PACIFIC ECONOMIC REVIEW, Issue 1 2008
Rod Tyers
The absence of secondary indices of import and export prices necessitates their construction from trade data. Some undervaluation is suggested in the lead-up to and during the financial crisis, due in part to an extraordinary accumulation of foreign reserves following exchange rate integration in 1994. If, instead, China had run a more typical trade balance prior to the crisis its real effective exchange rate would have been higher by about a tenth. [source]

THE REAL EXCHANGE RATE AND THE BALASSA,SAMUELSON EFFECT: THE ROLE OF THE DISTRIBUTION SECTOR

PACIFIC ECONOMIC REVIEW, Issue 1 2005
Ronald MacDonald
The main result is that an increase in the productivity and product market competition of the distribution sector with respect to foreign countries leads to an appreciation of the real exchange rate, similar to what a relative increase in the domestic productivity of tradables does. This contrasts with the result that one would expect by considering the distribution sector as belonging to the non-tradable sector. One explanation may lie in the use of the services from the distribution sector in the tradable sector. [source]

SHORT-RUN AND LONG-RUN DETERMINANTS OF THE REAL EXCHANGE RATE IN MEXICO

THE DEVELOPING ECONOMIES, Issue 1 2008
Antonia LÓPEZ VILLAVICENCIO
C32; F31; F41; F49 This paper explores the real exchange rate behavior in Mexico from 1960 until 2005. Since the empirical analysis reveals that the real exchange rate is not mean reverting, we propose that economic fundamental variables affect its evolution in the long run. Therefore, based on equilibrium exchange rate paradigms, we propose a simple model of real exchange rate determination, which includes the relative GDP per capita, the real interest rates, and the net foreign assets over a long period of time. Our analysis also considers the dynamic adjustment in response to shocks through impulse response functions derived from the multivariate vector autoregressive (VAR) model. [source]

THE YEN-DOLLAR EXCHANGE RATE AND MALAYSIAN MACROECONOMIC DYNAMICS

THE DEVELOPING ECONOMIES, Issue 3 2007
Mansor H. IBRAHIM
E30; F33; F40 This paper empirically assesses the effect of the yen-dollar exchange rate on selected macroeconomic variables, namely, real output, price level, and money supply, for Malaysia. The results, which are based on a vector autoregressive framework, suggest that variations in the yen-dollar rate can have significant influences on Malaysia's macroeconomic variables. More specifically, the yen-dollar depreciation leads to contraction in real GDP and money supply. These results are fairly robust to alternative model specifications. We believe that, apart from providing important insights into the interactions between the yen-dollar rate and domestic macroeconomic variables, our results contribute to the debate on choice of exchange rate regimes for Malaysia. [source]

CAPITAL CONTROLS AS A MEANS OF MINIMISING SPECULATIVE BUBBLES IN REAL EXCHANGE RATES: KEY FEATURES OF THE LITERATURE AND ITS APPLICATION TO CHINA AND INDIA

ECONOMIC PAPERS: A JOURNAL OF APPLIED ECONOMICS AND POLICY, Issue 3 2003
CRAIG APPLEGATE
First page of article [source]

THE INFLUENCE OF FUNDAMENTALS ON EXCHANGE RATES: FINDINGS FROM ANALYSES OF NEWS EFFECTS

JOURNAL OF ECONOMIC SURVEYS, Issue 4 2010
Rafael R. Rebitzky
Abstract As we survey the literature of macroeconomic news in the foreign exchange market, we can by now look back on nearly 30 years of research. The first studies which analysed news effects on exchange rates were established in the early 1990s (see, for example, Dornbusch). Almost at the same time Meese and Rogoff published their influential paper, revealing the forecasting inferiority in exchange rates of structural models against the random walk. This finding has shocked the pillars of exchange rate economics and thus cast general suspicion on research focusing on fundamentals in this field. The eventual rising popularity of event studies can partly be attributed to the re-establishment of the,raison d'être,of exchange rate economics. This work focuses on systematically surveying this literature with particular respect to its primary goal, i.e. shedding light on the analytical value of fundamental research. Thus, its major findings are, first, fundamental news does matter, whereas non-fundamental news matters to a lesser degree. Second, news influences exchange rates via two separated channels, i.e. incorporating common information into prices directly or indirectly based upon order flow. Third, with a few exceptions the impact of fundamental news on exchange rates is fairly stable over time. [source]

