336&r=opm |
| By: | Rossi, Barbara |
| Abstract: | The main goal of this article is to provide an answer to the question: "Does anything forecast exchange rates, and if so, which variables?". It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up-to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: "Are exchange rates predictable?" is, "It depends" on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift. |
| Keywords: | Exchange Rates; Forecast Evaluation; Forecasting; Instability |
| JEL: | C5 F3 |
| Date: | 2013–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9575&r=opm |
| By: | Bergin, Paul R; Corsetti, Giancarlo |
| Abstract: | Can a country gain international competitiveness by the design of optimal monetary stabilization rules? This paper reconsiders this question by specifying an open-economy monetary model encompassing a ‘production relocation externality,’ developed in trade theory to analyze the benefits from promoting entry of domestic firms in the manufacturing sector. In a macroeconomic context, this externality provides an incentive for monetary authorities to trade-off output gap with pro-competitive profit stabilization. While helping manufacturing firms to set competitively low prices, optimal pro-competitive stabilization nonetheless results in stronger terms of trade, due to the change in the country’s specialization and composition of exports. The welfare gains from international policy coordination are large relative to the case of self-oriented, strategic conduct of stabilization policy. Empirical evidence confirms that the effects of monetary policy design on the composition of trade predicted by the theory are present in data and are quantitatively important. |
| Keywords: | firm entry; international coordination; monetary policy; optimal tariff; production location externality |
| JEL: | F41 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9616&r=opm |
| By: | Takashi Kano |
| Abstract: | In an influential paper, Engel and West (2005) claim that the near random-walk behavior of nominal exchange rates is an equilibrium outcome of a variant of present-value models when economic fundamentals follow exogenous first-order integrated processes and the discount factor approaches one. Subsequent empirical studies further confirm this proposition by estimating a discount factor that is close to one under distinct identification schemes. In this paper, I argue that the unit market discount factor implies the counterfactual joint equilibrium dynamics of random-walk exchange rates and economic fundamentals within a canonical, two-country, incomplete market model. Bayesian posterior simulation exercises of a two-country model based on post-Bretton Woods data from Canada and the United States reveal difficulties in reconciling the equilibrium random-walk proposition within the two-country model; in particular, the market discount factor is identified as being much lower than one. |
| Keywords: | Exchange rates; Present-value model; Economic fundamentals; Random walk; Two-country model; Incomplete markets; Cointegrated TFPs; Debt elastic risk premium |
| JEL: | E31 E37 F41 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:een:camaaa:2013-62&r=opm |
| By: | Luis Catão; Roberto Chang |
| Abstract: | How should monetary policy respond to large fluctuations in world food prices? We study this question in an open economy model in which imported food has a larger weight in domestic consumption than abroad and international risk sharing can be imperfect. A key novelty is that the real exchange rate and the terms of trade can move in opposite directions in response to world food price shocks. This exacerbates the policy trade-off between stabilizing output prices vis a vis the real exchange rate, to an extent that depends on risk sharing and the price elasticity of exports. Under perfect risk sharing, targeting the headline CPI welfare-dominates targeting the PPI if the variance of food price shocks is not too small and the export price elasticity is realistically high. In such a case, however, targeting forecast CPI is a superior choice. With incomplete risk sharing, PPI targeting is clearly a winner. |
| Keywords: | Commodity price fluctuations;External shocks;Producer price indexes;Terms of trade;Exchange rate appreciation;Monetary policy;Economic models;Commodity Price Shocks, Inflation Targeting, Taylor rules, Incomplete Markets |
| Date: | 2013–05–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/114&r=opm |
| By: | Tamim Bayoumi; Mika Saito; Jarkko Turunen |
| Abstract: | With global supply chains, any value added or production task can be traded as part of goods. This means that competitiveness can be measured either in terms of “tasks†(Bems and Johnson, 2012), or goods, but with goods prices reflecting the cost of tasks embedded in those goods. We show that when measuring competitiveness in goods, the formula used in computing the real effective exchange rates at the IMF (Bayoumi, Lee, and Jayanthi, 2005) needs to be expressed in terms of the price of value added and needs an additional term, which captures a gain or loss in competitiveness of goods due to outsourcing. |
| Keywords: | Global competitiveness;Emerging markets;International trade;Real effective exchange rates;Economic models;Real Effective Exchange Rate; Global Supply Chains |
| Date: | 2013–05–08 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/100&r=opm |
| By: | Guonan Ma; Robert N McCauley |
