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Showing papers on "Exchange rate published in 1998"


Journal ArticleDOI
01 Mar 1998
TL;DR: In this article, the authors examine the empirical evidence on currency crises and propose a specific early warning system, which involves monitoring the evolution of several indicators that tend to exhibit an unusual behavior in the periods preceding a crisis.
Abstract: This paper examines the empirical evidence on currency crises and proposes a specific early warning system. This system involves monitoring the evolution of several indicators that tend to exhibit an unusual behavior in the periods preceding a crisis. When an indicator exceeds a certain threshold value, this is interpreted as a warning "signal" that a currency crisis may take place within the following 24 months. The variables that have the best track record within this approach include exports, deviations of the real exchange rate from trend, the ratio of broad money to gross international reserves, output, and equity prices.

1,262 citations


Journal ArticleDOI
TL;DR: This paper developed a multiple asset rational expectations model of asset prices to explain financial market contagion through cross-market rebalancing, where investors transmit idiosyncratic shocks from one market to others by adjusting their portfolios' exposures to shared macroeconomic risks.
Abstract: We develop a multiple asset rational expectations model of asset prices to explain financial market contagion. Although the model allows contagion through several channels, our focus is on contagion through cross-market rebalancing. Through this channel, investors transmit idiosyncratic shocks from one market to others by adjusting their portfolios' exposures to shared macroeconomic risks. The pattern and severity of financial contagion depends on markets' sensitivities to shared macroeconomic risk factors, and on the amount of information asymmetry in each market. The model can generate contagion in the absence of news, as well as between markets that do not directly share macroeconomic risks. A SPATE OF RECENT FINANCIAL CRISES-the Mexican crisis of 1995, the Asian crisis of 1997 to 1998, the default of the Russian government in August 1998, the sharp depreciation of the real in Brazil in 1999-have been accompanied by episodes of financial markets contagion in which many countries have experienced increases in the volatility and comovement of their financial asset markets on a day-to-day basis. The pattern of contagion has been uneven across both time and countries-with increased volatility and comovement occurring principally during times of financial and exchange rate crises-and with some countries, particularly those with emerging financial markets, having experienced the bulk of the contagion, while countries with more developed markets have remained relatively unscathed. Although heightened financial market volatility is to be expected within countries experiencing financial and exchange rate crises, the pattern of comovement across countries is not easily explained. Some of the increased comovement among countries that compete through trade or share close economic links can be rationalized on the basis of macroeconomic theory, but these theories are less persuasive in accounting for the increased comove

890 citations


ReportDOI
TL;DR: In this article, the authors examined the choice of a monetary-policy rule in a simple macroeconomic model and showed that pure inflation targeting is dangerous in an open economy, because it creates large fluctuations in exchange rates and output.
Abstract: This paper examines the choice of a monetary-policy rule in a simple macroeconomic model. In a closed economy, the optimal policy is a output and inflation. In an open economy, the optimal rule changes in two ways. First, the policy instrument is a Conditions Index the exchange rate. Second, on the right side of the rule, inflation is replaced by filters out the transitory effects of exchange-rate movements. The model also implies that pure inflation targeting is dangerous in an open economy, because it creates large fluctuations in exchange rates and output. Targeting long-run inflation avoids this problem and produces a close approximation to the optimal instrument rule.

839 citations


Posted Content
TL;DR: In this article, the authors examined the choice of a monetary-policy rule in a simple macroeconomic model and showed that pure inflation targeting is dangerous in an open economy, because it creates large fluctuations in exchange rates and output.
Abstract: This paper examines the choice of a monetary-policy rule in a simple macroeconomic model. In a closed economy, the optimal policy is a output and inflation. In an open economy, the optimal rule changes in two ways. First, the policy instrument is a Conditions Index the exchange rate. Second, on the right side of the rule, inflation is replaced by filters out the transitory effects of exchange-rate movements. The model also implies that pure inflation targeting is dangerous in an open economy, because it creates large fluctuations in exchange rates and output. Targeting long-run inflation avoids this problem and produces a close approximation to the optimal instrument rule.

