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.

How to Understand High Food Prices

Abstract: Agricultural price booms are better explained by common factors than by market-specific factors such as supply shocks. A capital asset pricing model-type model shows why one should expect this and Granger causality analysis establishes the role of demand growth, monetary expansion and exchange rate movements in explaining price movements over the period since 1971. The demand for grains and oilseeds as biofuel feedstocks has been cited as the main cause of the price rise, but there is little direct evidence for this contention. Instead, index-based investment in agricultural futures markets is seen as the major channel through which macroeconomic and monetary factors generated the 2007–2008 food price rises.

Empirical Exchange Rate Models of the Nineties: Are Any Fit to Survive?

Abstract: Previous assessments of nominal exchange rate determination have focused upon a narrow set of models typically of the 1970's vintage. The canonical papers in this literature are by Meese and Rogoff (1983, 1988), who examined monetary and portfolio balance models. Succeeding works by Mark (1995) and Chinn and Meese (1995) focused on similar models. In this paper we re-assess exchange rate prediction using a wider set of models that have been proposed in the last decade: interest rate parity, productivity based models, and behavioral equilibrium exchange rate' models. The performance of these models is compared against a benchmark model the Dornbusch-Frankel sticky price monetary model. The models are estimated in error correction and first-difference specifications. Rather than estimating the cointegrating vector over the entire sample and treating it as part of the ex ante information set as is commonly done in the literature, we recursively update the cointegrating vector, thereby generating true ex ante forecasts. We examine model performance at various forecast horizons (1 quarter, 4 quarters, 20 quarters) using differing metrics (mean squared error, direction of change), as well as the consistency' test of Cheung and Chinn (1998). No model consistently outperforms a random walk, by a mean squared error measure; however, along a direction-of-change dimension, certain structural models do outperform a random walk with statistical significance. Moreover, one finds that these forecasts are cointegrated with the actual values of exchange rates, although in a large number of cases, the elasticity of the forecasts with respect to the actual values is different from unity. Overall, model/specification/currency combinations that work well in one period will not necessarily work well in another period.

Purchasing Power Parity in the Long Run

Abstract: This paper re-examines the evidence on Purchasing Power Parity (PPP) in the long run. Previous studies have generally been unable to reject the hypothesis that the real exchange rate follows a random walk. If true, this implies that PPP does not hold. In contrast, this paper casts serious doubt on this random walk hypothesis. The results follow from more powerful estimation techniques, applied in a multilateral framework. Deviations from PPP, while substantial in the short run, appear to take about three years to be reduced in half. LONG-RUN PURCHASING POWER PARITY (PPP) is a fundamental building block of most models of exchange rate determination. Dynamic exchange rate models, as in Dornbusch (1976) and Mussa (1982), usually rely on PPP as a long-run equilibrium condition for the exchange rate. Yet the PPP doctrine has not fared well in recent tests.1 In particular, Roll (1979) and Adler and Lehmann (1983) have been unable to reject the hypothesis that the real exchange rate follows a random walk. If true, the random walk hypothesis has the disturbing implication that shocks to the real exchange rate are never reversed, which clearly implies that there is no tendency for PPP to hold in the long run. This paper presents evidence which casts doubt on the random walk hypothesis for the real exchange rate. In our opinion, the negative results obtained in previous empirical research2 reflect the poor power of the tests rather than evidence against PPP. In other words, the methodology employed so far will fail to reject the random walk assumption even in situations where the real exchange rate exhibits slow reversals to PPP values. This is why Hakkio (1986) concludes that, "although the hypothesis that the exchange rate follows a random walk cannot be rejected, not much weight should be put on this conclusion." This paper shows that PPP may hold in the long run after all. The stronger conclusions of this study can be traced to the use of more powerful tests, primarily the statistics advocated by Dickey and Fuller (1979), employed in a multivariate setting. We find that using a system of univariate autoregressions constraining * Salomon Brothers and Graduate School of Business, Columbia University, respectively. This material is related to Abuaf's Ph.D. dissertation at the University of Chicago. The suggestions of the referees led to numerous improvements in the paper. The views expressed here do not necessarily reflect those of Salomon Brothers. 'See for instance Frenkel (1981), Cumby and Obstfeld (1984), and Hakkio (1984). 2Exceptions are Cumby and Obstfeld (1984) and Cumby and Huizinga (1988), who report that expected exchange rate changes are biased predictors of relative inflation rates. This implies that real