Showing papers on "Exchange rate published in 2014"

Importers, Exporters, and Exchange Rate Disconnect

Abstract: Large exporters are simultaneously large importers. In this paper, we show that this pattern is key to understanding low aggregate exchange rate pass-through as well as the variation in pass-through across exporters. First, we develop a theoretical framework that combines variable markups due to strategic complementarities and endogenous choice to import intermediate inputs. The model predicts that fi rms with high import shares and high market shares have low exchange rate pass-through. Second, we test and quantify the theoretical mechanisms using Belgian fi rm-product-level data with information on exports by destination and imports by source country. We confi rm that import intensity and market share are the prime determinants of pass-through in the cross-section of fi rms. A small exporter with no imported inputs has a nearly complete pass-through of over 90 percent, while a fi rm at the 95th percentile of both import intensity and market share distributions has a pass-through of 56 percent, with the marginal cost and markup channels playing roughly equal roles. The largest exporters are simultaneously highmarket-share and high-import-intensity fi rms, which helps explain the low aggregate pass-through and exchange rate disconnect observed in the data.

International Prices and Exchange Rates

Abstract: We survey the recent empirical and theoretical developments in the literature on the relation between prices and exchange rates. After updating some of the major findings in the empirical literature, we present a simple framework to interpret this evidence. We review theoretical models that generate insensitivity of prices to exchange rate changes through variable markups, both under flexible prices and nominal rigidities, first in partial equilibrium and then in general equilibrium.

The Technology and Economic Determinants of Cryptocurrency Exchange Rates: The Case of Bitcoin

Abstract: Bitcoin, a digital currency created based on modern P2P and cryptograph technologies, has ignited much discussion among professionals. However, there is a lack of empirical understanding about the Bitcoin exchange rate. In this paper, we propose a theoretical framework from an economic-technological perspective for understanding determination of the Bitcoin exchange rate and to empirically examine dynamics of the Bitcoin exchange rate against the USD in an error correction model. Our findings suggest that it is critical to extend traditional economic exchange rate models and treat Bitcoin as both a medium for economic transactions and a technology innovation. Specifically, we find that the Bitcoin exchange rate responds to short-term changes in the US inflation rate and money supply as well as the market size of the Bitcoin economy as measured by the total number of transactions and total Bitcoin value of the transactions. Meanwhile, public recognition, reflected by Google search index and number of Twitter mentions, as well as mining difficulty have positive impacts on the Bitcoin exchange rate. Additional analysis suggests that the impact of mining difficulty diminishes as mining technology evolves.

Tapering talk: the impact of expectations of reduced federal reserve security purchases on emerging markets

Abstract: In May 2013, Federal Reserve officials first began to talk of the possibility of tapering their security purchases. This tapering talk had a sharp negative impact on emerging markets. Different countries, however, were affected very differently. This paper uses data on exchange rates, foreign reserves and equity prices between April and August 2013 to analyze who was hit and why. It finds that emerging markets that allowed the real exchange rate to appreciate and the current account deficit to widen during the prior period of quantitative easing saw the sharpest impact. Better fundamentals (the budget deficit, the public debt, the level of reserves, or the rate of economic growth) did not provide insulation. A more important determinant of the differential impact was the size of the country's financial market: countries with larger markets experienced more pressure on the exchange rate, foreign reserves, and equity prices. This is interpreted as showing that investors are better able to rebalance their portfolios when the target country has a relatively large and liquid financial market.

Exchange rates and international finance

Abstract: Exchange Rates and International Finance provides a guide to the causes and consequences of exchange rate fluctuations. The orientation of the book is towards exchange rate determination with particular emphasis given to the contributions of modern finance theory.

