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.

Constructing historical euro-zone data*

Abstract: Existing methods of reconstructing historical Euro-zone data by aggregation of the individual countries' aggregate data raises numerous difficulties, especially due to past exchange rate changes. The approach proposed here is designed to avoid such distortions, and aggregate exactly when exchange rates are fixed. We first compute growth rates within states, aggregate these, then cumulate this Euro-zone growth rate to obtain the aggregated levels variables. The aggregate of the implicit-deflator plice index coincides with the implicit deflator of our aggregate nominal and real data. We apply the method to Euro-zone M3, GDP and prices over the previous two decades. 1. Background With the introduction on 31 December 1998 of the irrevocably-fixed Euro exchange rates, eleven countries of the European Union entered a new monetary union. From that date onwards, monetary policy for these countries is set by the newly-formed European Central Bank (ECB). The Governing Council of the ECB bases its monetary policy on 'medium-term assumptions regarding real GDP growth and the trend decline in the velocity of circulation of M3' (ECB, 1999a, p. 40). Therefore, the construction of historical data for aggregate M3 and GDP for the Euro zone is of practical relevance to policy makers. In addition, any econometric model for Euro-zone countries requires such historical data. This paper describes an approach to doing so from the aggregate data of the individual member states. A number of previous reconstructions are noted, but as these have important drawbacks, an approach related to that in T6rnqvist (1936) is proposed and its properties are discussed. Although there have been many important contributions to index-number theory (see Section 4), few are directly relevant to the problem confronted here, where we wish to use the national aggregates from member states - not the individual-item data usually input into index calculations - to construct a Euro-zone aggregate. Moreover, the inherently non-stationary nature of those national aggregates, both from unit-roots inducing integrated time series

A General Equilibrium Model of International Portfolio Choice

Abstract: We investigate, in a two-country general equilibrium model, whether a bias in consumption towards domestic goods will necessarily lead to a preference for domestic securities. We develop a model where investors are constrained to consume only from their domestic capital stock and where it is costly to transfer capital across countries. In this model, investors less risk averse than an investor with log utility bias their portfolios towards domestic assets. Investors more risk averse than log, however, prefer foreign assets. Thus, this model suggests that it is unlikely that the portfolios observed empirically can be explained by the high proportion of domestic goods in total consumption. WE INVESTIGATE, IN A two-country, general equilbrium model, whether a bias in consumption toward domestic goods will necessarily lead to a preference for domestic assets in an investor's optimal portfolio. We constrain investors to consume only from their domestic capital stock and introduce a proportional cost for transferring goods from one country. This cost gives rise to endogenous deviations from the law of one price (LOP). Thus, the home and foreign investors do not hold identical portfolios. We show that an investor's optimal portfolio is biased towards domestic equity only if she is less risk averse than an investor with log utility. Investors with relative risk aversion greater than one exhibit a preference for the foreign asset. This is because the exchange rate, derived endogenously, is negatively correlated with the return on the foreign asset, and therefore, the translated return on the foreign stock is less risky than that on the domestic stock. Thus, the results of this model suggest that it is unlikely that the preference for domestic assets that is observed empirically can be explained by the high proportion of domestic goods in total consumption. There exists a considerable body of literature documenting the gains from international diversification. Grubel (1968) was the first to propose that international diversification allows investors to attain lower return variances than those achievable by diversifying domestically. This proposition relies on the correlation between stock indices across countries being significantly less

The Transmission of Disturbances under Alternative Exchange-Rate Regimeswith Optimal Indexing

Abstract: The paper develops a general stochastic macroeconomic model which can be used to study the international transmission of disturbances under alternative exchange-rate systems Four types of exchange-rate systems are considered: uniform flexible exchange rates, uniform fixed exchange rates, two-tier exchange rates in which the current-account exchange rate is fixed and the capital-account exchange rate is flexible, and two-tier exchange rates with separate, floating rates for current and capital-account transactions It is assumed that expectations are rational, so only the unexpected portion of macro policy alters the level of output In addition, private contracts form the underpinning of the aggregate supply function, and they can be adjusted optimally in response to the country's choice of exchange-rate regime It is shown that when the home country takes all prices as exogenous and wages are optimally indexed, the country is fully insulated from foreign disturbances under the two fixed-rate regimes but not under the two flexible-rate regimes Even so, the fixed-rate regimes are inferior to the flexible-rate regimes in terms of their ability to minimize output variance When the home country is large in the market for its own produced good, these results must be modified The analysis makes two general points First, one cannot assume stability of structure when assessing the consequences of alternative exchange-rate regimes For example, the slope of the aggregate supply curve and the rationally-formed expectations in the asset markets can respond dramatically to the government's choice of exchange-rate regime Second, exchange-rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare

Determinants of current account deficits in developing countries

Abstract: The objective of this paper is to provide an exhaustive characterization of the empirical linkage between current account deficits and a broad set of economic variables proposed by the literature In order to accomplish this task, we complement and extend previous empirical research by (1) using a large and consistent macroeconomic data set on public and private domestic saving, external saving, and other national income variables, (2) focusing on developing economies by drawing on a panel data set consisting of 44 developing countries and annual information for the period 1966-95, (3) adopting a reduced-form approach, instead of holding to a particular structural model, (4) developing a simple econometric model to distinguish between transitory and permanent effects, and (5) employing a class of estimators that controls for the problems of simultaneity and reverse causation Some of our findings are: (i) current account deficits are moderately persistent, (ii) a rise in domestic output growth generates a larger current account deficit; (iii) transitory increases in either public or private saving have a positive effect on the current account, and, in contrast, their permanent changes have insignificant effects, (iv) temporary shocks that increase the terms of trade or appreciate the real exchange rate are linked with higher current account deficits, but their permanent changes do not have significant effects, and (v) either higher growth rates in industrialized economies or larger international interest rates reduce the current account deficit in developing economies