671 citations


Book
13 Jul 1998
TL;DR: Eichengreen analyzes the shift from pegged to floating exchange rates in the 1970s, and ascribes that change to the growing capital mobility that has made pegged rates difficult to maintain this article.
Abstract: The importance of the International Monetary System is evident in the daily news stories about fluctuating currencies and in dramatic events, such as the recent reversals in the Mexican economy. It has become increasingly apparent that one cannot understand the international economy without knowing how its monetary system operates. This volume tells the story of the international financial system over the past 150 years. It is intended not only for economists, but also for a general audience of historians, political scientists, professionals in government and business, and anyone with a broad interest in international economic and political relations. The book demonstrates that insights into the International Monetary System and effective principles for governing it can result only if is seen as a historical phenomenon extending from the gold standard period to interwar instability, then to Bretton Woods and, finally, to the post-1973 period of fluctuating currencies. Eichengreen analyzes the shift from pegged to floating exchange rates in the 1970s, and ascribes that change to the growing capital mobility that has made pegged rates difficult to maintain. However, he shows that capital mobility was also high prior to World War I, yet this did not prevent the maintenance of fixed exchange rates. What was critical for the successful maintenance of fixed exchange rates during that period was the fact that governments were relatively insulated from democratic politics and, thus, from pressure to trade off exchange rate stability for other goals, such as the reduction of unemployment. Today, pegging exchange rates would require very radical reforms of a sort that governments are understandably reluctant to embrace. The implication seems undeniable: floating rates are here to stay. Barry Eichengreen is the author of "Golder Fetters: The Gold Standard and the Great Depression, 1918-1939".

666 citations


Journal ArticleDOI
TL;DR: The authors examined the effects of various policies on foreign direct investment (FDI) flows from the perspective of the "eclectic theory" of international investment, and hence the advantages of foreign ownership, host country location, and internationalization.

648 citations


Journal ArticleDOI
TL;DR: The authors found that a stable link exists between oil price shocks and the US real effective exchange rate over the post-Bretton Woods period, suggesting that oil prices may have been the dominant source of persistent real exchange rate shocks.

505 citations


Journal ArticleDOI
TL;DR: In this article, the authors examined which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance in low and middle-income countries, and found that an exchange rate crash is associated with a fall in output growth and a recovery thereafter.
Abstract: This paper studies large reductions in current account deficits and exchange rate depreciations in low- and middle-income countries. It examines which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance. Both domestic factors, such as the low reserves, and external factors, such as unfavorable terms of trade, are found to trigger reversals and currency crises. The two types of events are, however, distinct; an exchange rate crash is associated with a fall in output growth and a recovery thereafter, while for reversals there is no systematic evidence of a growth slowdown.

443 citations


Posted Content
TL;DR: In this article, a cross-generational framework for analyzing currency crises is proposed, which draws from both the early first-generation work and the more recent second-generation approach, emphasizing the important role of speculators and recognizing that the government's commitment to a fixed exchange rate is constrained by other policy goals.
Abstract: In the 1990s, currency crises in Europe, Mexico and Southeast Asia have drawn worldwide attention to speculative attacks on government-controlled exchange rates. To improve our understanding of these events, researchers have undertaken new theoretical and empirical work. In this paper, we provide some perspective on this work and relate it to earlier research in the area. Then we derive the optimal commitment to a fixed exchange rate and propose a common framework for analyzing currency crises that draws from both the early first-generation work and the more recent second-generation approach. The cross-generational framework stresses the important role of speculators and also recognizes that the government's commitment to a fixed exchange rate is constrained by other policy goals. In the final section we study the crisis prediction literature and find that some crises may be particularly difficult to predict using currently popular methods.

