Showing papers on "Exchange rate published in 2000"
TL;DR: In this paper, the authors explain the extent of exchange rate depreciation and stock market decline better than do standard macroeconomic measures using measures of corporate governance, particularly the effectiveness of protection for minority shareholders.
1,842 citations
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TL;DR: This article analyzed the behavior of exchange rates, reserves, monetary aggregates, interest rates, and commodity prices across 154 exchange rate arrangements to assess whether official labels' provide an adequate representation of actual country practice.
Abstract: In recent years, many countries have suffered severe financial crises, producing a staggering toll on their economies, particularly in emerging markets. One view blames fixed exchange rates-- soft pegs'--for these meltdowns. Adherents to that view advise countries to allow their currency to float. We analyze the behavior of exchange rates, reserves, the monetary aggregates, interest rates, and commodity prices across 154 exchange rate arrangements to assess whether official labels' provide an adequate representation of actual country practice. We find that, countries that say they allow their exchange rate to float mostly do not--there seems to be an epidemic case of fear of floating.' Since countries that are classified as having a free or a managed float mostly resemble noncredible pegs--the so-called demise of fixed exchange rates' is a myth--the fear of floating is pervasive, even among some of the developed countries. We present an analytical framework that helps to understand why there is fear of floating.
1,433 citations
TL;DR: This paper analyzed the adjustment dynamics of real exchange rates through impulse response analysis and found that the dynamic response pattern suggests that the shock response is initially amplified before dissipating and that such non-monotonic dynamics can contribute to more than one-third of the observed persistence of the real exchange rate.
1,390 citations
TL;DR: This paper used a structural VAR approach with non-recursive contemporaneous restrictions and identified monetary policy shocks by modeling the reaction function of the monetary authorities and the structure of the economy.
940 citations
TL;DR: In this paper, the authors developed a general equilibrium exchange rate model consistent with the weak empirical evidence supporting the law of one price, where firms segment markets by country, and set prices in local currency of sale, referred to as pricing-to-market (PTM).
794 citations
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TL;DR: This paper studied the relationship among exchange rates, balance sheets, and macroeconomic outcomes in a small open economy and showed that the impact of an adverse foreign shock can be strongly magnified by the balance sheet effect of the associated real devaluation.
Abstract: We study the relation among exchange rates, balance sheets, and macroeconomic outcomes in a small open economy. Because liabilities are dollarized,' a real devaluation has detrimental effects on entreprenurial net worth, which in turn constrains investment due to financial frictions. But there is an offsetting effect, int hat devaluation expands home output and the return to domestic investment, which are also components of net worth. We show that the impact of an adverse foreign shock can be strongly magnified by the balance sheet effect of the associated real devaluation. But the fall in output employment, and investment is stronger under fixed exchange rates than under flexible rates. Hence the conventional wisdom, that flexible exchange rates are better absorbers of real foreign shocks than are fixed rates, holds in spite of potentially large balance sheet effects.
780 citations
TL;DR: In this article, the authors examined the magnitude and changing nature of volatility spillovers from Japan and the US to six Pacific-Basin equity markets and constructed a volatility spillover model which allowed the unexpected return of any particular Pacific-basin market be driven by a local idiosyncratic shock, a regional shock from Japan, and a global shock from the US.
728 citations
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TL;DR: In this article, the authors show that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty-five years.
Abstract: The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty-five years Our approach elucidates J McCallum's home bias in trade puzzle, the Feldstein-Horioka saving-investment puzzle, the French-Poterba equity home bias puzzle, and the Backus-Kehoe- Kydland consumption correlations puzzle That one simple alteration to an otherwise canonical international macroeconomic model can help substantially to explain such a broad arrange of empirical puzzles, including some that previously seemed intractable, suggests a rich area for future research We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by Rogoff, and what we term the exchange-rate disconnect puzzle' The latter category of riddles includes both the Meese-Rogoff exchange rate forecasting puzzle and the Baxter-Stockman neutrality of exchange rate regime puzzle Here although many elements need to be added to our extremely simple model, we can still show that trade costs play an essential role
604 citations
TL;DR: In this article, the co-incidence of extreme return shocks across countries within a region and across regions that cannot be explained by linear propagation models of shocks is measured using a multinomial logistic regression model.
Abstract: This paper proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the co-incidence of extreme return shocks across countries within a region and across regions that cannot be explained by linear propagation models of shocks. We characterize the extent of contagion, its economic significance, and its determinants using a multinomial logistic regression model. Applying our approach to daily returns of emerging markets during the 1990s, we find that contagion, when measured by the co-incidence within and across regions of extreme return shocks, is predictable and depends on regional interest rates, exchange rate changes, and conditional stock return volatility. Evidence that contagion is stronger for extreme negative returns than for extreme positive returns is mixed.