What are the Macroeconomic Effects of Asset Purchases

Abstract: We examine the impact of large-scale asset purchases of government bonds on real GDP and the CPI in the United Kingdom and the United States with a Bayesian VAR, estimated on monthly data from 2009 M3 to 2013 M5. We identify an asset purchase shock with sign and zero restrictions. In contrast to the impulse response analysis in previous work, the reactions of real GDP and CPI are left unrestricted, so as formally to test whether these variables are affected by asset purchases. We then explore the transmission channels to the domestic economy and emerging markets. Our results suggest that asset purchases have a statistically significant effect on real GDP with a purchase of 1% of GDP leading to a .36% (.18%) rise in real GDP and a .38% (.3%) rise in CPI for the United States (United Kingdom). In the United States, this policy lowers yields on long-term government bonds and the real exchange rate. In the United Kingdom, on other hand, interest rate futures and measures of financial market uncertainty are more affected. There is also some evidence that emerging market sovereign bond and corporate bond spreads decline, with industrial production rising in response a positive asset purchase shock in either country.

Currency Unions, Product Introductions, and the Real Exchange Rate*

Abstract: We use a novel data set of online prices of identical goods sold by four large global retailers in dozens of countries to study good-level real exchange rates and their aggregated behavior. First, in contrast to the prior literature, we demonstrate that the law of one price holds very well within currency unions for tens of thousands of goods sold by each of the retailers, implying good-level real exchange rates often equal to 1. Prices of these same goods exhibit large deviations from the law of one price outside of currency unions, even when the nominal exchange rate is pegged. This clarifies that the common currency per se, and not simply the lack of nominal volatility, is important in reducing cross-country price dispersion. Second, we derive a new decomposition that shows that good-level real exchange rates in our data predominantly reflect differences in prices at the time products are first introduced, as opposed to the component emerging from heterogeneous passthrough or from nominal rigidities during the life of the good. Further, these international relative prices measured at the time of introduction move together with the nominal exchange rate. This stands in sharp contrast to pricing behavior in models where all price rigidity for any given good is due simply to costly price adjustment for that good.

China's Dominance Hypothesis and the Emergence of a Tri‐polar Global Currency System

Abstract: This study assesses whether the international monetary system is already tri-polar by testing what we call China's ‘dominance hypothesis’, i.e. whether the renminbi already influences exchange rate and monetary policies strongly in Asia, a direct reference to the old ‘German dominance hypothesis’ which ascribed to the German mark a dominant role in Europe in the 1980s. Using a global factor model of exchange rates and a complementary event study, we find evidence that the renminbi has become a key driver of currency movements in Asia since the mid-2000s, especially since the global financial crisis, in line with China's dominance hypothesis.

Capital-flow Management Measures: What Are They Good For?

Abstract: Are capital controls and macroprudential measures related to international exposures successful in achieving their objectives? Assessing their effectiveness is complicated by selection bias; countries which change their capital-flow management measures (CFMs) often share specific characteristics and are responding to changes in variables that the CFMs are intended to influence. This paper addresses these challenges by using a propensity-score matching methodology. We also create a new database with detailed information on weekly changes in controls on capital inflows, capital outflows, and macroprudential measures related to international transactions from 2009 to 2011 for 60 countries. Results show that these macroprudential measures can significantly reduce some measures of financial fragility. Most CFMs do not significantly affect other key targets, however, such as exchange rates, capital flows, interest-rate differentials, inflation, equity indices, and different volatilities. One exception is that removing controls on capital outflows may reduce real exchange rate appreciation. Therefore, certain CFMs can be effective in accomplishing specific goals—but most popular measures are not “good for” accomplishing their stated aims

Pricing-to-Market: Evidence From Plant-Level Prices

Abstract: We document pricing-to-market by plants which sell simultaneously in two markets that are segmented by variable exchange rates. Because we can match price quotes for the same product sold by the same plant across the two markets, we can cleanly identify relative markup responses to exchange rate movements by using xed eects to control for unobserved marginal cost changes. For prices invoiced in destination currency, we nd that, conditional on prices changing in both markets, relative markups move onefor-one with exchange rate changes. Consistent with this, the probability of prices changing in one market but not the other does not depend on the behavior of the exchange rate. This suggests that plants engage in an extreme form of pricing-tomarket, where relative markups inherit the random walk behavior of exchange rates.

Competition in the Cryptocurrency Market

Abstract: We analyze how network effects affect competition in the nascent cryptocurrency market. We do so by examining the changes over time in exchange rate data among cryptocurrencies.