401 citations


ReportDOI
TL;DR: In this paper, the authors examined which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance in low and middle-income countries.
Abstract: This paper studies sharp reductions in current account deficits and large exchange rate depreciations in low- and middle-income countries. It examines which factors help predict the occurrence of a reversal or a currency crisis, and how these events affect macroeconomic performance. It finds that both domestic factors, such as the low reserves, and external factors, such as unfavorable terms of trade and high interest rates in industrial countries, trigger reversals and currency crises. The two types of events are, however, distinct; indeed, current account imbalances are not sharply reduced in the years following a currency crisis. Economic performance around these events is also quite different. An exchange rate crash is associated with a fall in output growth and a recovery thereafter, while for reversal events there is no systematic evidence of a growth slowdown.

375 citations


Journal ArticleDOI
TL;DR: In this paper, the authors report the results of a questionnaire survey conducted in February 1995 on the use by foreign exchange dealers in Hong Kong of fundamental and technical analyses to form their forecasts of exchange rate movements.

Posted Content
TL;DR: This article developed an explicitly stochastic "new open economy macroeconomics" model, which can potentially by used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes.
Abstract: This paper develops an explicitly stochastic "new open economy macroeconomics" model, which can potentially by used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes.

Posted Content
TL;DR: In this paper, Car prices in Europe are characterized by large and persistent differences across countries, with Italy and the United Kingdom systematically representing the most expensive markets, and substantial year-to-year volatility that is, to a large extent, accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations.
Abstract: Car prices in Europe are characterized by large and persistent differences across countries The purpose of this paper is to document and explain this price dispersion Using a panel data set extending from 1980 to 1993, two main facts concerning car prices in Europe are demonstrated: (1) the existence of significant differences in quality adjusted prices across countries, with Italy and the United Kingdom systematically representing the most expensive markets; (2) substantial year-to-year volatility that is, to a large extent, accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations These facts are analysed within the framework of a multi-product oligopoly model with product differentiation The model identifies three potential sources for the international price differences: price elasticities generating differences in mark-ups; costs; and import quota constraints Based on the results we conjecture that EMU will substantially reduce the year-to-year volatility observed in the car price data, but without further measures to increase European integration, it will not completely eliminate existing cross-country price differences

Journal ArticleDOI
TL;DR: This paper examined the conditional heteroscedasticity of the yen-dollar exchange rate and found that the appreciation and depreciation shocks of the Japanese yen against the dollar have similar effects on future volatilities.
Abstract: This paper examines the conditional heteroscedasticity of the yen–dollar exchange rate A model is constructed by extending the asymmetric power autoregressive conditional heteroscedasticity model to a process that is fractionally integrated It is found that, unlike the equity markets, the appreciation and depreciation shocks of the yen against the dollar have similar effects on future volatilities Although the results reject both the stable and the integrated models, our analysis of the response coefficients of the past shocks and the application of the models to the estimation of the capital requirements for trading the currencies show that there are no substantial differences between the fractionally integrated models and the stable models © 1998 John Wiley & Sons, Ltd

Journal ArticleDOI
TL;DR: In this article, the authors studied the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. The direction of the exchange rate response conforms, in general, with a reaction function interpretation whereby reac? tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets.
Abstract: This paper studies the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. By us? ing data sampled at a five-minute frequency, we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post-announcement, although the significance of these effects decreases rapidly as the interval over which the post-announcement change in exchange rates is increased. The direction of the exchange rate response conforms, in general, with a reaction function interpretation whereby reac? tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets. Further, we detect influences of German monetary policy deci? sions on the reaction of the exchange rate, and also differences between U.S. and German announcements in the exchange rate reaction time pattern. I. Introduction This paper studies the high frequency reaction of the DEM/USD exchange rate to macroeconomic information emanating from Germany and the U.S. Specif? ically, we utilize exchange rate data covering the period 1/1/92 to 31/12/94, sam? pled at a five-minute frequency, to investigate how the major monthly macroe? conomic releases from these two countries impact the DEM/USD. The infor? mation contained in announcements over this three-year period is extracted via a set of market expectation series supplied by Money Market Services Interna? tional (MMS).1 Our analysis improves on previous work in this area in two main respects. First, our study is conducted using very high frequency data, whereas most earlier work has used exchange rate data sampled at a frequency of a number of hours or more. This allows us to construct a very precise characterization of

