During the 1990s a number of African central banks succeeded in bringing inflation to relatively low levels while maintaining a market-determined exchange rate. These central banks were generally reluctant to fully subordinate exchange rate targets to monetary targets, however, particularly in the face of large external shocks. We focus on the management of highly persistent shocks to aid flows, including PRSP-related increases in net flows, in the presence of currency substitution by the domestic private sector. Such shocks have beneficent long-run effects, but when currency substitution is high they can produce dramatic macroeconomic management problems in the short run. What is the appropriate mix of money and exchange rate targeting in such cases, and the role of temporary sterilization? We analyze these and related issues in an intertemporal optimizing model that allows a portion of aid to be devoted to reducing the government's seigniorage requirement. This creates a strong link between official aid flows and private capital flows, giving rise to tradeoffs reminiscent of the literature on private capital inflows in emerging markets. When the credibility of policymakers' commitment to low inflation is firm, some degree of dirty floating, with little or no sterilization of increases in the monetary base, is the most attractive approach.

/pdf/exchange-rate-policy-and-the-management-of-official-and-45tqi9xva4.pdf

Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa

Dynamic Laffer Curves

This paper examines the cross-dynamics of volatility term structures implied by foreign exchange options. The data used in the empirical analysis consist of daily observations of implied volatilities for OTC options on the euro, Japanese yen, British pound, Swiss franc, and Canadian dollar, quoted against the U.S. dollar. The empirical findings demonstrate that two common factors can explain a vast proportion of the variation in volatility term structures across currencies. Furthermore, the results indicate that the euro is the dominant currency, as the implied volatility term structure of the euro is found to affect all the other volatility term structures, while the term structure of the euro appears to be virtually unaffected by the other currencies. Finally, our results reveal a rather deviant relation between the volatility term structures of the euro and Swiss franc by providing evidence of significant nonlinearities in the relationship between these two currencies.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID804944_code485639.pdf?abstractid=804944&mirid=5

Cross-Dynamics of Volatility Term Structures Implied by Foreign Exchange Options

https://users.ox.ac.uk/~cadam/pdfs/EER2094.pdf

Riding the wave: Monetary responses to aid surges in low-income countries

We characterize the balanced growth path of the basic neoclassical growth economy using standard numerical solution methods which solve a linear or log-linear approximation to the economic model, as well as methods which preserve the nonlinearity in the original model. We also apply the same methods adding indivisible labor to the basic model, and to a monetary version of that economy, subject to a cash-in-advance constraint. In a unified framework, we show that log-linear approximations should generally be preferred to linear approximations. We also provide evidence that preserving the original nonlinear structure of the model when computing the numerical solution generally yields minor gains in accuracy. Methods that use either a linear or a log-linear approximation to the model can produce solutions as accurate as the parameterized expectations method. However, in extreme parametric cases, the solution may be rather sensible to small numerical errors, and even a log-linear approximation may then be inappropriate. Methods using the nonlinear structure of the original model can then perform significantly better.

https://www.ucm.es/data/cont/media/www/pag-41882/NovalesPerez_modified_paper.pdf

Is It Worth Refining Linear Approximations to Non-LinearRational Expectations Models?

We provide a summarized presentation of solution methods for rational expectations models, based on eigenvalue/eigenvector decompositions These methods solve systems of stochastic linear difference equations by relying on the use of stability conditions derived from the eigenvectors associated to unstable eigenvalues of the coefficient matrices in the system For nonlinear models, a linear approximation must be obtained, and the stability conditions are approximate, This is however, the only source of approximation error, since the nonlinear structure of the original model is used to produce the numerical solution After applying the method to a baseline stochastic growth model, we explain how it can be used: i) to salve some identification problems that may arise in standard growth models, and ii) to solve endogenous growth models

/pdf/solving-nonlinear-rational-expectations-models-by-eigenvalue-1fpatuqx0v.pdf

Solving nonlinear rational expectations models by eigenvalue-eigenvector decompositions

This paper departs from previous research in dealing with dimensionality reduction in the space of
international term structure slopes. Recent empirical work has documented the existence of information in
the slope of the term structure which is relevant to forecast future changes in economic activity, and it is
additional to information in past economic activity, inflation, or in any leading indicator index [see
Estrella and Hardouvelis (1991), Stock and Watson (1988), Hardouvelis (1994) and Plosser and 
Rouwenhorst (1994), among others]. This implies that a good forecasting model of term structure slopes
could be helpful to anticipate changes in economic activity with an even longer anticipation.

/pdf/a-factor-model-of-term-structure-slopes-in-eurocurrency-3jshlrvi87.pdf

A factor model of term structure slopes in eurocurrency markets

Using monthly data on Euro-rates for 1979-1998, we examine the extent to which crosscountry
information on term structure slopes can be used to improve upon univariate slope forecasts.
This is interesting from the point of view of forecasting economic activity, since term structure slopes
are known to anticipate fluctuations in the real economy. Additionally, the Expectations Hypothesis
states that the term structure slope summarizes the available information which is relevant for
forecasting future short-term interest rates, so that improved slope forecasts might also lead to better
forecasts of future interest rates. We find ample evidence of significant explanatory power in term
structure slopes across countries. Besides, we document that this information content leads to improved
forecasts of the term structure slope in some countries, using a foreign slope as indicator.

/pdf/dynamic-correlations-and-forecasting-of-term-structure-1aqkoyg1w2.pdf

Dynamic correlations and forecasting of term structure slopes in eurocurrency market

Using data on Euro-rates for 1978-1996, we have examined the extent to which crosscountry information on tenn structure slopes can be used to improve upon univariate slope forecasts. This is interesting from fue point of view of forecasting economic activity, since term structure slopes have been shown in recent empirical work to anticipate fluctuations in the real economy. On the other hand, the Expectations Hypothesis states that the term structure slope summarizes the available infonnation which is relevant for forecast future interest fates. We have found ample evidence of significant explanatory power in term structure slopes across countries. This leads to improved forecasts of the term structure slope, in some countries, using a foreign slope as indicator. However, the reductions in forecast error measures are not very large.

Alfonso Novales Cinca

Papers

Solving nonlinear rational expectations models by eigenvalue-eigenvector decompositions

A factor model of term structure slopes in eurocurrency markets

Dynamic correlations and forecasting of term structure slopes in eurocurrency market

Correlations among term structure slopes in eurocurrency markets