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Showing papers on "Exchange rate published in 2004"


Journal ArticleDOI
TL;DR: This article developed a novel system of reclassifying historical exchange rate regimes and employed monthly data on market-determined parallel exchange rates going back to 1946 for 153 countries, and showed that the breakup of Bretton-woods had less impact on exchange rate regime than is popularly believed.
Abstract: We develop a novel system of reclassifying historical exchange rate regimes. One key difference between our study and previous classifications is that we employ monthly data on market-determined parallel exchange rates going back to 1946 for 153 countries. Our approach differs from the IMF official classification (which we show to be only a little better than random), it also differs radically from all previous attempts at historical reclassification. Our classification points to a rethinking of economic performance under alternative exchange rate regimes. Indeed, the breakup of Bretton Woods had less impact on exchange rate regimes than is popularly believed.

1,544 citations


Posted Content
TL;DR: In this article, a new model of the link between expanding trade and rising wage inequality in developing countries, and investigates its causal implications in a newly constructed panel of Mexican manufacturing establishments.
Abstract: This paper proposes a new model of the link between expanding trade and rising wage inequality in developing countries, and investigates its causal implications in a newly constructed panel of Mexican manufacturing establishments. In a theoretical setting with heterogeneous rms and quality dierentiation, only the most productive rms in a developing country like Mexico enter the export market, and they produce a better-quality good for export than for the domestic market in order to appeal to richer developed-country consumers. Producing high-quality goods requires paying high wages both to white-collar and to blue-collar { but especially to white-collar { employees. An increase in the incentive for developing-country producers to export generates dierential quality upgrading within industries, as more-productive rms increase exports and produce a greater share of high-quality goods, while less-productive rms remain focused on the domestic market. This process raises wage inequality both between rms and within the rms that upgrade. The empirical part of the paper uses a major exchange rate shock { the Mexican peso crisis of late 1994 { to test this causal mechanism. I nd robust evidence that during the years of the crisis initially more-productive plants increased both white-collar and blue-collar wages and increased the relative wage of white-collar workers as compared to initially less-productive plants. This pattern is absent in the periods before or after the crisis years. The results thus provide strong support for the hypothesis that dierential quality upgrading induced by the exchange rate shock contributed to the increase in wage inequality in Mexico in the mid-1990s.

1,254 citations


Posted Content
TL;DR: The authors provide cross-country and time series evidence on the extent of exchange rate pass-through into the import prices of 25 OECD countries, and conclude that macroeconomic variables have played only a minor role in accounting for the evolution of OECD passthrough over time.
Abstract: We provide cross-country and time series evidence on the extent of exchange rate pass-through into the import prices of 25 OECD countries. Across the OECD and especially within manufacturing industries, we find compelling evidence of partial pass-through in the short run, rejecting both producer-currency pricing and local currency pricing. Over the long run, producer-currency pricing is more prevalent for many types of imported goods. We show that many countries have experienced changes in exchange rate pass-through over the past decades. While we find that countries with higher rates of exchange rate volatility are also those with higher pass-through elasticities, we also conclude that macroeconomic variables have played only a minor role in accounting for the evolution of OECD pass-through over time. Far more important for pass-through changes have been the dramatic shifts in the composition of country import bundles.

1,078 citations


Journal ArticleDOI
TL;DR: In this article, the authors classify countries as pegged or non-pegged and examine whether a pegged country must follow the interest rate changes in the base country more than nonpegs.
Abstract: To investigate how a fixed exchange rate affects monetary policy, this paper classifies countries as pegged or nonpegged and examines whether a pegged country must follow the interest rate changes in the base country. Despite recent research which hints that all countries, not just pegged countries, lack monetary freedom, the evidence shows that pegs follow base country interest rates more than nonpegs. This study uses actual behavior, not declared status, for regime classification; expands the sample including base currencies other than the dollar; examines the impact of capital controls, as well as other control variables; considers the time series properties of the data carefully; and uses cointegration and other levels-relationship analysis to provide additional insights.

