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.

The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity

Abstract: With transaction costs for trading goods, the nominal exchange rate moves within a band around the nominal purchasing power parity (PPP) value. We model the behavior of the band and of the exchange rate within the band. The model explains why there are below-unity slope coefficients in regression tests of PPP, and why these increase toward unity under hyperinflation or with low-frequency data. Our results are independent of the presence of nontraded goods in the economy. THE OBJECTIVE OF THIS article is to develop a model of the exchange rate that explains the following two stylized empirical facts about deviations from relative purchasing power parity (PPP). First, in a simple regression of changes in (nominal) exchange rates on inflation differentials, the slope coefficient is typically below unity. Second, the slope coefficient increases with the length of the observation interval, and the PPP link is also stronger under hyperinflation than under modest inflation.1 The low coefficients in the relative PPP regression, especially when tested over short periods of time, are often ascribed to errors-in-variables biases that arise from, for example, infrequent price sampling for some items, nonsynchroneity among the prices composing the index, relative price effects in price indices that are weighted differently across countries, and the presence of nontradable goods.2 In this article we present a complementary explanation for the stylized empirical facts, and show that below-unity regression coefficients are expected even when none of these errors in variables are present. We focus on the effect of costs for trading goods-such as shipping and insurance costs, tariffs, and information costs-on the nominal exchange rate.

The Collapse of Purchasing Power Parities during the 1970s

Abstract: This paper reviews and analyzes the empirical record of exchange rates and prices during the 1970's and the analysis is based on the experience of the Dollar/Pound, the Dollar/French Franc and the Dollar/DM exchange rates. Section 2 presents the evidence on PPP during the 1970's and contrasts it with the evidence from the 1920's -- a period during which the doctrine held up reasonably well. This analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks, and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy. The evidence regarding deviations from purchasing power parities is also relevant for determining whether there is a case for managed float. Section 3 attempts to explain what went wrong with the performance of the doctrine during the 1970's. It examines the hypothesis that the departures from PPP are a U.S. phenomenon, as well as the hypothesis that the departures are due to large changes in inter-sectoral relative price changes within the various economies. Given that the predictions of the simple versions of PPP do not hold up, section 4 proceeds in examining the question of whether national price levels have been independent of each other. Section 5 addresses the question of whether exchange rates and national price levels are comparable and whether in principle one should have expected them to be closely linked to each other. The main point that is being emphasized is that there is an important intrinsic difference between exchange rates and national price levels which stems from the basset market theory' of exchange rate determination. This theory implies that the exchange rate, like the prices of other assets, is much more sensitive to expectations concerning future events than national price levels and as a result, in periods which are dominated by news' which alter expectations, exchange rates are likely to be much more volatile than national price levels and departures from PPP are likely to be the rule rather than the exception. Finally, section 6 concludes the paper with some policy implications.

Currency crises and monetary policy in an economy withcredit constraints

Abstract: This paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic )rms and the existence of nominal price rigidities. The possibility of multiple equilibria, including a ‘currency crisis’ equilibrium withlow output and a depreciated domestic currency, results from the following mechanism: If nominal prices are ‘sticky’, a currency depreciation leads to an increase in the foreign currency debt repayment obligations of )rms, and thus to a fall in their pro)ts; this reduces )rms’ borrowing capacity and therefore investment and output in a credit-constrained economy, which in turn reduces the demand for the domestic currency and leads to a depreciation. We examine the impact of various shocks, including productivity, )scal, or expectational shocks. We then analyze the optimal monetary policy to prevent or solve currency crises. We also argue that currency crises can occur both under )xed and 5exible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private )rms. c � 2001

An empirical examination of long-run purchasing power parity using cointegration techniques

Abstract: This paper presents an empirical analysis of long-run purchasing power parity (PPP) for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series. Our empirical results are extremely unfavourable to the PPP hypothesis as a long-run equilibrium condition, even with an allowance made for measurement error and/or tranportation costs. In particular, we are unable to reject the hypothesis of non-cointegration of the exchange rate and relative prices for any of the countries concerned. Far from finding a stable, long-run proportionality between exchange rates and relative prices, our results therefore suggest that they tend to drift apart without bound.