Showing papers on "Exchange rate published in 1996"
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TL;DR: Foundations of International Macroeconomics as mentioned in this paper is an innovative text that offers the first integrative modern treatment of the core issues in open economy macroeconomics and finance, including intertemporal consumption and investment theory, government spending and budget deficits, finance theory and asset pricing, the implications of (and problems inherent in) international capital market integration, growth, inflation and seignorage, policy credibility, real and nominal exchange rate determination.
Abstract: Foundations of International Macroeconomics is an innovative text that offers the first integrative modern treatment of the core issues in open economy macroeconomics and finance. With its clear and accessible style, it is suitable for first-year graduate macroeconomics courses as well as graduate courses in international macroeconomics and finance. Each chapter incorporates an extensive and eclectic array of empirical evidence. For the beginning student, these examples provide motivation and aid in understanding the practical value of the economic models developed. For advanced researchers, they highlight key insights and conundrums in the field. Topic coverage includes intertemporal consumption and investment theory, government spending and budget deficits, finance theory and asset pricing, the implications of (and problems inherent in) international capital market integration, growth, inflation and seignorage, policy credibility, real and nominal exchange rate determination, and many interesting special topics such as speculative attacks, target exchange rate zones, and parallels between immigration and capital mobility. Most main results are derived both for the small country and world economy cases. The first seven chapters cover models of the real economy, while the final three chapters incorporate the economy's monetary side, including an innovative approach to bridging the usual chasm between real and monetary models.
1,830 citations
TL;DR: The authors defined a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation, and used a panel of annual data for over 100 developing countries from 1971 through 1992 to characterize currency crashes.
1,827 citations
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TL;DR: The authors showed that incomplete pass-through is a consequence of third-degree price discrimination and that the source of the border effect has not been clearly identified, and there is little evidence yet to suggest substantial market power is implied by the observed price discrimination.
Abstract: Import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country. Recent research indicates that common-currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets. This evidence suggests that incomplete pass-through is a consequence of third-degree price discrimination. While distance matters for market segmentation, borders have independent effects. The source of the border effect has not been clearly identified. Furthermore, there is little evidence yet to suggest substantial market power is implied by the observed price discrimination.
1,326 citations
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TL;DR: In this article, a self-reinforcing mechanism for currency market equilibria is presented, in which high unemployment may cause an exchange rate crisis with self-fulfilling features.
Abstract: The discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency-market equilibria. After describing an illustrative model in which high unemployment may cause an exchange rate crisis with self-fulfilling features, the paper reviews some other self-reinforcing mechanisms. Recent econometric evidence seems to support the practical importance of these mechanisms.
1,259 citations
TL;DR: The authors showed that incomplete pass-through is a consequence of third-degree price discrimination and that the source of the border effect has not been clearly identified, and there is little evidence yet to suggest substantial market power is implied by the observed price discrimination.
Abstract: Import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country. Recent research indicates that common-currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets. This evidence suggests that incomplete pass-through is a consequence of third-degree price discrimination. While distance matters for market segmentation, borders have independent effects. The source of the border effect has not been clearly identified. Furthermore, there is little evidence yet to suggest substantial market power is implied by the observed price discrimination.
1,147 citations
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TL;DR: In this paper, the authors examine the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises and explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not.
Abstract: In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.
1,053 citations
TL;DR: A survey of advances in this area since the publication of Hodrick's (1987) survey is presented in this article, with a focus on the relationship between uncovered interest parity and real interest parity.
998 citations
TL;DR: The authors found strong evidence of mean-reverting real exchange rate behavior, using simple, stationary, autoregressive models estimated on pre-float data, and easily outperformed nonstationary real-exchange rate models in dynamic forecasting exercises over the recent float.
Abstract: Using annual data spanning two centuries for dollar-sterling and franc-sterling real exchange rates, we find strong evidence of mean-reverting real exchange rate behavior. Using simple, stationary, autoregressive models estimated on prefloat data, we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float. Such stationary univariate equations explain 60-80 percent of the in-sample variation in real exchange rates, although the degree of short-run persistence may be high. The econometric estimates imply a half-life of shocks to the real exchange rate of about 6 years for dollar-sterling and a little under 3 years for franc-sterling.
979 citations
TL;DR: In this paper, the authors examine the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises and explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not.
