Showing papers on "Exchange rate published in 2006"
TL;DR: In this paper, the authors test for asymmetry in a model of the dependence between the Deutsche mark and the yen, in the sense that a different degree of correlation is exhibited during joint appreciations against the U.S. dollar versus during joint depreciations.
Abstract: We test for asymmetry in a model of the dependence between the Deutsche mark and the yen, in the sense that a different degree of correlation is exhibited during joint appreciations against the U.S. dollar versus during joint depreciations. We consider an extension of the theory of copulas to allow for conditioning variables, and employ it to construct flexible models of the conditional dependence structure of these exchange rates. We find evidence that the mark‐dollar and yen‐dollar exchange rates are more correlated when they are depreciating against the dollar than when they are appreciating.
1,666 citations
TL;DR: In this paper, the response of U.S., German and British stock, bond and foreign exchange markets to real-time macroeconomic news is characterized using a unique high-frequency futures dataset.
1,082 citations
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TL;DR: In this paper, the authors examined Philippine households' responses to overseas members' economic shocks and found that these positive income shocks lead to enhanced human capital accumulation and entrepreneurship in migrants' origin households.
Abstract: Millions of households in developing countries receive financial support from family members working overseas How do migrant earnings affect origin-household investments? This paper examines Philippine households%u2019 responses to overseas members%u2019 economic shocks Overseas Filipinos work in dozens of foreign countries, which experienced sudden (and heterogeneous) changes in exchange rates due to the 1997 Asian financial crisis Appreciation of a migrant%u2019s currency against the Philippine peso leads to increases in household remittances received from overseas The estimated elasticity of Philippine-peso remittances with respect to the Philippine/foreign exchange rate is 060 These positive income shocks lead to enhanced human capital accumulation and entrepreneurship in migrants%u2019 origin households Child schooling and educational expenditure rise, while child labor falls In the area of entrepreneurship, households raise hours worked in self-employment, and become more likely to start relatively capital-intensive household enterprises
864 citations
TL;DR: In this paper, the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade are investigated.
Abstract: This paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of shocks to world interest rates and the terms of trade. In particular, we highlight the impact of financial frictions and the degree of exchange rate pass through in determining the relative performance of alternative regimes in stabilizing the economy in the face of external shocks. Our results are quite sharp. When exchange rate pass-through is high, a policy of non-traded goods inflation targeting does best in stabilizing the economy, and is better in welfare terms. When exchange rate pass-through is low, however, a policy of strict CPI inflation targeting is better. In all cases, a fixed exchange rate is undesirable. In addition, financial frictions have no implications for the ranking of alternative policy rules.
434 citations
TL;DR: The authors developed an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading, showing that higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation and net equity flows into the foreign market are positively correlated with a foreign currency appreciation.
Abstract: We develop an equilibrium model in which exchange rates, stock prices and capital flows are jointly determined under incomplete forex risk trading. Incomplete hedging of forex risk, documented for US global mutual funds, has three important implications: 1) exchange rates are almost as volatile as equity prices when the forex liquidity supply is not infinitely price elastic; 2) higher returns in the home equity market relative to the foreign equity market are associated with a home currency depreciation; 3) net equity flows into the foreign market are positively correlated with a foreign currency appreciation. The model predictions are strongly supported at daily, monthly and quarterly frequencies for 17 OECD countries vis-a-vis the US. Moreover, correlations are strongest after 1990 and for countries with higher market capitalization relative to GDP, suggesting that the observed exchange rate dynamics are indeed related to equity market development.
393 citations
TL;DR: In this paper, the authors derived a pass-through relation based on new open-economy macroeconomic models and found strong evidence of a positive and significant association between the passthrough and the average inflation rate across countries and periods.
385 citations
TL;DR: In this article, the authors introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model to explain these stylized facts, which implies that observed fundamentals account for little of exchange rate volatility in the short to medium run, over long horizons, the exchange rate is closely related to observed fundamentals, and exchange rate changes are a weak predictor of future fundamentals.
Abstract: Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow.
377 citations
TL;DR: Yeyati et al. as mentioned in this paper assessed the evidence on the determinants of financial dollarization and tested whether its empirical effects on monetary and financial stability and on economic performance are consistent with theoretical predictions.
