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.

Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates

Abstract: The central puzzle in international business cycles is that real exchange rates are volatile and persistent. The most popular story for real exchange rate fluctuations is that they are generated by monetary shocks interacting with sticky goods prices. We quantify this story and find that it can account for some of the observed properties of real exchange rates. When prices are held fixed for at least one year, risk aversion is high and preferences are separable in leisure, the model generates real exchange rates that are as volatile as in the data. The model also generates real exchange rates that are persistent, but less so than in the data. If monetary shocks are correlated across countries, then the comovements in aggregates across countries are broadly consistent with those in the data. Making asset markets incomplete or introducing sticky wages does not measurably change the results.

A Rational Expectations Model of Financial Contagion

Abstract: We develop a multiple asset rational expectations model of asset prices to explain financial market contagion. Although the model allows contagion through several channels, our focus is on contagion through cross-market rebalancing. Through this channel, investors transmit idiosyncratic shocks from one market to others by adjusting their portfolios' exposures to shared macroeconomic risks. The pattern and severity of financial contagion depends on markets' sensitivities to shared macroeconomic risk factors, and on the amount of information asymmetry in each market. The model can generate contagion in the absence of news, as well as between markets that do not directly share macroeconomic risks. A SPATE OF RECENT FINANCIAL CRISES-the Mexican crisis of 1995, the Asian crisis of 1997 to 1998, the default of the Russian government in August 1998, the sharp depreciation of the real in Brazil in 1999-have been accompanied by episodes of financial markets contagion in which many countries have experienced increases in the volatility and comovement of their financial asset markets on a day-to-day basis. The pattern of contagion has been uneven across both time and countries-with increased volatility and comovement occurring principally during times of financial and exchange rate crises-and with some countries, particularly those with emerging financial markets, having experienced the bulk of the contagion, while countries with more developed markets have remained relatively unscathed. Although heightened financial market volatility is to be expected within countries experiencing financial and exchange rate crises, the pattern of comovement across countries is not easily explained. Some of the increased comovement among countries that compete through trade or share close economic links can be rationalized on the basis of macroeconomic theory, but these theories are less persuasive in accounting for the increased comove

A new approach to measuring financial contagion

Abstract: This article proposes a new approach to evaluate contagion in financial markets. Our measure of contagion captures the coincidence of extreme return shocks across countries within a region and across regions. 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 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.

Exchange Rate Pass-through into Import Prices

Abstract: Though exchange rate pass-through has long been of interest, the focus of this interest has evolved considerably over time. After a long period of debate over the law of one price and convergence across countries, beginning in the late 1980s exchange rate pass-through studies emphasized industrial organization and the role of segmentation and price discrimination across geographically distinct product markets. More recently pass-through issues have played a central role in heated debates over appropriate monetary policies and exchange rate regime optimality in general equilibrium models. 1 These debates have broad implications for the conduct of monetary policy, for macroeconomic stability, for international transmission of shocks, and for efforts to contain large imbalances in trade and international capital flows. These debates hinge on the issue of the prevalence of producer-currency pricing (PCP) versus local-currency pricing (LCP) of imports, and on whether exchange rate pass-through rates are endogenous to a country’s monetary performance. Low import price pass-through means that nominal exchange rate fluctuations may lead to lower expenditure-switching effects of domestic monetary policy. As a consequence of this insulation, monetary policy effectiveness is greater for stimulating the domestic economy. Taylor (2000) also has noted the potential complementarity between monetary stability and monetary effectiveness as a policy instrument. The idea is that if pass-through rates are endogenous to a country’s relative monetary stability, periods of more stable inflation and monetary performance also will be periods when monetary policy may be more effective as a stabilization instrument. Concerns

Hysteresis, Import Penetration, and Exchange Rate Pass-Through

Abstract: A competitive industry has established home firms, and foreign firms with entry and exit costs. The real exchange rate follows a Brownian motion. Industry equilibrium is determined using methods of option pricing. Entry requires the operating profit to exceed the interest on the entry cost, and similarly for exit. The middle band of rates without entry or exit yields hysteresis; it is found to be very wide for plausible parameter values. The exchange rate pass-through to domestic prices is found to be close to one in the phases where foreign firms enter or exit, and near zero otherwise.