Abstract: In this paper we examine closely the financial events following the Mexican peso devaluation to uncover new lessons about the nature of financial crises. We explore the question of why, during 1995, some emerging markets were hit by financial crises while others were not. To this end, we ask whether there are some fundamentals that help explain the variation in financial crises across countries or whether the variation just reflects contagion. We present a simple model identifying three factors that determine whether a country is more vulnerable to suffer a financial crisis: a high real exchange rate appreciation, a recent lending boom, and low reserves. We find that for a set of 20 emerging markets, differences in these fundamentals go far in explaining why during 1995 some emerging markets were hit by financial crises while others were not. We also find that alternative hypotheses that have been put forth to explain such crises often do not seem to be supported by the data, such as high current account deficits, excessive capital inflows and loose fiscal policies.
787 citations
TL;DR: In this article, the authors re-examine deviations from PPP using a panel of 150 countries and 45 annual post WWII observations, and show strong evidence of mean-reversion that is similar to that from long time-series.
633 citations
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TL;DR: In this article, the authors measure the proportion of U.S. exchange rate movements that can be accounted for by movements in relative prices of non-traded goods, and find that the majority of these movements can be explained by price changes.
Abstract: This study measures the proportion of U.S. exchange rate movements that can be accounted for by movements in relative prices of non-traded goods.
TL;DR: This paper showed that the presence of pricing-to-market combined with sticky local-currency nominal prices magnifies the response of the exchange rate to money shocks, and that the degree of exchange rate variability may be increased considerably relative to a model where the law of one price holds continuously.
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TL;DR: In the long run, relative prices generally reflect relative labor productivities in the traded and non-traded goods sectors as discussed by the authors, and the evidence on purchasing power parity in traded goods is considerably less favorable.
Abstract: The Balassa-Samuelson model, which explains real exchange rate movements in terms of sectoral productivities, rests on two components. First, for a class of technologies including Cobb-Douglas, the model implies that the relative price of nontraded goods in each country should reflect the relative productivity of labor in the traded and nontraded goods sectors. Second, the model assumes that purchasing power parity holds for traded goods in the long-run. We test each of these implications using data from a panel of OECD countries. Our results suggest that the first of these two fits the data quite well. In the long run, relative prices generally reflect relative labor productivities. The evidence on purchasing power parity in traded goods is considerably less favorable. When we look at US dollar exchange rates, PPP does not appear to hold for traded goods, even in the long run. On the other hand, when we look at DM exchange rates purchasing power parity appears to be a somewhat better characterization of traded goods prices.
TL;DR: A multinomial approximation of correlated exchange rate processes is proposed that leads to a consistent and tractable lattice model for this compound option valuation problem.
Abstract: In this paper, we develop a stochastic dynamic programming formulation for the valuation of global manufacturing strategy options with switching costs. Overall, we adopt a hierarchical approach. First, exchange rates are modeled as stochastic diffusion processes that exhibit intercountry correlation. Second, the firm's global manufacturing strategy determines options for alternative product designs as well as supply chain network designs. Product options introduce international supply flexibility. Supply chain network options determine the firm's manufacturing flexibility through production capacity and supply chain network linkages. Third, switching costs determine the cost of operational hedging, i.e., the costs associated with reducing downside risks. Overall, the firm maximizes its expected, discounted, global, after-tax value through the exercise of product and supply chain network options and/or through exploitation of operational flexibility contingent on exchange rate realizations. In this environment, the firm must trade off fixed operating costs, switching costs, and the economic benefits derived from exploiting differentials in factor costs and corporate tax rates. A multinomial approximation of correlated exchange rate processes is proposed that leads to a consistent and tractable lattice model for this compound option valuation problem. We then demonstrate how the global manufacturing strategy planning model framework can be utilized to analyze financial and operational hedging strategies.
TL;DR: In this paper, the authors explored the factors that contribute to the explanation of FDI in the United States by country of origin of investment, and found that the main significant positive influences are home country's exports to the USA and home country market size.
Abstract: Given the large size and rapid growth of foreign direct investment in the United States, this subject is a central concern of U.S. firms and U.S. government policymakers. This study explores the factors that contribute to the explanation of FDI in the United States by country of origin of investment. Evidence from the past twelve years shows that the main significant positive influences are home country's exports to the United States and home country market size. Significant negative influences include the home country's imports from the United States, the cultural and geographic distances of the home country from the United States, and the exchange rate (fx/$).
TL;DR: In this paper, the results of unit root tests for real exchange rates using a panel framework were reported, and the authors obtained evidence supporting PPP over the recent flexible exchange rate period for G-6 and OECD countries.