577 citations
TL;DR: In this article, the authors estimate nonlinear time-series models of the deviations of the dollar-sterling and dollar-mark exchange rates from the level suggested by simple monetary fundamentals over the recent floating rate period.
521 citations
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TL;DR: The authors investigated purchasing power parity (PPP) since the late nineteenth century and found that episodes of floating exchange rates have generally been associated with larger deviations from PPP, as expected; this result is not attributable to significantly greater persistence (longer half-life) of deviations in such regimes, but is due to the larger shocks to the real-exchange rate process in such episodes.
Abstract: This paper investigates purchasing-power parity (PPP) since the late nineteenth century. I collected data for a group of twenty countries over one hundred years, a larger historical panel of annual data than has ever been studied before. The evidence for long-run PPP is favorable using recent multivariate and univariate tests of higher power. Residual variance analysis shows that episodes of floating exchange rates have generally been associated with larger deviations from PPP, as expected; this result is not attributable to significantly greater persistence (longer halflives) of deviations in such regimes, but is due to the larger shocks to the real-exchange rate process in such episodes. In the course of the twentieth century there was relatively little change in the capacity of international market integration to smooth out real exchange rate shocks. Instead, changes in the size of shocks depended on the political economy of monetary and exchange-rate regime choice under the constraints imposed by the trilemma.
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TL;DR: Williamson as mentioned in this paper argues that although there is some truth in the allegation that intermediate regimes are vulnerable to speculative crises, they still offer offsetting advantages and also argues that it would be possible to redesign them to be more flexible so as to reduce their vulnerability to crises.
Abstract: In the aftermath of the Asian/global financial crises of 1997-98, howshould emerging markets now structure their exchange rate systemsto prevent new crises from occurring? This study challengescurrent orthodoxy by advocating the revival of intermediate exchangerate regimes. In so doing, Williamson presents a reasoned challenge tothe new prevailing attitude that claims that all countries involved in the international capital markets need to polarize to one of the extreme regimes (to a fixed rate with either a currency board or dollarization, or to a lightly-managed float). He concludes that although there is some truth in the allegation that intermediate regimes are vulnerable to speculative crises, they still offer offsetting advantages. He also contends that it would be possible to redesign them to be more flexible so as to reduce their vulnerability to crises.
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TL;DR: In this paper, the authors exploit a three-dimensional panel data set of prices on 27 traded goods, over 88 quarters, across 96 cities in the U.S. and Japan, and show that a simple average of good-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices.
Abstract: This paper exploits a three-dimensional panel data set of prices on 27 traded goods, over 88 quarters, across 96 cities in the U.S. and Japan. We show that a simple average of good-level real exchange rates tracks the nominal exchange rate well, suggesting strong evidence of sticky prices. Focusing on dispersion in prices between city-pairs, we find that crossing the U.S.-Japan Border' is equivalent to adding as much as 43,000 trillion miles to the cross-country volatility of relative prices. We turn next to economic explanations for this so-called border effect and to its dynamics. Distance, unit-shipping costs, and exchange rate variability, collectively, explain a substantial portion of the observed international market segmentation. Relative wage variability, on the other hand, has little independent impact on segmentation.
TL;DR: In this paper, a stylized model that imposes uncovered interest rate parity (UIP) and allows the daily spot exchange rate to possess very persistent volatility is presented, and the model is calibrated around realistic parameter values for daily returns and the anomalous regressions with monthly data are found to be centered around unity, but are very widely dispersed, and converge to the true value of unity at a very slow rate.
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TL;DR: In this article, the authors present evidence that EMs are very different from developed economies in key dimensions that play a key role when it comes to the choice of exchange rate regime.
Abstract: The Asian crisis took place against a background of exchange rate regimes that were characterized as soft pegs. This has led many analysts to conclude that “the peg did it” and that emerging markets (EMs) should “just say no” to pegged exchange rates. We present evidence that EMs are very different from developed economies in key dimensions that play a key role when it comes to the choice of exchange rate regime--floating for EMs is no panacea. In EMs currency crashes are contractionary, the adjustments in the current account are far more acute. Credibility and market access, as captured in the behavior of credit ratings and interest rates, is adversely affected by devaluations or depreciations. Exchange rate volatility is more damaging to trade and the passthrough from exchange rate swings to inflation is far higher in EMs. These differences between emerging and developed economies may explain EMs reluctance to tolerate large exchange rate movements. In a simple framework we illustrate why large exchange rate swings are feared when access to international credit may be lost.