Journal ArticleDOI
TL;DR: In this paper, the effects of the number of input and hidden nodes as well as the size of the training sample on the in-sample and out-of-sample performance were examined.
Abstract: Neural networks have successfully been used for exchange rate forecasting. However, due to a large number of parameters to be estimated empirically, it is not a simple task to select the appropriate neural network architecture for an exchange rate forecasting problem. Researchers often overlook the effect of neural network parameters on the performance of neural network forecasting. This paper examines the effects of the number of input and hidden nodes as well as the size of the training sample on the in-sample and out-of-sample performance. The British pound/US dollar is used for detailed examinations. It is found that neural networks outperform linear models, particularly when the forecast horizon is short. In addition, the number of input nodes has a greater impact on performance than the number of hidden nodes, while a larger number of observations do reduce forecast errors.

Book ChapterDOI
01 Aug 1998
TL;DR: For example, this paper showed that the nominal prices of domestically produced goods tend to adjust far more sluggishly than exchange rates, and that the feedback from monetary nonneutralities to market risks, and instead imposes exogenously the covariances between monetary shocks and consumption levels.
Abstract: Nominal exchange risk is a ubiquitous factor in international economic policy analysis. For example, sudden appreciations of the dollar following financial crises outside the United States often are ascribed to “safe haven” portfolio shifts. The elimination of national currencies in Europe has been rationalized in part by the claim that uncertain exchange rates discourage trade, and thereby hamper the full realization of the gains from removing other obstacles to commodity and asset-market integration. Unfortunately, the analytical underpinnings of such widely discussed phenomena have received scant attention. In analyzing the properties of stochastic general-equilibrium monetary models, researchers typically rely on a certainty equivalence assumption to approximate exact equilibrium relationships. This practice, as Kimball (1995, p. 1243) remarks, “precludes a serious welfare analysis of changes that affect the variance of output.” In the relatively rare cases in which higher moments are considered theoretically, tractability usually has required the assumption of instantaneously flexible commodity prices and wages. That modeling choice not only assumes away much of the real effect of nominal exchange rate uncertainty. It simultaneously precludes discussion of the feedback from monetary nonneutralities to market risks, and instead imposes exogenously the covariances between monetary shocks and consumption levels. And it is unrealistic. There is strong, indeed overwhelming, empirical evidence that the nominal prices of domestically produced goods tend to adjust far more sluggishly than exchange rates.

Book ChapterDOI
TL;DR: The interpretation of the recent crisis in Korea remains highly controversial as mentioned in this paper, and three issues have been especially controversial in the debate: financial liberalization, industrial policy, and corporate governance.
Abstract: As the interpretation of its economic ‘miracle’ has been, so the interpretation of the recent crisis in Korea remains highly controversial.1 Although there are many important issues which have been raised by the Korean crisis, such as exchange rate policy, labour market policy, and the architecture of the international financial system (Chang, 1998a), three issues have been especially controversial in the debate: financial liberalization, industrial policy and corporate governance.

Journal ArticleDOI
TL;DR: This paper used a rich new dataset of option prices on the dollar-mark, dollar-yen, and key EMS cross-rates to extract the entire risk-neutral probability density function (pdf) over horizons of 1 and 3 months.

