Showing papers on "Exchange rate published in 1995"
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TL;DR: This paper developed an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices.
Abstract: We develop an analytically tractable two-country model that marries a full account of global macroeconomic dynamics to a supply framework based on monopolistic competition and sticky nominal prices The model offers simple and intuitive predictions about exchange rates and current accounts that sometimes differ sharply from those of either modern flexible-price intertemporal models or traditional sticky-price Keynesian models Our analysis leads to a novel perspective on the international welfare spillovers due to monetary and fiscal policies
1,763 citations
TL;DR: In this article, the authors survey recent work on competition in markets in which consumers have costs of switching between competing firms' products, even when all products are functionally identical, and discuss the causes of switching costs, explain introductory offers and price wars.
Abstract: We survey recent work on competition in markets in which consumers have costs of switching between competing firms' products, even when all firms' products are functionally identical We address issues in macroeconomics and international trade, as well as industrial organization: In a market with switching costs (or 'brand loyalty'), a firm's current market share is an important determinant of its future profitability We examine how the firm's choice between setting a low price to capture market share, and setting a high price to Harvest profits by exploiting its current locked-in customers, is affected by the threat of new entry interest rates, exchange rate expectations, the state of the business cycle, etc We also discuss the causes of switching costs, explain introductory offers and price wars, and examine industry profits, firms' product choices, and implications for multi-product competition
1,604 citations
TL;DR: Eichengreen et al. as discussed by the authors evaluated the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty OECD countries, and concluded that there are no clear early warning signals of many speculative attacks, and no easy solutions for policy-makers.
Abstract: Exchange market mayhem
The antecedents and aftermath of speculative attacks
This paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets. Using data from 1959 through 1993 for twenty OECD countries, we consider the antecedents and aftermath of devaluations and revaluations, flotations, fixings and speculative attacks (which may not be successful). We find that realignments of fixed exchange rates are alike: devaluations are preceded by political instability, budget and current account deficits, and fast growth of money and prices. Revaluations are mirror images of devaluations. Speculative attacks resemble devaluations, but money growth and inflation are more endemic and there is no last-minute attempt to tighten monetary policy. In contrast, few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables. Transitions between exchange rate regimes are largely idiosyncratic, and are neither consistently provoked ex ante by systematic imbalances, nor typically justified ex post by subsequent changes in policy. We conclude that there are no clear early warning signals of many speculative attacks, and no easy solutions for policy-makers.
— Barry Eichengreen, Andrew K. Rose and Charles Wyplosz
1,267 citations
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TL;DR: In this paper, the effect of multiple-period changes in the log exchange rate on the deviation of the log nominal exchange rate from its 'fundamental value' was investigated. But the model was designed to account for small-sample bias and size distortion.
Abstract: Regressions of multiple-period changes in the log exchange rate on the deviation of the log exchange rate from its 'fundamental value' display evidence that long-horizon changes in log nominal exchange rates contain an economically significant predictable component. To account for small-sample bias and size distortion in asymptotic tests, inference is drawn from bootstrap distributions generated under the null hypothesis that the log exchange rate is unpredictable. The bias-adjusted slope coefficients and R[superscript]2's increase with the forecast horizon, and the out-of-sample point predictions generally outperform the driftless random walk at the longer horizons. Copyright 1995 by American Economic Association.
1,195 citations
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TL;DR: A survey of advances in this area since the publication of Hodrick's (1987) survey is presented in this paper, with a focus on the relationship between uncovered interest parity and real interest parity.
Abstract: Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation of uncovered interest parity to real interest parity, and the implications of uncovered interest parity for cointegration of various quantities are discussed. The modeling and testing for risk premiums is surveyed. Included in this area are tests of the consumption CAPM, tests of the latent variable model, and portfolio-balance models of risk premiums. General equilibrium models of the risk premium are examined and their empirical implications explored. The survey does not cover the important areas of learning and peso problems, tests of rational expectations based on survey data, or the models of irrational expectations and speculative bubbles.