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01 Jan 2000TL;DR: The authors examines the consequences of heightened capital mobility and of the integration of developing economies in increasingly globalized markets for the exchange rate regimes of the industrial, developing, and transition economies, consistent with the IMF's role of surveillance over its members' exchange rate policies.
Abstract: This paper examines the consequences of heightened capital mobility and of the integration of developing economies in increasingly globalized markets for the exchange rate regimes of the industrial, developing, and transition economies. It builds upon previous studies by IMF staff on various aspects of the exchange rate arrangements of member countries, consistent with the IMF's role of surveillance over its members' exchange rate policies.
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TL;DR: This article analyzed the behavior of exchange rates, reserves, monetary aggregates, interest rates, and commodity prices across 154 exchange rate arrangements to assess whether official labels' provide an adequate representation of actual country practice.
Abstract: In recent years, many countries have suffered severe financial crises, producing a staggering toll on their economies, particularly in emerging markets. One view blames fixed exchange rates-- soft pegs'--for these meltdowns. Adherents to that view advise countries to allow their currency to float. We analyze the behavior of exchange rates, reserves, the monetary aggregates, interest rates, and commodity prices across 154 exchange rate arrangements to assess whether official labels' provide an adequate representation of actual country practice. We find that, countries that say they allow their exchange rate to float mostly do not--there seems to be an epidemic case of fear of floating.' Since countries that are classified as having a free or a managed float mostly resemble noncredible pegs--the so-called demise of fixed exchange rates' is a myth--the fear of floating is pervasive, even among some of the developed countries. We present an analytical framework that helps to understand why there is fear of floating.
TL;DR: The authors showed that unit root and cointegration tests with a nominal size of 5% have true sizes that range from 0.90 to 0.99 in 100-year long data series, even though there is a permanent component that accounts for 42% of the real exchange rate.
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TL;DR: In this article, the authors used a sample of 75 emerging markets in 1975-1997 to determine what we know about banking crises by establishing which previous results are robust, i.e., rapid domestic credit growth, large bank liabilities relative to reserves, and deposit-rate decontrol.
Abstract: The existing empirical literature on banking crises has not produced agreement on their causes. Using a sample of 75 emerging markets in 1975-1997, we attempt to determine what we know about banking crises by establishing which previous results are robust. Among the robust causes of emerging-market banking crises are rapid domestic credit growth, large bank liabilities relative to reserves, and deposit-rate decontrol. On the other hand, there is no compelling evidence of any particular relationship between exchange rate regimes and crises. Finally, the evidence that deposit insurance or a weak institutional environment heighten crisis risk appears to be fragile.
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TL;DR: In this article, the relationship between international payments and the real exchange rate is studied and a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject.
Abstract: The relationship between international payments and the real exchange rate--the transfer problem--is a classic question in international economics. We use new data on countries' net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.
TL;DR: The authors empirically studied the sensitivity of local interest rates to international interest rates and how that sensitivity is affected by a country's choice of exchange rate regime, finding that interest rates are typically lower in economies with fixed exchange rates than in those with flexible exchange rates.
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30 Jun 2000
TL;DR: In this article, the authors provide an overview of the main drivers of economic growth, including consumption, saving, investment, and investment in the financial system, money demand, and monetary policy.
Abstract: Introduction and Overview Consumption, Saving, and Investment The Financial System, Money Demand, and Monetary Policy Fiscal Deficits, Public Debt, and the Current Account Exchange Rate Regimes, Credibility, and Exchange Rate Adjustment Inflation and Disinflation Capital Inflows: Causes and Policy Responses Currency Crises and Financial Volatility Aggregate Accounts, Budget Constraints, and Model Consistency Policy Tools for Macroeconomic Analysis Growth, Poverty, and Income Distribution: Some Basic Facts Growth and Technological Progress: The Solow-Swan Model Knowledge, Human Capital, and Endogenous Growth The Determinants of Economic Growth: An Empirical Overview Structural Adjustment: Agriculture, Trade, and the Labor Market Fiscal and Financial Sector Reforms Adjustment and External Debt in Low-Income Countries Sequencing, Gradualism, and the Political Economy of Adjustment Annex A: The Information Sector and the Urban Labor Market Annex B: Informal Financial Markets Annex C: Exchange Market Unification References Index of Names Index of Subjects
TL;DR: The authors developed a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare and found that trade is unaffected by the exchange-rate system, consistent with most evidence.
Abstract: We develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare. An important feature of the model is deviations from purchasing power parity, caused by rigid price setting in buyers' currency. We find the following. First, exchange rate stability is not necessarily associated with more trade.In a simple benchmark model with separable preferences and only monetary shocks, trade is unaffected by the exchange rate system, consistent with most evidence. Second, both trade and welfare can be higher under either exchange rate system, depending on preferences and on the monetary policy rules followed under each system. Finally, in general there is no one-to-one relationship between the levels of trade and welfare across exchange rate systems.