Working Paper 195 - Inequality Economic Growth and Poverty in the Middle East and North Africa (MENA)

Abstract: In this paper, we have presented the patterns of inequality, growth and income inequality in the MENA region. Using a cross-sectional time series data of MENA countries for the period 1985-2009, we have also investigated the effect of income inequality on key societal development, namely economic growth and poverty, in the region. Our empirical results show that income inequality reduces economic growth and increases poverty in the region. Other factors having significant negative effect on economic growth in the MENA region include previous growth rate, exchange rate, government consumption expenditure or government burden, initial per capita GDP, inflation, and primary education. On the other hand, variables positively and significantly associated with MENA’s economic growth are domestic investment rate, urbanization, infrastructure development, and mineral rent as a percentage of GDP. In addition, apart from income inequality, other factors increasing poverty in the region are foreign direct investment, population growth, inflation rate, and the attainment of only primary education. Poverty-reducing variables in the region include domestic investment, trade openness, exchange rate, income per capita, and oil rents as a percentage of GDP. The policy implications of these results are discussed.

Impact of Fed Tapering Announcements on Emerging Markets

Abstract: This paper analyzes market reactions to the 2013–14 Fed announcements relating to tapering of asset purchases and their relationship to macroeconomic fundamentals and country economic and financial structures. The study uses daily data on exchange rates, government bond yields, and stock prices for 21 emerging markets. It finds evidence of markets differentiating across countries around volatile episodes. Countries with stronger macroeconomic fundamentals, deeper financial markets, and a tighter macroprudential policy stance in the run-up to the tapering announcements experienced smaller currency depreciations and smaller increases in government bond yields. At the same time, there was less differentiation in the behavior of stock prices based on fundamentals.

Capital Inflows, Exchange Rate Flexibility and Credit Booms: Capital Inflows, Exchange Rate, Credit

Abstract: The prospects of expansionary monetary policies in the advanced countries for the foreseeable future have renewed the debate over policy options to cope with large capital inflows that are, at least partly, driven by low interest rates in the financial centers. Historically, capital flow bonanzas have often fueled sharp credit expansions in advanced and emerging market economies alike. Focusing primarily on emerging markets, we analyze the impact of exchange rate flexibility on credit markets during periods of large capital inflows. We show that bank credit grows more rapidly and its composition tilts to foreign currency in economies with less flexible exchange rate regimes, and that these results are not explained entirely by the fact that the latter attract more capital inflows than economies with more flexible regimes. Our findings thus suggest countries with less flexible exchange rate regimes may stand to benefit the most from regulatory policies that reduce banks' incentives to tap external markets and to lend/borrow in foreign currency; these policies include marginal reserve requirements on foreign lending, currency-dependent liquidity requirements, and higher capital requirement and/or dynamic provisioning on foreign exchange loans.

What Is Made in America

Abstract: Accurately determining how much of our economy’s total production is American-made can be a daunting task. However, data from the Commerce Department’s U.S. Census Bureau and the Bureau of Economic Analysis (BEA) can help shed light on the dollar value of what America produces, and what percentage of the dollar value of an industry’s output that is considered domestic. Gross output, value added, domestically-sourced inputs, and domestic content are all concepts that can be used to measure U.S. production and to estimate how much of that production is made in the United States. This report starts with the concept of gross output and then looks further, seeking to answer the question: “What is Made in America?”Our analysis reveals that in 2012: U.S. manufacturers sold $5.6 trillion of goods, $4.4 trillion (79 percent) of which was “Made in the U.S.A.” Value added directly by the manufacturing sector accounted for $1.9 trillion, while value added indirectly from all industries (including manufacturing) accounted for the remaining $2.5 trillion. In many cases, the portion of domestic content in U.S. production differs markedly from the domestic content on store shelves. For example, although the United States imported most of the apparel that consumers purchased, the apparel that was made in the United States contained 87 percent domestic content. Domestic content accounted for 51 cents of every dollar that U.S. consumers and businesses spent on manufactured goods. By industry, it ranged from a high of 79 cents per dollar of food, beverages, and tobacco products to a low of 7 cents per dollar of apparel. The four industries with the largest dollar values of American content were food, beverage, and tobacco products; chemicals; petroleum and coal products; and motor vehicles and parts. The petroleum and coal products industry, which is predominantly petroleum refining, was the only manufacturing industry whose gross output was less than 70 percent domestic content.Although manufacturing employment has been growing, jobs in manufacturing are affected by, among other things, increased automation, productivity gains, exchange rate fluctuations, trade agreements, and import prices that affect how manufacturers build their supply chains.