1,137 citations
TL;DR: The authors examined the relationship between terms of trade and business cycles using a three-sector intertemporal equilibrium model and a large multicountry database and found that terms-of-trade shocks account for nearly one-half of actual GDP variability.
Abstract: This paper examines the relationship between terms of trade and business cycles using a three-sector intertemporal equilibrium model and a large multicountry database. Results show that terms-of-trade shocks account for nearly one-half of actual GDP variability. The model explains weak correlations between net exports and terms of trade (the Harberger, Laursen, and Metzler effect), and produces large and weakly correlated deviations from purchasing power parity and real interest rate parity. Terms-of-trade shocks cause real appreciations and positive interest differentials, although productivity shocks have opposite effects. The puzzle that welfare gains of international asset trading are negligible is left unresolved. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
1,017 citations
TL;DR: In this article, the authors developed and estimated a model of the U.S. Automobile Industry using micro data from the Consumer Expenditure Survey (CES) and used it in conjunction with population weights to derive aggregate demand.
Abstract: This paper develops and estimates a model of the U.S. Automobile Industry. On the demand side, a discrete choice model is adopted, that is estimated using micro data from the Consumer Expenditure Survey. The estimation results are used in conjunction with population weights to derive aggregate demand. On the supply side, the automobile industry is modelled as an oligopoly with product differentiation. Equilibrium is characterized by the first order conditions of the profit maximizing firms. The estimation results are used in counterfactual simulations to investigate two trade policy issues: the effects of the VER, and exchange rate pass-through.
693 citations
TL;DR: In this article, the authors investigated whether exchange rate risks are priced in international asset markets using a conditional approach that allows for time variation in the rewards for exchange rate risk, and the results for equities and currencies of the world's four largest equity markets support the existence of foreign exchange risk premia.
Abstract: Departures from purchasing power parity imply that different countries have different prices for goods when a common numeraire is used. Stochastic changes in exchange rates are associated with changes in these prices and constitute additional sources of risk in asset pricing models. This article investigates whether exchange rate risks are priced in international asset markets using a conditional approach that allows for time variation in the rewards for exchange rate risk. The results for equities and currencies of the world's four largest equity markets support the existence of foreign exchange risk premia. IN THE ASSET PRICING MODELS (APM) of Solnik (1974), Sercu (1980), Stulz (1981), and Adler and Dumas (1983), exchange rate risk is priced. Investors of different countries face different prices of goods at which they consume the income from their investments. In such a setting, the model contains risk premia that are based on the covariances of assets with exchange rates, in addition to the traditional premium based on the covariance with the market portfolio. These new premia are present because of deviations from purchasing-power parity (PPP). We call "international" an APM that contains additional terms to reward exchange-rate risk, while we call "classic" an APM that does not contain such terms and in which there is only one risk premium based on the covariance of
689 citations
TL;DR: In this article, the authors provide a critical survey of the empirical literature on exchange rate pass-through, focusing on the data and methodology employed in previous work and guiding future work.
Abstract: . The resilience of trade balances of the major industrialized economies to changes in their exchange rates has evoked interest in the exchange rate pass-through relationship. So far, there has not been a comprehensive survey of this literature. The paper aims to fill this gap in two ways. First, it pieces together the theoretical literature on exchange rate pass-through. Second, it provides a critical survey of the empirical literature on exchange rate pass-through. Emphasis is placed on the data and methodology employed in previous work. This is done in order to guide future work in this growing area of research.
653 citations
TL;DR: In this article, the authors present a critical survey and an interpretation of recent exchange rate research, focusing on empirical results for exchange rates among major industrialized countries and examining the issue of speculative bubbles.