TL;DR: In this article, the authors have tested for volatility spillovers between stock returns and exchange rate changes for six countries, namely the US, the UK, Japan, Germany, Canada and France.
Abstract: In this paper, we have tested for volatility spillovers between stock returns and exchange rate changes for six countries, namely the US, the UK, Japan, Germany, Canada and France. Our findings can be summarised as follows. (a) Evidence of spillovers from stock returns to exchange rate changes is found for all countries except Germany. These results suggest that the asset approach to exchange rate determination is valid when formulated in terms of the second moments of the exchange rate distribution for these countries. (b) The spillovers from stock returns to exchange rate changes are symmetric in nature. (c) Volatility spillovers from exchange rate changes to stock returns are insignificant for all countries. The non-presence of spillovers from exchange rate changes to stock returns is in line with previous research which has focused on the first moments of the relevant distributions. (d) The correlation coefficient between the EGARCH filtered stock returns and exchange rate changes is negative and significant for all countries, indicating that there is a significant contemporaneous relationship between stock returns and exchange rate changes. (e) Volatility spillovers from stock returns spillovers to exchange rates have increased since the October 1987 crash, perhaps because financial markets have become more closely integrated during this period. © Blackwell Publishers Ltd. 2000.
TL;DR: In this article, the authors compare currency boards, fixed rate and flexible rates, with and without a lender of last resort, in an open economy model in which banks are maturity transformers as in Diamond-Dybvig.
TL;DR: This paper examined the dynamics of current account adjustment among industrial countries and identified 25 episodes in which there was a sustained improvement in the current account following a large deficit between 1980 and 1997, and found that a typical current account reversal begins when the current-account deficit is about 5% of GDP.
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TL;DR: The authors reviewed developments in the theory of international monetary economics from the late 1960's through the early 1980's and reviewed the more modern analysis of the dynamics of balance of payments adjustment under fixed exchange rates and of exchange rate determination under flexible exchange rates.
Abstract: This paper, written as a chapter for a Handbook of International Economics, reviews developments in the theory of international monetary economics from the late 1960's through the early 1980's. Following a review of the operation of the monetary mechanism of balance of payments adjustment in the context of the Mundell-Fleming model, the paper reviews the more modern analysis of the dynamics of balance of payments adjustment under fixed exchange rates and of exchange rate determination under flexible exchange rates. Beginning with a simple exposition of the monetary mechanism, the model is then extended to incorporate sluggish wage and output adjustments, endogenous monetary policy and sterilization operations, multiplicity of tradable and nontradable goods, large countries, capital mobility and portfolio balance. The review then turns to an exposition of exchange rate theory, starting with the monetary approach to exchange rate determination. Issues discussed in this context include purchasing power parities, nontraded goods, the real exchange rate, currency substitution and the interaction between real and monetary factors in effecting exchange rates.The paper proceeds with a presentation of a more general framework that views the question of exchange rate determination as part of the general theory of the determination of asset prices, and which highlights the unique role of expectations. The general framework is then applied to characterize the interaction between the balance of payments and the equilibrium real exchange rate.The paper concludes with a brief discussion of some empirical issues of exchange rate analysis.
TL;DR: A survey of practitioners in the interbank foreign exchange markets in Hong Kong, Tokyo, and Singapore was conducted by as mentioned in this paper, who found that liquidity and market uncertainty are two important reasons for deviating from the conventional interbank bid-ask spread.
TL;DR: In this article, the authors disentangle the possible factors underlying this correlation and determine whether a positive long-run effect of real depreciation on output is in the data and conclude that even after sources of spurious correlation and reverse causation are controlled for, real devaluation has led to high inflation and economic contraction.
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TL;DR: In this paper, the authors present a critical overview of differnt methods of constructing an equilibrium exchange rate and disccused the internal-external balance approach to define an equilibrium real exchange rate.
Abstract: In this paper we present a critical overview of differnt methods of constructing an equilibrium exchange rate The recent literature on purchasing power parity (PPP) indicates that on its own PPP is not a good vehicle for defining an equilibrium exchange rate Rather, we argue that the latter can only be recover from a model in which the real determinants of exchange rates are explicitly modelled The advantages and disadvantages of various such models are discussed In particular, the internal-external balance approach to defining an equilibrium real exchange rate is disccused, and this method is compared to the so-called behavioural equilibrium approach Finally, an approach which uses purely time series methods to construct an equilibrium exchange rate is also discussed