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TL;DR: This paper examined the differences in inflation performance across countries and found that institutional arrangements such as central bank independence or exchange rate mechanisms are relatively unimportant determinants of inflation performance, while economic fundamentals such as openness and optimal tax considerations are relatively important determinants.
Abstract: This paper attempts to explain the differences in inflation performance across countries. Earlier research has examined this topic, but it has considered only some of the factors that might be empirically important determinants of inflation rates. We consider the distaste for inflation, optimal tax considerations, time consistency issues, distortionary non-inflation policies and other factors that might be empirically important determinants of inflation performance. Overall, the results suggest that institutional arrangements - central bank independence or exchange rate mechanisms - are relatively unimportant determinants of inflation performance, while economic fundamentals - openness and optimal tax considerations - are relatively important determinants.
TL;DR: In this paper, the authors studied the behavior of the exchange rate in the Kareken-Wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm.
Abstract: This paper studies the behavior of the exchange rate in the Kareken-Wallace overlapping generations economy with two currencies in which decision rules are updated using the genetic algorithm. The analysis shows that a stationary monetary equilibrium of the Kareken-Wallace model is not stable under the genetic algorithm dynamics. The fluctuations in the genetic algorithm exchange rate are driven by fluctuations in the portfolio fractions, which change over time in response to the inequality between the rates of return on two currencies. Further, both the genetic algorithm simulations and the experiments with human subjects were characterized by continuing fluctuations of the exchange rate, with first-period consumption values close to a stationary value.
TL;DR: In this paper, the effects of previous entry on the subsequent decisions of Japanese electronics companies to invest in the United States were examined. And the results suggest that initial investments serve as platforms for subsequent entry, with the timing of entry triggered by movements in real exchange rates.
Abstract: This study examines the effects of previous entry on the subsequent decisions of Japanese electronics companies to invest in the United States By gathering data at the firm level, the empirical analysis provides a fine-grain sorting out of firm and industry effects on foreign direct investment decisions The findings show that investment behavior is highly heterogeneous across firms and reflects their individual technological capabilities and their history of previous investments in the United States Real exchange rate levels are also important The results suggest that initial investments serve as platforms for subsequent entry, with the timing of entry triggered by movements in real exchange rates Copyright 1996 by MIT Press
TL;DR: This article showed that the recent literature's result that expectations of crisis can be self-fulfilling is due less to the new assumption of endogeneity of government policy than to the dropping of the classical assumption that fundamentals are deteriorating.
Abstract: Recent theoretical analyses of currency crises have argued that, when a government's decision to defend its exchange rate depends on the government's broader macroeconomic objectives, then an exchange-rate crisis can be triggered by self-fulfilling expectations of traders. Some authors have been willing to draw strong policy implications from this result, in particular that fixed exchange rates cannot coexist with free capital mobility. This paper shows that the recent literature's result that expectations of crisis can be self-fulfilling is due less to the new assumption of endogeneity of government policy than to the dropping of the classical assumption that fundamentals are deteriorating. When objective economic conditions are steadily deteriorating, these fundamentals can be shown to determine uniquely the timing of a currency crisis, even if policy is endogenous and even if people are uncertain about the government's objective function. If fundamentals evolve randomly and are not certain to deteriora...
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TL;DR: This article used a panel of annual data for over one hundred developing countries from 1971 through 1992 to characterize currency crashes, defined as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation.
Abstract: We use a panel of annual data for over one hundred developing countries from 1971 through 1992 to characterize currency crashes. We define a currency crash as a large change of the nominal exchange rate that is also a substantial increase in the rate of change of nominal depreciation. We examine the composition of the debt as well as its level, and a variety of other macroeconomic factors, external and foreign. Crashes tend to occur when: output growth is low; the growth of domestic credit is high; and the level of foreign interest rates are high. A low ratio of FDI to debt is consistently associated with a high likelihood of a crash.
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TL;DR: In this paper, the authors argue that allowing for the possibility of a self-fulfilling panic helps in understanding several features of the recent Mexican crisis, and they present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others.
Abstract: We argue that allowing for the possibility of a self-fulfilling panic helps in understanding several features of the recent Mexican crisis. Self-fulfilling expectations became decisive in generating a panic only after the government ran down gross reserves and ran up short-term dollar debt. We present a simple model to explain how and why multiple equilibria can occur for some levels of reserves or debt, but not for others. Lastly, we argue that the imperfect credibility of Mexican exchange rate policy made it advisable to follow more contractionary fiscal and monetary policies in 1994. Our model formalizes the reasons why this is so.