Abstract: Publisher Summary This chapter presents a critical survey and an interpretation of recent exchange rate research. It focuses on empirical results for exchange rates among major industrialized countries. The expectations of future exchange rate changes are a key determinant of asset demands, and therefore of the current exchange rate. The expectations variable is relatively straightforward in the conventional monetary models; in theoretical terms , it is determined by the rational expectations assumption, while in empirical terms, it is typically measured by the forward discount or interest differential. The standard empirical implementation of rational expectations methodology infers ex ante expectations of investors from ex post changes in the exchange rate. Unexpected changes in monetary policy frequently cause movements in the exchange rate in the direction hypothesized by the sticky-price monetary model. The chapter presents a survey of the work on exchange rate determination in floating rate regimes. It considers evidence across exchange rate regimes and examines the issue of speculative bubbles. It also reviews some relatively new directions in exchange rate research that focus on the micro-structure of foreign exchange markets.
553 citations
TL;DR: The authors showed that exchange rate models based only on macroeconomic fundamentals are unlikely to be very successful and that there is no clear tradeoff between reduced exchange rate volatility and macroeconomic stability.
TL;DR: In this paper, the authors developed a model of the exchange rate that explains deviations from relative purchasing power parity (PPP) in regression tests of PPP, and why these increase toward unity under hyperinflation or with low frequency data.
Abstract: With transaction costs for trading goods, the nominal exchange rate moves within a band around the nominal purchasing power parity (PPP) value. We model the behavior of the band and of the exchange rate within the band. The model explains why there are below-unity slope coefficients in regression tests of PPP, and why these increase toward unity under hyperinflation or with low-frequency data. Our results are independent of the presence of nontraded goods in the economy. THE OBJECTIVE OF THIS article is to develop a model of the exchange rate that explains the following two stylized empirical facts about deviations from relative purchasing power parity (PPP). First, in a simple regression of changes in (nominal) exchange rates on inflation differentials, the slope coefficient is typically below unity. Second, the slope coefficient increases with the length of the observation interval, and the PPP link is also stronger under hyperinflation than under modest inflation.1 The low coefficients in the relative PPP regression, especially when tested over short periods of time, are often ascribed to errors-in-variables biases that arise from, for example, infrequent price sampling for some items, nonsynchroneity among the prices composing the index, relative price effects in price indices that are weighted differently across countries, and the presence of nontradable goods.2 In this article we present a complementary explanation for the stylized empirical facts, and show that below-unity regression coefficients are expected even when none of these errors in variables are present. We focus on the effect of costs for trading goods-such as shipping and insurance costs, tariffs, and information costs-on the nominal exchange rate.
TL;DR: In this article, the authors developed a model of firm valuation to examine the exchange risk sensitivity of 409 U.S. multinational firms during the 1978-89 period, finding that approximately sixty percent of firms with significant exchange risk exposure gain from a depreciation of the dollar.
Abstract: We develop a model of firm valuation to examine the exchange risk sensitivity of 409 U.S. multinational firms during the 1978-89 period. In contrast to previous studies, we find that exchange rate fluctuations do affect firm value. More specifically, we find that approximately sixty percent of firms with significant exchange risk exposure gain from a depreciation of the dollar. We also find that cross-sectional differences in exchange risk sensitivity are linked to key firm-specific operational variables (i.e., foreign operating profits, sales, and assets). Although we find limited support for exchange risk sensitivity when we aggregate the data into 20 SIC-based industry groups, we do observe some cross-sectional and inter-temporal variation in the exchange risk coefficients. Subperiod analysis reveals higher number of firms with significant exchange risk sensitivity during the weak-dollar period as compared to the strong-dollar period. • Exchange rate variability is a major source of macroeconomic uncertainty affecting firms in an open economy. Exchange rate fluctuations affect operating cash flows and firm value through the translation, transaction, and economic effects of exchange risk exposure. In addition, extemal shocks may create an interdependen ce between exchange rates and stock retums. Therefore, it is reasonable to expect a connection between exchange rate changes and firm value. The importance of exchange rate variability is also evidenced by the growing emphasis corporations place on exchange risk measurement and management strategies. However, compared to other macroeconomic factors, such as inflation and interest rate risk, the research on exchange risk and its impact on firm value is scant. Recent studies based on portfolio data (Bodnar and Gentry, 1993, Jorion, 1990, and Prasad and Rajan, 1995) and market-index data (Ma and Kao, 1990) have found minimal or no evidence of exchange rate fluctuations affecting stock retums. One explanation for these counterintuitive results is the research design used in these studies. We posit that, like any other
TL;DR: The incompatibility of pegged exchange rates, international capital mobility and national monetary autonomy is a basic postulate of open economy macroeconomies as discussed by the authors, and the case can be made for "throwing sand in the wheels" of international finance.