754 citations


Journal ArticleDOI
TL;DR: In this paper, the authors empirically examined the impact of tourism on the long-run economic growth of Greece by using causality analysis of real gross domestic product, real effective exchange rate and international tourism earnings.
Abstract: This paper empirically examines the impact of tourism on the long-run economic growth of Greece by using causality analysis of real gross domestic product, real effective exchange rate and international tourism earnings A Multivariate Auto Regressive (VAR) model is applied for the period 1960:I-2000:IV The results of co-integration analysis suggest that there is one co-integrated vector among real gross domestic product, real effective exchange rate and international tourism earnings Granger causality tests based on Error Correction Models (ECMs), have indicated that there is a ‘strong Granger causal’ relationship between international tourism earnings and economic growth, a ‘strong causal’ relationship between real exchange rate and economic growth, and simply ‘causal’ relationships between economic growth and international tourism earnings and between real exchange rate and international tourism earnings

670 citations


Posted Content
TL;DR: In this paper, the authors analyzed the empirical characteristics of sudden stops in capital flows and the relevance of balance-sheet effects in the likelihood of their occurrence, finding that large real exchange rate fluctuations accompanied by sudden stops are basically an emerging market phenomenon.
Abstract: Using a sample of 32 developed and developing countries we analyze the empirical characteristics of Sudden Stops in capital flows and the relevance of balance-sheet effects in the likelihood of their occurrence. We find that large real exchange rate (RER) fluctuations accompanied by Sudden Stops are basically an emerging market (EM) phenomenon. Sudden Stops seem to come in bunches, grouping together countries that are different in many respects. However, countries are similar in that they remain vulnerable to large RER fluctuations. This may be the case because countries are forced to make large adjustments in the absorption of tradable goods, and/or because the size of dollar liabilities in the banking system (i. e. , domestic liability dollarization, or DLD) is large. Openness, understood as a large supply of tradable goods that reduces leverage over the current account deficit, in combination with DLD, is a key determinant of the probability of Sudden Stops. The relationship between Openness and DLD in the determination of the probability of Sudden Stops is highly non-linear, implying that the interaction of high current account leverage and high dollarization may be a dangerous cocktail.

591 citations


Journal ArticleDOI
TL;DR: In this paper, the impact of workers' remittances on the real exchange rate using a panel of 13 Latin American and Caribbean countries was analyzed and it was shown that remittance has the potential to inflict economic costs on the export sector of receiving countries by reducing its international competitiveness.

543 citations


Journal ArticleDOI
TL;DR: The authors examined whether the real exchange rates of commodity-exporting countries and the real prices of their commodity exports move together over time using International Monetary Fund (IMF) data on the world prices of 44 commodities and national commodity export shares.

401 citations


Posted ContentDOI
01 Jan 2004
TL;DR: In this article, the authors used long-term data to test UIP using interest rates on longer-maturity bonds for the Group of Seven countries and found that the long-horizon regressions yield much more support for UIP-all of the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to zero.
Abstract: Uncovered interest parity (UIP) has been almost universally rejected in studies of exchange rate movements. In contrast to previous studies, which have used short-horizon data, we test UIP using interest rates on longer-maturity bonds for the Group of Seven countries. These long-horizon regressions yield much more support for UIP-all of the coefficients on interest differentials are of the correct sign, and almost all are closer to the UIP value of unity than to zero. We then use a macroeconomic model to explain the differences between the short- and long-horizon results. Regressions run on model-generated data replicate the important regularities in the actual data, including the sharp differences between short- and long-horizon parameters. In the short run, the failure of UIP results from the interaction of stochastic exchange market shocks with endogenous monetary policy reactions. In the long run, in contrast, exchange rate movements are driven by the "fundamental," leading to a relationship between interest rates and exchange rates that is more consistent with UIP.

401 citations


Posted Content
TL;DR: In this article, the authors analyzed the empirical characteristics of sudden stops in capital flows and the relevance of balance sheet effects in the likelihood of their materialization, finding that large real exchange rate fluctuations coming hand in hand with sudden stops are basically an emerging market (EM) phenomenon.
Abstract: Using a sample of 32 developed and developing countries we analyze the empirical characteristics of Sudden Stops in capital flows and the relevance of balance sheet effects in the likelihood of their materialization. We find that large real exchange rate (RER) fluctuations coming hand in hand with Sudden Stops are basically an emerging market (EM) phenomenon. Sudden Stops seem to come in bunches, grouping together countries that are different in many respects. However, countries are similar in that they remain vulnerable to large RER fluctuations - be it because they could be forced to large adjustments in the absorption of tradable goods, and/or because the size of dollar liabilities in the banking system (i.e., domestic liability dollarization, or DLD) is high. Openness, understood as a large supply of tradable goods that reduces leverage over the current account deficit, coupled with DLD, are key determinants of the probability of Sudden Stops. The relationship between Openness and DLD in the determination of the probability of Sudden Stops is highly non-linear, implying that the interaction of high current account leverage and high dollarization may be a dangerous cocktail.