| Abstract: | We analyse global and euro area imbalances by focusing on China and Germany as large surplus and creditor countries. In the 2000s, domestic reforms in both countries expanded the effective labour force, restrained wages, shifted income towards profits and increased corporate saving. As a result, both economies' current account surpluses widened before the global financial crisis, and that of Germany has proven more persistent as domestic investment has remained subdued. |
| Keywords: | Global imbalances, current account, capital account, saving and investment, international assets and liabilities, distribution of income; world banker |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:bis:biswps:424&r=opm |
| By: | Joshua Aizenman; Hiro Ito |
| Abstract: | This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the relative policy divergence among the three trilemma policy choices, namely monetary independence, exchange rate stability, and financial openness, we find that emerging market countries have adopted trilemma policy combinations with the least degree of relative policy divergence in the last fifteen years. We also find that a developing or emerging market country with a higher degree of relative policy divergence is more likely to experience a currency or debt crisis. However, a developing or emerging market country with a higher degree of relative policy divergence tends to experience smaller output losses when it experiences a currency or banking crisis. Latin American crisis countries tended to reduce their financial integration in the aftermath of a crisis, while this is not the case for the Asian crisis countries. The Asian crisis countries tended to reduce the degree of relative policy divergence in the aftermath of the crisis, probably aiming at macroeconomic policies that are less prone to crises. The degree of relative policy divergence is affected by past crisis experiences – countries that experienced currency crisis or a currency-banking twin crisis tend to adopt a policy combination with a smaller degree of policy divergence. |
| JEL: | F31 F36 F41 O24 |
| Date: | 2013–09 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19448&r=opm |
| By: | Ruben Atoyan; Jonathan F Manning; Jesmin Rahman |
| Abstract: | After the 2003-2007 economic boom, European countries with large pre-crisis current account imbalances are undergoing adjustments. Countries are adjusting at different paces and ways reflecting the source and magnitude of imbalances, availability of financing, competitiveness of the tradable sector and external environment. While emerging European countries with large pre-crisis imbalances and a fixed exchange rate regime have seen sharp current account adjustments and a rebound in growth, adjustment in the euro zone periphery countries, which are also carrying a legacy of pre-crisis CA imbalances, has been gradual with difficulties bringing back growth. This paper is an empirical investigation of current account adjustment in Europe with a focus on these two groups, looking at contributions from cyclical and other factors, and seeking to draw policy conclusions. |
| Keywords: | Current account balances;Europe;Emerging markets;Current account deficits;Fiscal policy;Wage adjustments;Current Account adjustment, Rebalancing, Competitiveness, Euro Zone Periphery |
| Date: | 2013–03–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/74&r=opm |
| By: | Joong Shik Kang; Jay C. Shambaugh |
| Abstract: | Explanations of the large current account deficits for the euro area periphery and the Baltics in the run up to the crisis revolve around two main factors: deteriorating export performance or demand driven booms. We add that there were important movements in transfers and net income balances. While export performance remained relatively stable in most countries, for some countries, when transfers declined, households and firms borrowed so as to maintain the same level of spending. This was part of a persistent failure to adjust to trade deficits, which, along with rising net income payments, led to growing current account deficits. All of these factors played varying roles in the development of current account deficits across these countries. |
| Keywords: | Current account deficits;Euro Area;Greece;Portugal;Spain;Ireland;Baltics;Exports;Imports;Cross country analysis;current account deficit, transfer, income balance, competitiveness, domestic boom |
| Date: | 2013–07–17 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/169&r=opm |
| By: | Yi Wu |
| Abstract: | This paper examines the factors affecting the weekly peso/dollar exchange rate movements between 1999 and 2013 using an error correction model. The model fits the historical data well. While copper price is the most important determinant of the peso exchange rate over the long run, other factors including interest rate differential, global financial distress, local pension funds’ derivative position, as well as the Federal Reserve’s quantitative easing also affect the peso in the short run. The Central Bank of Chile’s foreign exchange interventions in 2008 and 2011 had a small impact on the peso. |
| Keywords: | Exchange rate adjustments;Chile;Copper;Commodity price fluctuations;Capital flows;Exchange rates;Currencies;Economic models;Chilean peso, exchange rate |
| Date: | 2013–07–18 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/171&r=opm |
| By: | John C Bluedorn; Rupa Duttagupta; Jaime Guajardo; Petia Topalova |