Abstract: The incompatibility of pegged exchange rates, international capital mobility and national monetary autonomy is a basic postulate of open economy macroeconomies. In the present environment of high capital mobility and political uncertainty, even the possibility that governments may utilize their policy autonomy can defeat efforts to peg the exchange rate. This leaves two possibilities. One is to fix the exchange rate irrevocably through monetary unification. The other is to live with floating rates. Either way, a case can be made for "throwing sand in the wheels" of international finance. Where monetary unification is not an option, this is a may to make distinct national currencies tolerable and international money and capital markets compatible with modest national autonomy in monetary and macroeconomic policy. For. EU counties striving to create a monetary union, it is the only politically and economically feasible way of completing the transition to Stage III of the Maastricht process.
TL;DR: The authors analyzed the impact of commercial and financial policies on the reorientation of trade in the 1930s and reported evidence that commercial policies attenuated prior connections between income growth and trade, and that exchange rate instability marginally discouraged international trade.
TL;DR: This article examined the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques and found that error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies.
Book•
29 Sep 1995
TL;DR: In this article, the authors present a model of exchange rate behavior with respect to exchange rate stability and the balance of payments in the international monetary regimes, including exchange rates and exchange rate policies.
Abstract: Preface 1. Introduction PART I. HISTORICAL aND INSTITUTIONAL PERSPECTIVES: 2. Foreign exchange markets and the marketability of money 3. Exchange rate arrangements and international monetary regimes PART II. MODELS oF EXCHANGE RATE BEHAVIOR: 4. Exchange rates and national price levels 5. Exchange rates and interest rates 6. Exchange rates and the balance of payments 7. News, revisions in expectations, and exchange rate dynamics 8. Empirical estimates of structural exchange rate models 9. New perspectives from optimizing models of realignments under fixed exchange rates 10. New directions for conceptual models of flexible exchange rates PART III. EXCHANGE RATE POLICY: 11. The choice of exchange rate arrangements 12. Policy-oriented perspectives on exchange rate stability References Index of authors Index of subjects.
TL;DR: In this article, a nonnegative correlation exists between export demand and exchange rate shocks, the multinational optimally locates some productive capacity abroad, the capacity share increases as exchange rate volatility rises and becomes more correlated with export demand shocks.
Abstract: Variable real exchange rates influence the location of production facilities chosen by a multinational. With risk averse investors and fixed productive factors, parent companies should not be indifferent to production location, even with identical expected costs of production across countries. If a nonnegative correlation exists between export demand and exchange rate shocks, the multinational optimally locates some productive capacity abroad. The capacity share abroad increases as exchange rate volatility rises and becomes more correlated with export demand shocks. These results are confirmed using quarterly U.S. bilateral foreign direct investment flows with Canada, Japan, and the United Kingdom. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
TL;DR: The authors compare the performance of univariate homoskedastic, GARCH, autoregressive, and nonparametric models for conditional variances, using five bilateral weekly exchange rates for the dollar, 1973-1989.