395 citations


Posted Content
TL;DR: In this article, the response of U.S., German and British stock, bond and foreign exchange markets to real-time macroeconomic news is analyzed based on a unique data set of high-frequency futures returns for each of the markets.
Abstract: We characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. Our analysis is based on a unique data set of high-frequency futures returns for each of the markets. We find that news surprises produce conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. The details of the linkages are particularly intriguing as regards equity markets. We show that equity markets react differently to the same news depending on the state of the economy, with bad news having a positive impact during expansions and the traditionally-expected negative impact during recessions. We rationalize this by temporal variation in the competing "cash flow" and "discount rate" effects for equity valuation. This finding helps explain the time-varying correlation between stock and bond returns, and the relatively small equity market news effect when averaged across expansions and recessions. Lastly, relying on the pronounced heteroskedasticity in the high-frequency data, we document important contemporaneous linkages across all markets and countries over-and-above the direct news announcement effects.

Journal ArticleDOI
TL;DR: The authors argue that the normal evolution of the international monetary system involves the emergence of a periphery for which the development strategy is export-led growth supported by undervalued exchange rates, capital controls and official capital outflows in the form of accumulation of reserve asset claims on the centre country.
Abstract: The economic emergence of a fixed exchange rate periphery in Asia has re-established the United States as the centre country in the Bretton Woods international monetary system. We argue that the normal evolution of the international monetary system involves the emergence of a periphery for which the development strategy is export-led growth supported by undervalued exchange rates, capital controls and official capital outflows in the form of accumulation of reserve asset claims on the centre country. The success of this strategy in fostering economic growth allows the periphery to graduate to the centre. Financial liberalization, in turn, requires floating exchange rates among the centre countries. But there is a line of countries waiting to follow the Europe of the 1950s/60s and Asia today, sufficient to keep the system intact for the foreseeable future. Copyright # 2004 John Wiley & Sons, Ltd. JEL CODE: F02; F32; F33

Journal ArticleDOI
TL;DR: In this article, the authors used a post-Bretton Woods sample (1973-96) of 75 developing countries to assess whether the responses of real GDP, real exchange rates, and prices to terms-of-trade shocks differ systematically across exchange rate regimes.

Journal ArticleDOI
TL;DR: In this paper, the authors considered the relationship between tourism and economic growth for Latin American countries since 1985 until 1998 and employed a generalised least squares AR(1) panel data model.
Abstract: We consider the relationship between tourism and economic growth for Latin American countries since 1985 until 1998. The analysis proposed is based on a panel data approach and the Arellano-Bond estimator for dynamic panels. We obtain estimates of the relationship between economic growth and growth in tourists per capita conditional on main macroeconomic variables. We show that the tourism sector is adequate for the economic growth of medium or low-income countries, though not necessarily for developed countries. We then invert the causality direction of the analysis. Rather than explaining economic growth, we try to explain tourism arrivals conditional on GDP and other covariates such as safety, prices and education level, and investment in infrastructures. We employ a generalised least squares AR(1) panel data model. The results provide evidence that low-income countries seem to need adequate levels of infrastructures, education and development to attract tourists. Medium-income countries need high levels of social development like health services and high GDP per capita levels. Finally, the results disclose that price of the destination, in terms of exchange rate and PPP is irrelevant for tourism growth.

Posted Content
TL;DR: In this article, the authors show that in a rational expectations present value model, an asset price manifests near random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one.
Abstract: We show analytically that in a rational expectations present value model, an asset price manifests near random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the well known puzzle that fundamental variables such as relative money supplies, outputs, inflation and interest rates provide little help in predicting changes in floating exchange rates. As well, we show that the data do exhibit a related link suggested by standard models - that the exchange rate helps predict these fundamentals. The implication is that exchange rates and fundamentals are linked in a way that is broadly consistent with asset pricing models of the exchange rate.

Journal ArticleDOI
TL;DR: This paper developed a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both passthrough and the exchange rate are simultaneously determined, and interact with one another.