| Abstract: | Has the unprecedented financial globalization of recent years changed the behavior of capital flows across countries? Using a newly constructed database of gross and net capital flows since 1980 for a sample of nearly 150 countries, this paper finds that private capital flows are typically volatile for all countries, advanced or emerging, across all points in time. This holds true across most types of flows, including bank, portfolio debt, and equity flows. Advanced economies enjoy a greater substitutability between types of inflows, and complementarity between gross inflows and outflows, than do emerging markets, which reduces the volatility of their total net inflows despite higher volatility of the components. Capital flows also exhibit low persistence, across all economies and across most types of flows. Inflows tend to rise temporarily when global financing conditions are relatively easy. These findings suggest that fickle capital flows are an unavoidable fact of life to which policymakers across all countries need to continue to manage and adapt. |
| Keywords: | Capital flows;Globalization;Developed countries;Developing countries;Cross country analysis;international capital flows; volatility; persistence; comovement; global factors |
| Date: | 2013–08–22 |
| URL: | http://d.repec.org/n?u=RePEc:imf:imfwpa:13/183&r=opm |
| By: | Buetzer, Sascha; Jordan, Christina; Stracca, Livio |
| Abstract: | In this paper, we address the question of whether cross-country differences in civic capital, notably interpersonal trust, have contributed to the build-up of macroeconomic imbalances over the last three decades. We analyse the link between a stylised index of economic imbalances (a combination of the government budget balance, the inflation rate and the current account balance) and interpersonal trust, alongside other measures of civic and cultural capital, obtained from value survey data for 65 advanced and emerging countries. For the whole set of countries, we find robust empirical evidence for a negative and significant relationship between trust and macroeconomic imbalances which may therefore partly reflect underlying heterogeneity in civic capital. Within the euro area, differences in trust exist although they are not particularly large from an international perspective. With the nexus between trust and macroeonomic imbalances being equally robust we can attribute one fifth of the variation in intra-euro area imbalances to differences in interpersonal trust. Euro area membership and EU fiscal rules do not appear to have weakened the link between the two variables. JEL Classification: F33, F42, Z1 |
| Keywords: | culture, euro area, Macroeconomic imbalances, Trust |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:ecb:ecbwps:20131584&r=opm |
| By: | André Mattos Marques; Erik Alencar de Figueiredo |
| Abstract: | The long run PPP hypothesis was tested considering real effective exchange rate dataset for twenty countries which it was provided by the International Monetary Fund (IMF). By focusing on a nonlinear approach, the study tests IMF monthly dataset for general and specific nonlinearities. Additionally, the study presents a method to estimate the value that real exchange rate may converge in the long run. Linear and nonlinear cases were distinguished by the Tsay and Hansen?s test. The number of regimes was determined by the Hansen?s test. The Self-Exciting Threshold Autoregressive (SETAR) model was applied to estimate potential thresholds to indicate the states turning points of the countries competitiveness. Results suggest that real exchange rate for thirteen countries are highly nonlinear and subjected to regime switching. The asymptotic stability analysis guarantees the data stationarity behavior. Absolute PPP hypothesis was supported in five out of thirteen cases. The real exchange rate generally converges to a stable equilibrium not far from the value predicted by the PPP hypothesis asserts. |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:ppg:ppgewp:16&r=opm |
| By: | Gobillon, Laurent; Guillotreau, Patrice; Wolff, François-Charles |
| Abstract: | This paper investigates spatial variations in product prices using an exhaustive micro dataset on fish transactions. The data record all transactions between vessels and wholesalers that occur on local fish markets in France during the year 2007. Spatial disparities in fish prices are sizable, even after fish quality, time, seller and buyer unobserved heterogeneity have been taken into account. The price difference between local fish markets can be explained to some extent by distance, but mostly by a coast effect (analogous to a border effect in the literature on the law of one price) related to separate location on the Atlantic and Mediterranean coasts. In particular, fish and crustacean prices are 34% higher on the Mediterranean coast. The law of one price is verified for almost all species when considering only local fish markets on the Atlantic coast. |
| Keywords: | commodity price; fish; local markets; panel data |
| JEL: | L11 Q22 R32 |
| Date: | 2013–08 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:9586&r=opm |
| By: | Blagov , Boris (BOFIT); Funke, Michael (BOFIT) |
| Abstract: | An estimated Markov-switching DSGE modelling framework that allows for parameter shifts across regimes is employed to test the hypothesis of regime-dependent credibility of Hong Kong’s linked exchange rate system. The model distinguishes two regimes with respect to the time-series properties of the risk premium. Regime-dependent impulse responses to macroeconomic shocks reveal substantial differences in spreads. These findings contribute to efforts at modelling exchange rate regime credibility as a non-linear process with two distinct regimes. |
| Keywords: | Markov-switching DSGE models; exchange rate regime credibility; Hong Kong |
| JEL: | C51 C52 E32 F41 |
| Date: | 2013–09–04 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:bofitp:2013_024&r=opm |