TL;DR: The authors used a unified analytical framework to assess the relevance of the different hypotheses that have been proposed to explain the real effects of exchange-rate-based stabilizations, including the supply side effects associated with an inflation decline, the perception that the exchange rate peg is temporary, the fiscal adjustments that tend to accompany the peg, and the existence of nominal rigidities in wages or prices.
Abstract: This paper uses a unified analytical framework to assess, both qualitatively and quantitatively, the relevance of the different hypotheses that have been proposed to explain the real effects of exchange-rate-based stabilizations. The four major hypotheses analyzed are: (1) the supply-side effects associated with an inflation decline; (2) the perception that the exchange-rate peg is temporary; (3) the fiscal adjustments that tend to accompany the peg; and (4) the existence of nominal rigidities in wages or prices.
TL;DR: In this article, the authors analyzed the long-run foreign transmission effects in a multivariate time-series model of Danish and German prices, exchange rates and interest rates, and found that the vector process is I(2), but that a linear transformation of the prices and the nomical exchange rate removes the I (2) trend from the data.
TL;DR: The authors studied the impact of exchange rate fluctuations and political risk on the risk premiums reflected in cross-sections of individual equity returns from Mexico, a country that has ex? perienced significant monetary and political turbulence.
Abstract: We study the impact of exchange rate fluctuations and political risk on the risk premiums reflected in cross-sections of individual equity returns from Mexico, a country that has ex? perienced significant monetary and political turbulence. Indicators from Mexico's currency and sovereign debt markets are employed as proxies for exchange rate and political risks. We find some evidence of equity market premiums for exposure to these risks. The results suggest common factors in emerging market equity, currency, and sovereign debt markets, and have several implications for corporate and portfolio management and for the use of emerging market data by researchers.
TL;DR: In the early 20th century, the world monetary system fragmented into currency blocs and trading blocs: Sterling bloc, gold bloc, Central Europe bloc, and dollar bloc as discussed by the authors, and the subsequent period of growth in world trade and income was closely associated with the common world monetary standard, the dollar standard.
Abstract: When countries in the 19th century joined the gold standard one-by-one, they were seeking to acquire more than just stability in the values of their currencies. They were moving toward closer integration, financially and economically, with the world economy. After World War I, the system fragmented into currency blocs and trading blocs: Sterling bloc, gold bloc, Central Europe bloc, and dollar bloc.1 The allies who met at Bretton Woodsin 1944 were determined not to repeat after World War II the fragmentation and instability that had characterized the interwar years. The ensuing period of growth in world trade and income indeed seemed to be closely associated with the common world monetary standard, the dollar standard.
TL;DR: In this paper, the authors used data on bilateral automobile export prices from the USA, Germany and Japan to gauge the importance of markup adjustment driven by exchange rate movements across several destination markets.
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TL;DR: The authors provides a wide-ranging survey of the literature on exchange rate economics, with background on the history of international monetary regimes and the institutional characteristics of foreign exchange markets, an overview of the development of conceptual and empirical models of exchange rate behavior, and perspectives on the key issues that policymakers confront in deciding whether, and how, to try to stabilize exchange rates.
Abstract: This book describes and evaluates the literature on exchange rate economics. It provides a wide-ranging survey, with background on the history of international monetary regimes and the institutional characteristics of foreign exchange markets, an overview of the development of conceptual and empirical models of exchange rate behavior, and perspectives on the key issues that policymakers confront in deciding whether, and how, to try to stabilize exchange rates. The treatment of most topics is reasonably compact, with extensive references to the literature for those desiring to pursue individual topics further. The level of exposition is relatively easy to comprehend and the chapters are written at a level intelligible to first-year graduate students or advanced undergraduates. The book will enlighten both students and policymakers, and should also serve as a valuable reference for many research economists.
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TL;DR: In the first quarter of 1995, Mexico found itself in the grip of an intense financial panic as mentioned in this paper, which was due to unexpected shocks that occurred in 1994, and the inadequate policy response to those shocks.