Addicted to Dollars

Abstract: Dollarization, in a broad sense, is increasingly a defining characteristic of many emerging market economies. How important is this trend quantitatively and how important is it for the conduct of monetary policy and the choice of exchange rate regimes? Though these questions have become a hot topic in both the theory and policy literature, most efforts are remarkably uninformed by evidence, in no small part because meaningful data has been lacking, except for a very narrow range of assets. This paper attempts to move the discussion forward and shed light on the critical questions by proposing a measure of dollarization that is broad both conceptually and in terms of country coverage. We use this measure to identify trends in the evolution of dollarization in the developing world in the last two decades, and to ascertain the consequences that dollarization has had on the effectiveness of monetary and exchange rate policy. We find that, contrary to the general presumption in the literature, a high degree of dollarization does not seem to be an obstacle to monetary control or to disinflation. A level of dollarization does, however, appear to increase exchange rate pass-through, reinforcing the claim that 'fear of floating' is a greater problem for highly dollarized economies. We also review the developing countries' record in combating their addiction to dollars. Concretely, we try to explain why some countries have been able to avoid certain forms of the addiction, and examine the evidence on successful de-dollarization.

Handbook of International Economics

Abstract: Macroeconomic theory and policy: How the closed economy was opened (P.B. Kenen). Asset markets, exchange rates, and the balance of payments (J.A. Frenkel, M.L. Mussa). The specification and influence of asset markets (W.H. Branson, D.W. Henderson). The specification of goods and factor markets in open economy macroeconomic models (N. Bruce, D. Purvis). Stabilization policies in open economies (R.C. Marston). Exchange rate dynamics (M. Obstfeld, A. Stockman). Empirical studies of exchange rates: Price behavior, rate determination and market efficiency (R.M. Levich). Income and price effects in foreign trade (M. Goldstein, M.S. Kahn). Empirical studies of macroeconomic interdependence (J.F. Helliwell, T. Padmore). International money and international monetary arrangements (S.W. Black). Economic interdependence and coordination of economic policies (R.N. Cooper).

Real Exchange Rates and Sectoral Productivity in the Eurozone

Abstract: We investigate the link between real exchange rates and sectoral total factor productivity measures for countries in the Eurozone. Real exchange rate patterns closely accord with an amended Balassa-Samuelson interpretation, both in cross-section and time series. We construct a sticky price dynamic general equilibrium model to generate a cross-section and time series of real exchange rates that can be directly compared to the data. Under the assumption of a common currency, estimates from simulated regressions are very similar to the empirical estimates for the Eurozone. Our findings contrast with previous studies that have found little relationship between productivity levels and the real exchange rate among high-income countries, but those studies have included country pairs which have a floating nominal exchange rate.

The Impact of Foreign Direct Investment on Economic Growth in Nigeria.

Abstract: This study investigates the impact of FDI on economic growth. Quarterly data is used and covers the period 1980Q1-2009Q4. Endogenous growth model is employed for the study with emphases on the impact of FDI inflow into agriculture, manufacturing and telecommunication sectors in Nigeria. However, the study also examines the direction of causality between FDI inflow into these sectors and economic growth. In addition, the study further investigate the influence of business environment - political instability (PI), corruption (CRPINDX), institution/legal framework (LEGFRWK) proxied by FH, 2001, suggested by work of Sala-i-Martin (1997) and Barro and Lee (1994) and macroeconomic indicators such as inflation (INF), real interest rate (RINTR) and real exchange rate (RER) on the inflow of FDI. The empirical evidence shows that FDI into manufacturing and telecommunication sector has positive impact on economic growth in Nigeria while FDI into agricultural sector impacted on economic growth negatively. The findings on granger causality suggest that FDI into agriculture, manufacturing and telecommunication sector have a unidirectional relationship with economic growth in Nigeria. Institution or legal framework has positive and significant influence on the inflow of FDI, hence suggesting the need for strong legal framework for property right protection could serve as an incentive to attract more foreign investors. Political instability and real exchange rate significantly and negatively influences the inflow of FDI vis-a-vis signifying the importance of friendly business environment in