TL;DR: In this paper, the authors examine the recent financial debacle in Mexico and its effects on other emerging markets (the Tequila effect) and argue that financial and liquidity considerations appear to have played a prominent role.
Abstract: This paper examines the recent financial debacle in Mexico and its effects on other emerging markets (the Tequila effect). I argue that financial and liquidity considerations—as opposed to current account sustainability or real exchange rate considerations—appear to have played a prominent role. Special attention is given to financial factors in Latin America. On this basis it is concluded that Mexico and Argentina were particularly vulnerable to speculative attacks. For contrast, the experience of Austria is examined and compared with that of Mexico. The analysis suggests that the remarkable stability of Austria—which pegged its currency to the Deutsche Mark for more than 15 years—may be due to the low volatility of its monetary aggregates.
I also argue that financial factors could account for multiple self-fulfilling equilibria, helping to explain the sudden and deep reversals in Mexico and Argentina. It concludes with a discussion on policy implications. I suggest that, aside from the usual fiscal prudence advice, countries should pay special attention to the banking system and the maturity of public debt. Furthermore, the appropriateness of an exchange rate regime should take into account the characteristics of the financial sector.
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TL;DR: In this paper, Hong Kong and Singapore agreed to intervene for the account of the Bank of Japan to help the latter manage the dollar/yen rate, as had Singapore and the Philippines sometime earlier.
Abstract: This conference is one sign of increased interest in collective or cooperative exchange rate arrangements for East Asian countries. A more concrete indication is the announcement in November 1995 by the Hong Kong Monetary Authority and the central banks of Malaysia, Indonesia and Thailand of repurchase agreements designed to provide one another with exchange market support.2 In February of this year Hong Kong and Singapore agreed to intervene for the account of the Bank of Japan to help the latter manage the dollar/yen rate. In March the Bank of Japan joined the network of repurchase arrangements (as had Singapore and the Philippines sometime earlier). Against this background it is not surprising that the apostles of European monetary integration have chosen this time to bring their message to Asia
TL;DR: The authors empirically examined the assumption that central banks in fact back up interventions with subsequent changes in monetary policy, and showed that this is not always the case and that the monetary effects of the intervention are typically offset by central banks.
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TL;DR: This paper found evidence in favor of long-run PPPPPP (by rejecting either the null hypothesis of unit roots in real exchange rates and relative prices) using long data series.
Abstract: Recent tests using long data series find evidence in favor of long-run PPP (by rejecting either the null hypothesis of unit roots in real exchange rates and relative prices.)
TL;DR: In this article, the authors show that the long-horizon predictability of exchange rates depends on the null hypothesis that is used to generate empirical critical values, and that results are weaker under the null that exchange rates and fundamentals are generated by an unrestricted VAR with no integration restrictions.
Abstract: Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction equations. We show by means of a simulation study that, in small to medium samples, inference from this regression procedure depends on the null hypothesis that is used to generate empirical critical values. The standard assumption of a stationary error-correction term between exchange rates and fundamentals biases the results in favor of predictive power. Our results show that evidence of long-horizon predictability weakens when using empirical critical values generated under the more stringent null of no cointegration. Likewise, results are weakened using critical values generated under the null that exchange rates and fundamentals are generated by an unrestricted VAR with no integration restrictions.
TL;DR: In this article, the theoretical relationship between the major exchange rates and the prices of internationally-traded commodities was examined using forecast error data, and it was found that, since the dissolution of the Bretton Woods International monetary system, floating exchange rates among the major currencies have been a major source of price instability in the world gold market.
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TL;DR: This article interpreted the stylized facts and offered estimates of the equilibrium real exchange rate based on an international comparison of dollar wages and on a study of the dynamics of real exchange rates in several transition economies, concluding that the process of real appreciation is a combination of a return to equilibrium following the early overshooting and equilibrium appreciation.
Abstract: A stylized fact of the transition process is an early profound exchange rate depreciation followed by continuing real appreciation. Absent historical reference points, it is difficult to judge whether the real appreciation is threatening competitiveness. This paper interprets the stylized facts and offers estimates of the equilibrium real exchange rate based on an international comparison of dollar wages and on a study of the dynamics of real exchange rates in several transition economies. The results suggest that the process of real appreciation is a combination of a return to equilibrium following the early overshooting and equilibrium appreciation.