Abstract: In the first quarter of 1995 Mexico found itself in the grip of an intense financial panic. Foreign investors fled Mexico despite very high interest rates on Mexican securities, an undervalued currency, and financial indicators that pointed to long-term solvency. The fundamental conditions of the Mexican economy cannot account for the entire crisis. The crisis was due to unexpected shocks that occurred in 1994, and the inadequate policy response to those shocks. In the aftermath of the March assassination the exchange rate experienced a nominal devaluation of around 10 percent and interest rates increased by around 7 percentage points. However, the capital outflow continued. The policy response to this was to maintain the exchange rate rule, and to prevent further increases in interest rates by expanding domestic credit and by converting short-term peso- denominated government liabilities (Cetes) falling due into dollar- denominated bonds (Tesobonos). A fall in international reserves and an increase in short-term dollar-denominated debt resulted. The government simply ended up illiquid, and therefore financially vulnerable. Illiquidity exposed Mexico to a self-fulfilling panic.
TL;DR: In this article, it was shown that high-frequency fluctuations of consumption and real exchange rates are consistent with unrestricted international trade in risk-free bonds in the US, Japan, France, UK, Italy, Canada and Sweden.
TL;DR: The authors empirically assess the importance of two sources of real exchange rate movements, namely hysteretic price-setting and nominal exchange rate changes, and find some support for non-traded goods models.
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01 Jan 1995
TL;DR: In this article, the authors present a comparison of Discriminant Analysis with Neural Networks Predicting Corporate Mergers Using Backpropagation Networks Self-Organizing Neural Networks: the Financial State of Spanish Companies.
Abstract: PART ONE: NEURAL NETWORKS: Introduction Design Considerations Methods for Optimal Network Design Data Modelling Considerations Testing Strategies and Metrics PART TWO: EQUITY APPLICATIONS: Modelling Stock Returns in the Framework of APT: A Comparative Study with Regression Models Testing the Efficient Markets Hypothesis with Gradient Descent Algorithms Neural Networks as an Alternative Market Model PART THREE: FOREIGN EXCHANGE APPLICATIONS: The Foreign Exchange Markets Nonlinear Modelling of the US$/DM Exchange Rate Managing Exchange Rate Trading Strategies Financial Market Applications of Learning from Hints Machine Learning for Foreign Exchange Trading Indicator Selection PART FOUR: BOND APPLICATIONS: Criteria for Performance in Gilt Futures Pricing Bond Rating with Neural Networks PART FIVE: MACRO-ECONOMIC FORECASTING APPLICATIONS: Bankruptcy Prediction: a Comparison of Discriminant Analysis with Neural Networks Predicting Corporate Mergers Using Backpropagation Networks Self-Organizing Neural Networks: the Financial State of Spanish Companies.
TL;DR: In this paper, the authors present an overview of the long-run determinants of purchasing power parity (PPP), including the supply-side determinants emphasized in the popular Balassa-Samuelson model.
Abstract: Publisher Summary This chapter presents an overview of the long-run determinants of purchasing power parity (PPP). It reviews the huge time series literature testing simple PPP. This area has proven fruitful ground for applying modern methods for dealing with nonstationary and near-nonstationary time series. The chapter traces out the evolution of the literature from naive static tests of PPP to modern unit-root approaches for testing whether real exchange rates are stationary and to cointegration techniques—the most recent phase of PPP testing. The research on more disaggregated price data is discussed in the chapter, including a nearly two-hundred year data set on commodity prices in England and France during the seventeenth and eighteenth centuries. Aside from providing an extremely long data set, this historical data offers some perspective on the behavior of cross-country relative prices in more modern times. The chapter looks at some possible medium- and long-run determinants of the real exchange rate, particularly the supply-side determinants emphasized in the popular Balassa–Samuelson model. It also considers some evidence that positive demand shocks, such as unexpected increases in government spending, lead to medium-run appreciations of the real exchange rate.