Posted Content
TL;DR: In this article, the authors characterized welfare in a small open economy and derived the corresponding optimal monetary policy rule, showing that the utility-based loss function is a quadratic expression in domestic inflation, output gap and real exchange rate.
Abstract: This paper characterizes welfare in a small open economy and derives the correspondingoptimal monetary policy rule. It shows that the utility-based loss function for a small openeconomy is a quadratic expression in domestic inflation, output gap and real exchange rate. Incontrast to previous works, this paper demonstrates that welfare in a small open economy,completely integrated with the rest of the world, is affected by exchange rate variability.Consequently, the optimal policy in a small open economy is not isomorphic to a closedeconomy and does not prescribe a pure floating exchange rate regime. Domestic inflationtargeting is optimal only under a particular parameterization, where the unique relevantdistortion in the economy is price stickiness. Under a general specification for preferencesand in the presence of inefficient steady state output, exchange rate targeting arises as part ofthe optimal monetary plan.

Journal ArticleDOI
TL;DR: This paper showed that the forward premium is always a biased predictor of future depreciation; the bias can be so severe as to lead to negative coefficients in the Fama regression, and that delayed overshooting may or may not occur depending upon the persistence of interest rate innovations and the degree of misperception.

Posted Content
01 Jan 2004
TL;DR: In this article, the authors assess the historical durability and performance of alternative exchange rate regimes, with special focus on developing and emerging market countries, and review the performance of exchange-rate regimes in terms of inflation and business cycles.
Abstract: The issue of the appropriate exchange rate regime for individual countries has been perennially lively, and the role played by international capital flows and domestic financial systems in determining the performance of these regimes has gained prominence in the policy debate. Using recent advances in the classification of exchange rate regimes, the key message in this paper is that, as economies and their institutions mature, the value of exchange rate flexibility increases. This study assesses the historical durability and performance of alternative exchange rate regimes, with special focus on developing and emerging market countries. It describes trends in the distribution of regimes and examines the transitions between regimes. It also reviews the performance of exchange rate regimes in terms of inflation and business cycles.

Posted Content
TL;DR: This paper found that for developing countries with little exposure to international capital markets, pegs are notable for their durability and relatively low inflation, while floats are distinctly more durable and also appear to be associated with higher growth.
Abstract: Drawing on new data and advances in exchange rate regimes' classification, we find that countries appear to benefit by having increasingly flexible exchange rate systems as they become richer and more financially developed. For developing countries with little exposure to international capital markets, pegs are notable for their durability and relatively low inflation. In contrast, for advanced economies, floats are distinctly more durable and also appear to be associated with higher growth. For emerging markets, our results parallel the Baxter and Stockman classic exchange regime neutrality result, though pegs are the least durable and expose countries to higher risk of crisis.

Posted Content
TL;DR: In this paper, the authors explore the nature of the mean and volatility transmission mechanism between stock and foreign exchange markets for the G-7 countries and show that movements of stock prices will affect future exchange rate movements, but changes in exchange rates have less direct impact on future changes of stock price.
Abstract: This paper explores the nature of the mean and volatility transmission mechanism between stock and foreign exchange markets for the G-7 countries. Empirical evidence supports the asymmetric volatility spillover effect and shows that movements of stock prices will affect future exchange rate movements, but changes in exchange rates have less direct impact on future changes of stock prices. The implication is particularly important to international portfolio managers when devising hedging and diversification strategies for their portfolios.

Book
01 Jan 2004
TL;DR: This article examined the effect of exchange rate volatility on trade, in the light of recent developments in the world economy, and found that there is no robust evidence of a large negative effect on trade.
Abstract: This study examines the effect of exchange rate volatility on trade, in the light of recent developments in the world economy. It looks at aggregate trade, and considers the effect of volatility on differentiated and homogeneous products. The study finds that, overall, there is no robust evidence of a large negative effect of exchange rate volatility on trade, although this does not rule out the possibility that a large exchange rate volatility could affect an economy through other channels.

Journal ArticleDOI
TL;DR: In this article, the authors report the results of a survey using the contingent valuation method (CVM) of the willingness of Japanese households to pay more, in the form of a flat monthly surcharge, for renewable energy.

Journal ArticleDOI
TL;DR: In this article, a theoretical model suggests a set of conditions under which the price of gold rises over time at the general rate of inflation and hence be an effective hedge against inflation and demonstrates that short run changes in the gold lease rate, the real interest rate, convenience yield, default risk, the covariance of gold returns with other assets and the dollar/world exchange rate can disturb this equilibrium relationship and generate short run price volatility.
Abstract: This paper attempts to reconcile an apparent contradiction between short‐run and long‐run movements in the price of gold. The theoretical model suggests a set of conditions under which the price of gold rises over time at the general rate of inflation and hence be an effective hedge against inflation. The model also demonstrates that short‐run changes in the gold lease rate, the real interest rate, convenience yield, default risk, the covariance of gold returns with other assets and the dollar/world exchange rate can disturb this equilibrium relationship and generate short‐run price volatility. Using monthly gold price data (1976–1999), and cointegration regression techniques, an empirical analysis confirms the central hypotheses of the theoretical model.

