Exchange rate

About: Exchange rate is a research topic. Over the lifetime, 47255 publications have been published within this topic receiving 944563 citations. The topic is also known as: foreign-exchange rate & forex rate.

Capital Flows and Macroeconomic Management: Tequila Lessons

Abstract: This paper examines the recent financial debacle in Mexico and its effects on other emerging markets (the Tequila effect). I argue that financial and liquidity considerations—as opposed to current account sustainability or real exchange rate considerations—appear to have played a prominent role. Special attention is given to financial factors in Latin America. On this basis it is concluded that Mexico and Argentina were particularly vulnerable to speculative attacks. For contrast, the experience of Austria is examined and compared with that of Mexico. The analysis suggests that the remarkable stability of Austria—which pegged its currency to the Deutsche Mark for more than 15 years—may be due to the low volatility of its monetary aggregates. I also argue that financial factors could account for multiple self-fulfilling equilibria, helping to explain the sudden and deep reversals in Mexico and Argentina. It concludes with a discussion on policy implications. I suggest that, aside from the usual fiscal prudence advice, countries should pay special attention to the banking system and the maturity of public debt. Furthermore, the appropriateness of an exchange rate regime should take into account the characteristics of the financial sector.

Volatility Transmission in Emerging European Foreign Exchange Markets

Abstract: This paper studies the dynamics of volatility transmission between Central European (CE) currencies and the EUR/USD foreign exchange using model-free estimates of daily exchange rate volatility based on intraday data. We formulate a flexible yet parsimonious parametric model in which the daily realized volatility of a given exchange rate depends both on its own lags as well as on the lagged realized volatilities of the other exchange rates. We find evidence of statistically significant intra-regional volatility spillovers among the CE foreign exchange markets. With the exception of the Czech and, prior to the recent turbulent economic events, Polish currencies, we find no significant spillovers running from the EUR/USD to the CE foreign exchange markets. To measure the overall magnitude and evolution of volatility transmission over time, we construct a dynamic version of the Diebold Yilmaz volatility spillover index and show that volatility spillovers tend to increase in periods characterized by market uncertainty.

Exchange Rate Fluctuations and Trade Flows: Evidence from the European Union

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

Exchange Rate Regimes: Is the Bipolar View Correct?

Abstract: The bipolar or two-corner solution view of exchange rates is that intermediate policy regimes between hard pegs and floating are not sustainable. This paper argues that the proponents of the bipolar view have probably exaggerated their point. The right statement is that for countries open to international capital flows, softly pegged exchange rates are crisis-prone and not sustainable over long periods. However a wide variety of flexible rate arrangements remains possible; and monetary and exchange rate policy in most countries should not and will not be indifferent to exchange rate movements.