Abstract: The presence in residents’ portfolio of foreign-currency assets and liabilities (or ‘financial dollarization’) has been alleged to influence monetary policy in developing economies and, especially, to cause debtors’ insolvency in the aftermath exchange rate depreciations (the ‘balance sheet effect’). The abundant and influential literature on these implications, however, contrasts sharply with the scarcity of empirical work aimed at confirming or refuting them. Using a new database, this paper assesses the evidence on the determinants of financial dollarization and tests whether its empirical effects on monetary and financial stability and on economic performance are consistent with theoretical predictions. It finds that financially dollarized economies display a more unstable demand for money, a greater propensity to suffer banking crises after a depreciation of the local currency, and slower and more volatile output growth, without significant gains in terms of domestic financial depth. The results indicate that active de-dollarization policies may be advisable for the many economies, including Central and Eastern European ones, where foreign-currency denominated assets and liabilities are important in residents’ financial portfolios.
— Eduardo Levy Yeyati
368 citations
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TL;DR: In this paper, the authors provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions' capacity to generate financial assets from real investments.
Abstract: Three of the most important recent facts in global macroeconomics -- the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio -- appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) heterogeneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.
353 citations
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TL;DR: In this paper, the authors econometrically estimate determinants of the shares of major currencies in the reserve holdings of the world's central banks and forecast the Euro to surpass the dollar as the leading international reserve currency by 2022.
Abstract: Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency? Unlike the last time this question was prominently discussed, ten years ago, there now exists a credible competitor: the euro. This paper econometrically estimates determinants of the shares of major currencies in the reserve holdings of the world’s central banks. Significant factors include: size of the home country, inflation rate (or lagged depreciation trend), exchange rate variability, and size of the relevant home financial center (as measured by the turnover in its foreign exchange market). We have not found that net international debt position is an important determinant. Network externality theories would predict a tipping phenomenon. Indeed we find that the relationship between currency shares and their determinants is nonlinear (which we try to capture with a logistic function, or else with a dummy “leader” variable for the largest country). But changes are felt only with a long lag (we estimate a weight on the preceding year’s currency share around 0.9). The advent of the euro interrupts the continuity of the historical data set. So we estimate parameters on pre-1999 data, and then use them to forecast the EMU era. The equation correctly predicts a (small) narrowing in the gap between the dollar and euro over the period 1999-2004. Whether the euro might in the future rival or surpass the dollar as the world’s leading international reserve currency appears to depend on two things: (1) do enough other EU members join euroland so that it becomes larger than the US economy, and (2) does US macroeconomic policy eventually undermine confidence in the value of the dollar, in the form of inflation and depreciation. What we learn about functional form and parameter values helps us forecast, contingent on these two developments, how quickly the euro might rise to challenge the dollar. Under two important scenarios – the remaining EU members, including the UK, join EMU by 2020 or else the recent depreciation trend of the dollar persists into the future – the euro may surpass the dollar as leading international reserve currency by 2022.
352 citations
TL;DR: The authors examined the relationship between exchange rate movements and firm value and found that the direction of exposure depends on the specific exchange rate and varies over time, suggesting that firms dynamically adjust their behavior in response to exchange rate risk.
TL;DR: In this article, the authors provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) hetero-geneity in these regions' capacity to generate financial assets from real investments.
Abstract: Three of the most important recent facts in global macroeconomics - the sustained rise in the US current account deficit, the stubborn decline in long run real rates, and the rise in the share of US assets in global portfolio - appear as anomalies from the perspective of conventional wisdom and models. Instead, in this paper we provide a model that rationalizes these facts as an equilibrium outcome of two observed forces: a) potential growth differentials among different regions of the world and, b) hetero-geneity in these regions' capacity to generate financial assets from real investments. In extensions of the basic model, we also generate exchange rate and FDI excess returns which are broadly consistent with the recent trends in these variables. Unlike the conventional wisdom, in the absence of a large change in (a) or (b), our model does not augur any catastrophic event. More generally, the framework is flexible enough to shed light on a range of scenarios in a global equilibrium environment.
TL;DR: In this paper, the authors present an overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies of the former soviet bloc.
Abstract: In this paper, we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings, differences in the econometric estimation techniques, and differences relating to the time-series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size. Copyright Blackwell Publishers Ltd, 2006.
TL;DR: In this paper, the authors analyzed a two-country dynamic general equilibrium model with nominal rigidities, monopolistic competition and producer currency pricing and derived a quadratic approximation to the utility of the consumers.
TL;DR: The authors developed a model of the exchange rate in which agents use simple forecasting rules and based on an ex post evaluation of the relative profitability of these rules they decide whether to switch or not.
TL;DR: In this paper, the authors support the view that the de facto dollar peg may now have outlived its usefulness for China and support the use of fixed and flexible exchange rates each have advantages, and a country has the right to choose the regime suited to its circumstances.