Posted Content
TL;DR: In this paper, the effects of exchange rate volatility on bilateral trade flows are analyzed through use of a gravity model and panel data from western Europe, and the results seem to be robust with respect to the particular measures representing exchange rate uncertainty.
Abstract: This paper analyzes the effects of exchange rate volatility on bilateral trade flows. Through use of a gravity model and panel data from western Europe, exchange rate uncertainty is found to have a negative effect on international trade. The results seem to be robust with respect to the particular measures representing exchange rate uncertainty. Particular attention is reserved for problems of simultaneous causality. The negative correlation between trade and bilateral volatility remains significant after controlling for the simultaneity bias. However, a Hausman test rejects the hypothesis of the absence of simultaneous causality.

ReportDOI
TL;DR: In this article, the authors argue that the 1997-98 Asian financial crisis was a consequence of international illiquidity, which is defined as a country's potential short-term obligations in foreign currency exceeding the amount of foreign currency it can have access to in short notice.
Abstract: A country's financial system is internationally illiquid if its potential short term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition may be crucial for the existence of financial crises and/or exchange rate collapses (Chang and Velasco 1998a, b). In this paper we argue that the 1997-98 crises in Asia were in fact a consequence of international illiquidity. This follows from an analysis of empirical indicators of illiquidity as well as other macroeconomic statistics. We trace the emergence of illiquidity to financial liberalization, the shortening of the foreign debt structure, and the currency denomination of assets versus liabilities. We explain how financial crises became exchange rate collapses due to a government policy of both fixing exchange rates and acting as lender of last resort. Finally, we outline the policy implications of our view for both preventing crises and dealing with them.

BookDOI
TL;DR: The IMF's internal analysis of exchange rate issues has been guided by, and limited by, the conceptual and empirical frameworks that have emerged from the collective research of the economics profession.
Abstract: The IMF's internal analysis of exchange rate issues has been guided by, and limited by, the conceptual and empirical frameworks that have emerged from the collective research of the economics profession. The research has provided several general approaches that are useful for assessing whether countries exchange rates seem broadly appropriate. One involves the calculation of purchasing power-party (PPP) measure or international competitiveness indicators. A second, known as the macroeconomic balance framework, focuses on the extent to which prevailing exchange rates and policies are consistent with simultaneous internal and external equilibrium over the medium run. Some recent extensions of the macroeconomic balance approach and the manner in which it is applied by the IMF staff are described in this paper.

Journal ArticleDOI
TL;DR: The authors show that OCA considerations affect exchange market pressures and intervention in different ways, while intervention largely reflects the variables pointed to by OCA theory that cause countries to value stable exchange rates (small size and the extent of trade links).

Journal ArticleDOI
TL;DR: The authors apply a test where the null hypothesis is violated only when all series are stationary, and reject non-stationarity for real dollar rates for real exchange rate series with respect to a single series.

Journal ArticleDOI
TL;DR: In this paper, the effect of real exchange rate changes on a multinational firm and a global competitor is discussed and evaluated using a sample of automotive firms from the U.S., Japan and Germany.
Abstract: Financial theory predicts that a change in the real exchange rate should affect the value of a multinational firm. To a large extent, past empirical research has not supported this theory. This study discusses and evaluates the effect of real exchange rate changes on a multinational firm and a global competitor and incorporates the effect of industry competition on the relation between exchange rates and firm value. In order to better test the hypothesis and address the shortcomings of previous studies, tests are conducted using a sample of automotive firms from the U.S., Japan and Germany. The analysis is done at the country specific portfolio level as well as the firm specific level. Consistent with the hypothesis, I find significant rate exposure to exchange rate shocks. Moreover, there is evidence of time variation in exchange rate exposure which is consistent with a change in the competitive environment within the industry. Finally, evidence is presented that is consistent with the hedging value of a firm producing in the export market, but only after production exceeds a certain level of sales in the export market.

Book ChapterDOI
TL;DR: For the recent floating period weak-form purchasing power parity (PPP) would seem to hold on a single currency basis, but strong-form PPP does not as mentioned in this paper.