Journal ArticleDOI
Silvia Ardagna1
TL;DR: The authors showed that the success of a fiscal adjustment in decreasing the debt-to-GDP ratio depends on the size of the fiscal contraction and less on its composition, and that the effects of the composition on growth work mostly through the labor market rather than through agents' expectations of future fiscal policy.

Journal ArticleDOI
Q. Farooq Akram1
TL;DR: In this paper, the authors explore the possibility of a non-linear relationship between oil prices and the Norwegian exchange rate, which leads to an econometrically well specified and interpretable exchange rate model that also has strong predictive properties.
Abstract: Summary Previous empirical studies have suggested an ambiguous relationship between crude oil prices and exchange rates. In contrast to these studies, we explore the possibility of a non-linear relationship between oil prices and the Norwegian exchange rate. We reveal a negative relationship between oil prices and the value of the Norwegian exchange rate that is relatively strong when oil prices are below 14 dollars and are falling. Allowance for this non-linear relationship leads to an econometrically well specified and interpretable exchange rate model that also has strong predictive properties. Notably, this model substantially improves the forecasts compared with those from a similar model but with linear oil price effects and a random walk model. We undertake an extensive evaluation of our findings to demonstrate their robustness.

Journal ArticleDOI
Jouko Rautava1
TL;DR: The role of oil prices and real exchange rate in Russia's economy is discussed in this paper, where a cointegration approach is proposed to analyze the relationship between the two factors.

Journal ArticleDOI
TL;DR: In this article, the authors investigated the relationship between sudden stops of capital inflows and current account reversals and showed that sudden stops and reversals have been closely related, and that the degree of financial openness does not appear to be related to the intensity with which reversals affect real economic performance.
Abstract: In this paper I use a panel data set to investigate the mechanics of sudden stops of capital inflows and current account reversals. I am particularly interested in four questions: (a) What is the relationship between sudden stops and current account reversals? (b) To what extent does financial openness affect the probability of a country being subject to a current account reversal? In other words, do restrictions on capital mobility reduce the probability of such occurrences? (C) Does openness -- both trade openness and financial openness -- play a role in determining the effect of current account reversals on economic performance (i.e. GDP growth)? And, (d) does the exchange rate regime affect the intensity with which reversals affect real activity? The empirical analysis shows that sudden stops and current account reversals have been closely related. The econometric analysis suggests that restricting capital mobility does not reduce the probability of experiencing a reversal. Current account reversals, in turn, have had a negative effect on real growth that goes beyond their direct effect on investment. The regression analysis indicates that the negative effects of current account reversals on growth will depend on the country's degree of trade openness: More open countries will suffer less in terms of lower growth relative to trend than countries with a lower degree of trade openness. On the other hand, the degree of financial openness does not appear to be related to the intensity with which reversals affect real economic performance. The empirical analysis also suggests that countries with more flexible exchange rate regimes are able to accommodate better shocks stemming from a reversal than countries with more rigid exchange rate regimes.

Journal ArticleDOI
TL;DR: In this article, the authors argue that the fear of floating is entirely rational from the perspective of each individual country and, although Japan remains an important outlier, their joint pegging to the dollar benefits the East Asian dollar bloc as a whole.
Abstract: Before the crisis of 1997-98, the East Asian economies — except for Japan but including China — pegged their currencies to the U.S. dollar. To avoid further turmoil, the IMF now argues that these currencies should float more freely. However, our econometric estimations show that the dollar's predominant weight in East Asian currency baskets has returned to its pre-crisis levels. By 2002, the day-to-day volatility of each country's exchange rate against the dollar has again become negligible. In addition, most governments are rapidly accumulating a "war chest" of official dollar reserves, which portends that this exchange rate stabilization will come to extend over months or quarters. From the doctrine of "original sin" applied to emerging-market economies, we argue that this fear of floating is entirely rational from the perspective of each individual country. And, although Japan remains an important outlier, their joint pegging to the dollar benefits the East Asian dollar bloc as a whole.

Journal ArticleDOI
TL;DR: In this article, the authors look at the responsiveness of a country's export supply to exchange rate changes and measure its quantitative importance by breaking down export adjustments between changes in output levels by existing exporters and movements due to changes in the number of exporters.