Abstract: Fixed and flexible exchange rates each have advantages, and a country has the right to choose the regime suited to its circumstances. Nevertheless, several arguments support the view that the de facto dollar peg may now have outlived its usefulness for China. (i) Although foreign exchange reserves are a useful shield against currency crises, by now China’s current level is fully adequate, and US treasury securities do not pay a high return. (ii) It may become increasingly difficult to sterilize the inflow over time. (iii) Although external balance could be achieved by expenditure reduction, e.g. by raising interest rates, the existence of two policy goals (external balance and internal balance) in general requires the use of two independent policy instruments (e.g. the real exchange rate and the interest rate). (iv) A large economy like China can achieve adjustment in the real exchange rate via flexibility in the nominal exchange rate more easily than via price flexibility. (v) The experience of other emerging markets points toward exiting from a peg when times are good and the currency is strong, rather than waiting until times are bad and the currency is under attack. (vi) From a longer-run perspective, prices of goods and services in China are low—not just low relative to the US (0.23), but also low by the standards of a Balassa–Samuelson relationship estimated across countries (which predicts 0.36). In this specific sense, the yuan was undervalued by � 35 percent in 2000, and is by at least as much as that today. The study finds that, typically across countries, such gaps are corrected halfway, on average, over the subsequent decade. These six arguments for increased exchange rate flexibility need not imply a free float. China is a good counter-example to the popular ‘‘corners hypothesis’’ prohibition on intermediate exchange rate regimes. However, the specific changes announced by the Chinese authorities in July 2005 have not yet resulted in a de facto abandonment of the
TL;DR: The authors examines several new empirical findings in the study of uncovered interest parity, including the implications of relaxing the rational expectations methodology and the characteristics of results pertaining to non-G7 currencies, including those in less developed economies.
TL;DR: In this paper, the authors explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate, in conjunction with some standard assumptions, and show that the deviation of real exchange rates from its steady state depends on the present value of a weighted sum of inflation and output gap differentials.
Abstract: We explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate. The interest rate rule, in conjunction with some standard assumptions, implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials. The weights are functions of the parameters of the interest rate rule. An initial look at German data yields some support for the model.
TL;DR: In this paper, the New Open Economy Macroeconomic literature in an empirical direction, estimating and testing a two-country model performs moderately well for the exchange rate and current account, and finds that deviations from interest rate parity are not closely related to monetary policy shocks.
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TL;DR: In this article, the authors examined the impact of economic shocks on origin-household investments in the Philippines and found that the estimated elasticity of Philippine-peso remittances with respect to the Philippine/foreign exchange rate is 0.60.
Abstract: Millions of households in developing countries receive financial support from family members working overseas. How do migrant earnings affect origin-household investments? This paper examines Philippine households%u2019 responses to overseas members%u2019 economic shocks. Overseas Filipinos work in dozens of foreign countries, which experienced sudden (and heterogeneous) changes in exchange rates due to the 1997 Asian financial crisis. Appreciation of a migrant%u2019s currency against the Philippine peso leads to increases in household remittances received from overseas. The estimated elasticity of Philippine-peso remittances with respect to the Philippine/foreign exchange rate is 0.60. These positive income shocks lead to enhanced human capital accumulation and entrepreneurship in migrants%u2019 origin households. Child schooling and educational expenditure rise, while child labor falls. In the area of entrepreneurship, households raise hours worked in self-employment, and become more likely to start relatively capital-intensive household enterprises.
TL;DR: The authors developed an open economy DGE model featuring demand curves with variable elasticities so that a firm's pricing decision depends on its competitors' prices and found that exporters became more responsive to the prices of their competitors, explaining a sizeable portion of the observed decline in the sensitivity of U.S import prices to the exchange rate.
01 Jan 2006
TL;DR: In this article, the authors provide a comprehensive evaluation of the short-horizon predictive ability of economic fundamentals and forward premia on monthly exchange rate returns in a framework that allows for volatility timing.
Abstract: This paper provides a comprehensive evaluation of the short-horizon predictive ability of economic fundamentals and forward premia on monthly exchange rate returns in a framework that allows for volatility timing. We implement Bayesian methods for estimation and ranking of a set of empirical exchange rate models, and construct combined forecasts based on Deterministic and Bayesian Model Averaging. More importantly, we assess the economic value of the in-sample and out-of-sample forecasting power of the empirical models, and …nd two key results: (i) a risk averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one which conditions on the forward premium with stochastic volatility innovations; and (ii) strategies based on combined forecasts yield large economic gains over the random walk benchmark. These two results are robust to reasonably high transaction costs.
TL;DR: In this paper, the role of the real exchange rate in a structural vector autoregression framework for the United Kingdom, Euro area, Japan, and Canada vis-a-vis the United States is analyzed.