01 Jan 1998
TL;DR: In this article, the authors extended previous analysis of closed-economy in-policy targeting to a small open economy with forward-looking aggregate supply and demand with some microfoundations, and with stylized realistic lags in the dierent transmission channels for monetary policy.
Abstract: The paper extends previous analysis of closed-economy in‡ation targeting to a small open economy with forward-looking aggregate supply and demand with some microfoundations, and with stylized realistic lags in the dierent transmission channels for monetary policy. The paper compares targeting of CPI and domestic in‡ation, strict and ‡exible in‡ation targeting, and in‡ation-targeting reaction functions and the Taylor rule. The optimal monetary policy response to several dierent shocks is examined. Flexible CPI-in‡ation targeting stands out as successful in limiting not only the variability of CPI in‡ation but also the variability of the output gap and the real exchange rate. Somewhat counter to conventional wisdom, negative productivity supply shocks and positive demand shocks have similar eects on in‡ation and the output gap, and induce similar monetary policy responses. The model gives limited support for a so-called monetary conditions index, MCI, of the monetary-policy impact on aggregate demand, but the impact on in‡ation is too complex to be captured by any single index. The index diers from currently used indices in combing (1) a long rather than a short real interest rate with the real exchange rate and (2) expected future values rather than current values. Because of (2), the index is not directly observable and veri…able to external observers. JEL Classi…cation: E52, E58, F41.

Posted Content
TL;DR: In this paper, the long-horizon regressions were used to test UIP using interest rates on longer-maturity bonds for the G-7 countries, and they showed that long-term regressions yield much more support for UIP.
Abstract: Uncovered interest parity (UIP) has been almost universally rejected in studies of exchange rate movements, although there is little consensus on why it fails. In contrast to previous studies, which have used relatively short-horizon data, we test UIP using interest rates on longer-maturity bonds for the G-7 countries. These long-horizon regressions yield much more support for UIP -- all the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to the zero coefficient implied by the random walk hypothesis. We then use a small macroeconomic model to explain the differences between the short- and long-horizon results. Regressions run on data generated by stochastic simulations replicate the important regularities in the actual data, including the sharp differences between short- and long-horizon parameters. In the short run from risk premium shocks in the face of endogenous monetary policy. In the long run, in contrast, exchange rate movements are driven by the "fundamentals," leading to a relationship between interest rates and exchange rates that is more consistent with UIP.

Book
12 Aug 1998
TL;DR: In a world of increasing capital mobility and broadening and more diversified trade, many developing and transition economies are likely to find it desirable to move from relatively fixed exchange rate regimes to regimes of greater exchange rate flexibility as mentioned in this paper.
Abstract: In a world of increasing capital mobility and broadening and more diversified trade, many (but not all) developing and transition economies are likely to find it desirable to move from relatively fixed exchange rate regimes to regimes of greater exchange rate flexibility. This paper suggests why, and considers strategies that countries may consider for such a move. It reinforces this discussion with a review of experience from teh past two decades with alternative exchange rate regimes. The paper also identifies policies that can facilitate the transition to greater exchange rate flexibility for countries that wish to pursue this option.

Posted Content
TL;DR: In this paper, the authors argue that the 1997-98 Asian financial crisis was a consequence of international illiquidity, which is defined as a country's potential short-term obligations in foreign currency exceeding the amount of foreign currency it can have access to in short notice.
Abstract: A country's financial system is internationally illiquid if its potential short-term obligations in foreign currency exceed the amount of foreign currency it can have access to in short notice. This condition may be necessary and sufficient for financial crises and/or exchange rate collapses (Chang and Velasco 1998a, b). In this paper we argue that the 1997-98 crises in Asia were in fact a consequence of international illiquidity. This follows from an analysis of empirical indicators of illiquidity as well as other macroeconomic statistics. We trace the emergence of illiquidity to financial liberalization, the shortening of the foreign debt structure, and the currency denomination of assets versus liabilities. We explain how financial crises became exchange rate collapses due to a government policy of both fixing exchange rates and acting as lender of last resort. Finally, we outline the policy implications of our view for preventing crises and for dealing with them.