Exchange Rate Pass-Through in Developing and Emerging Markets: A Survey of Conceptual, Methodological and Policy Issues, and Selected Empirical Findings

Abstract: Global integration has increased the international linkages of financial markets for emerging market countries. A key channel for the international transmission of inflation and economic cycles is from exchange rate movements to domestic prices, known as exchange rate pass-through (ERPT). This article reviews the conceptual, methodological and policy issues connected with ERPT in emerging market and developing countries, and critically surveys selected empirical studies. A key contribution is to categorise and compare the heterogeneous methodologies used to extract ERPT measures in the empirical literature. Single equation models and systems methods are contrasted; frequent misspecifications that produce unreliable ERPT estimates are highlighted. The discerning policy-maker needs to ascertain by which methods ERPT measures were calculated, the controls and restrictions applied, and the time frame and stability of the estimates.

Detrended cross-correlation analysis approach for assessing asymmetric multifractal detrended cross-correlations and their application to the Chinese financial market

Abstract: We propose a new method called the multifractal asymmetric detrended cross-correlation analysis method (MF-ADCCA) to investigate the asymmetric cross-correlations in nonstationary time series that combine the multifractal detrended cross-correlation analysis (MF-DCCA) and asymmetric detrended fluctuation analysis (A-DFA). The study aims to determine whether different scaling properties of the cross-correlations are obtained if a one-time series trending is either positive or negative. We apply MF-ADCCA to analyze empirically the scaling behavior of the cross-correlations among the Chinese stock market, the RMB exchange market, and the US stock market. Empirical results indicate that the cross-correlations between the Chinese stock market and the RMB/USD exchange market are more persistent when any one of the markets is falling. On the contrary, the cross-correlations between the Chinese stock market and the RMB/EU, RMB/GBP, RMB/JPY exchange markets and the US stock market are more persistent when one of the markets is rising. Moreover, asymmetric cross-correlations between any two of the selected financial markets are multifractal.

Reserve requirement policy over the business cycle

Abstract: Based on a novel quarterly dataset for 52 countries for the period 1970-2011, we analyze the use and cyclical properties of reserve requirements (RR) as a macroeconomic stabilization tool and whether RR policy substitutes or complements monetary policy. We …nd that (i) around two thirds of developing countries have used RR policy as a macroeconomic stabilization tool compared to just one third of industrial countries (and no industrial country since 2004); (ii) most developing countries that rely on RR use them countercyclically; and (iii) in many developing countries, monetary policy is procyclical and hence RR policy has substituted monetary policy as a countercyclical tool. We interpret the latter …nding as re‡ecting the need of many emerging markets to raise interest rates in bad times to defend the currency and not raise or lower the interest rate in good times to prevent further currency appreciation. Under these circumstances, RR policy provides a second instrument that substitutes for monetary policy. Evidence from expanded Taylor rules (i.e., Taylor rules that include a nominal exchange rate target) supports these mechanisms. � The …rst draft of this paper was written while the authors were visiting the World Bank’s O¢ ce of the Chief Economist for Latin America and the Caribbean (LAC) and Vegh was also visiting the Macroeconomics and Growth Division (DEC) at the World Bank, and is part of a project on macroprudential policy carried out at the O¢ ce of the Chief Economist for LAC. The authors are very grateful for the World Bank’s hospitality and stimulating policy and research environment. They would also like to thank Enrique Alberola, Stijn Claessens, Tito Cordella, Augusto de la Torre, Eva Gutierrez, Luis Jacome, Alain Ize, Michael Leahy, Samuel Pienknagura, Andy Powell, Alessandro Rebucci, and seminar participants at the Bank of Japan, Bank of Spain, Brookings Institution, CEMLA, Central Bank of Bolivia, Central Bank of Uruguay, IDB, IMF, and World Bank for many helpful comments and discussions. Jorge Puig and Pedro Pablo Matinez provided excellent research assistance. The views expressed in the paper are the authors’own and do not necessarily re‡ect those of the O¢ ce of the Chief Economist for LAC or the World Bank.