Abstract: This paper analyses the role of the real exchange rate in a structural vector autoregression framework for the United Kingdom, Euro area, Japan, and Canada vis-a´-vis the United States. A new identification strategy is proposed building on sign restrictions. The results are compared to the benchmark conventional approach of Clarida and Gali (1994) based on longrun zero restrictions. Although the restrictions are derived from the same theoretical model, the results are strikingly different. In contrast to the benchmark model, an important role for nominal shocks in explaining real exchange rate fluctuations is found. Hence, the exchange rate can rather be considered as a source of shocks instead of a shock absorber.
TL;DR: In this paper, the canonical predictions of intertemporal open-economy macro models are tested by a structural VAR analysis of G7 countries, and the signs of some impulse responses point toward models that differentiate tradables and nontradables.
TL;DR: In this article, the authors distinguish between target-earnings and life cycle motivations for return migration by examining how migrants' return decisions respond to major, unexpected exchange rate changes in their overseas locations (due to the Asian financial crisis).
Abstract: This paper distinguishes between target-earnings and life cycle motivations for return migration by examining how Philippine migrants' return decisions respond to major, unexpected exchange rate changes in their overseas locations (due to the Asian financial crisis). Overall, the evidence favors the life cycle explanation: more favorable exchange rate shocks lead to fewer migrant returns.A10% improvement in the exchange rate reduces the 12-month return rate by 1.4 percentage points. However, some migrants appear motivated by target-earnings considerations: in households with intermediate foreign earnings, favorable exchange rate shocks have the least effect on return migration, but lead to increases in household investment.
01 Jan 2006
TL;DR: In this article, the authors discussed international liberalisation of financial capital in a perfect world (Chapters 2 and 3) and under tax distortions (Channels 4 and 5). The perfect-world analysis delivered the result that international liberalization contributes via optimal international allocation of physical capital to welfare of both countries and therefore of the world as a whole.
Abstract: In the previous chapters I discussed international liberalisation of financial capital in a perfect world (Chapters 2 and 3) and under tax distortions (Chapters 4 and 5). The perfect-world analysis delivered the result that international liberalisation contributes via optimal international allocation of physical capital to welfare of both countries and therefore of the world as a whole. In Chapter 4 a tax distortion was introduced by way of differences in company taxes between countries. This distortion jeopardizes the perfect-world result, even to the extent that the benefits of international liberalisation of financial capital become uncertain. This outcome represents the actual stance of the literature. Policy thinking regarding tax harmonisation in the EU is developing on this basis.
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TL;DR: In this article, the authors introduce the key questions and three perspectives on macroeconomics in developing countries: macroeconomic management, exchange rate management and micro tools for macro management, and capital market liberalization.
Abstract: PREFACE OVERVIEW 1. Introducing the key questions 2. Objectives MACROECONOMICS 3. Three perspectives on policy 4. Is macroeconomics different in developing countries? 5. Policy instruments from three perspectives: fiscal and monetary policy 6. Open economy complications 7. Exchange rate management and micro tools for macro management 8. Policy frameworks 9. Formal approaches CAPITAL MARKET LIBERALIZATION 10. Capital market liberalization: the arguments for and against 11. A formal approach: capital market failures 12. Interventions in capital markets 13. Capital market liberalization: summary and remaining debates CONCLUSION 14. Stabilization, liberalization, and growth
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TL;DR: In this article, the relationship between inflation targeting and exchange rates is investigated and it is shown that exchange rate volatility is different in countries with an inflation targeting regime than in countries having alternative monetary policy arrangements.
Abstract: This paper deals with the relationship between inflation targeting and exchange rates. I address three specific issues: first, I analyze the effectiveness of nominal exchange rates as shock absorbers in countries with inflation targeting. This issue is closely related to the magnitude of the “passthrough” coefficient. Second, I investigate whether exchange rate volatility is different in countries with an inflation targeting regime than in countries with alternative monetary policy arrangements. And third, I discuss whether the exchange rate should play a role in determining the monetary policy stance under inflation targeting. An alternative way of posing this question is whether the exchange rate should have an independent role in an open economy Taylor rule.
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TL;DR: In this paper, the authors explored the connection between interest rates in major industrial countries and annual real output growth in other countries and found that high large country interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates.
Abstract: It is often argued that small economies are affected by conditions in large countries This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries The results show that high large-country interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates The paper then examines the potential channels through which large-country interest rates affect small economies The direct monetary policy channel is the most likely channel when compared with other possibilities, such as a general capital market effect or a trade effect
TL;DR: In this article, the authors re-examine the nature and the economic significance of the exchange rate to firm value relation using a database of non-financial firms from over 18 countries.