OMITTED VARIABLES, CONFIDENCE INTERVALS, AND THE PRODUCTIVITY OF EXCHANGE RATES

PACIFIC ECONOMIC REVIEW, Issue 1 2007
Jonathan E. Leightner
This paper develops confidence intervals for BD-RTPLS and uses BD-RTPLS to estimate the relationship between the exchange rate (e) and gross domestic product (GDP) using annual data from 1984 to 2000 for 23 developing Asian and Pacific countries. BD-RTPLS produces estimates for the exchange rate multiplier (dGDP/de) for these countries and shows how omitted variables affected these multipliers across countries and over time. [source]

PARTIAL DOLLARIZATION, EXCHANGE RATES, AND FIRM INVESTMENT IN PARAGUAY

THE DEVELOPING ECONOMIES, Issue 1 2009
John SERIEUX
E44; F41; G18; O16 Between 1989 and 1993 the government of Paraguay removed most restriction on financial transactions in domestic and foreign currency. The resulting financial deepening also involved partial dollarization. This investigation sought to determine whether partial dollarization led to negative balance sheet effects (in the form of reduced access to investment credit due to depreciation-induced reduction in firms' net worth as a result of currency mismatches on their balance sheets) and, therefore, to investment contractions, at the firm level, in the face of real currency depreciations. Support was found for that thesis. However, there was also evidence that banks expanded credit more rapidly in the face of currency depreciations. These apparent contradictory movements in credit and investment were shown to be a result of the absence of any clear causal link (in a Granger sense) between bank credit to the private sector and private investment in Paraguay. [source]

THE PURCHASING POWER PARITY PERSISTENCE PUZZLE: EVIDENCE FROM BLACK MARKET REAL EXCHANGE RATES,

THE MANCHESTER SCHOOL, Issue 4 2008
MARIO CERRATO
In this paper we analyse the purchasing power parity (PPP) persistence puzzle using a unique data set of black market real exchange rates for 36 emerging market economies and (exact and approximate) median unbiased univariate and panel estimation methods. We construct bootstrap confidence intervals for the half-lives, as well as exact quantiles of the median function for different significance levels using Monte Carlo simulation. Even after accounting for a number of econometric issues, the PPP persistence puzzle is still a striking characteristic of the majority of emerging market countries. However, in a minority of exchange rates, the PPP puzzle is removed. [source]

MODELLING THE SLOW MEAN-REVERSION OF THE CENTRAL AND EASTERN EUROPEAN COUNTRIES' REAL EXCHANGE RATES,

THE MANCHESTER SCHOOL, Issue 1 2008
GILLES DUFRENOT
In this paper we propose a new modelling approach of the exchange rate misalignments in four transition countries: Hungary, Poland, Slovakia and Slovenia. We provide an empirical framework that takes into account two characteristics of these misalignments: while the fundamentals and policies adjust to restore equilibrium towards the long-term exchange rate, there are factors that hinder a fast mean-reverting dynamics. When the exchange rates adjust slowly to their equilibrium long-run values, the standard regressions that assume zero-mean misalignments present some drawbacks and one needs a model that helps to capture the time-varying aspects of the misalignment dynamics. The model proposed in this paper reproduces well the periods of overvaluation and undervaluation observed in the four countries. [source]

OPTIMAL AND ADAPTIVE SEMI-PARAMETRIC NARROWBAND AND BROADBAND AND MAXIMUM LIKELIHOOD ESTIMATION OF THE LONG-MEMORY PARAMETER FOR REAL EXCHANGE RATES,

THE MANCHESTER SCHOOL, Issue 2 2005
SAEED HERAVI
The nature of the time series properties of real exchange rates remains a contentious issue primarily because of the implications for purchasing power parity. In particular are real exchange rates best characterized as stationary and non-persistent; nonstationary but non-persistent; or nonstationary and persistent? Most assessments of this issue use the I(0)/I(1) paradigm, which only allows the first and last of these options. In contrast, in the I(d) paradigm, d fractional, all three are possible, with the crucial parameter d determining the long-run properties of the process. This study includes estimation of d by three methods of semi-parametric estimation in the frequency domain, using both local and global (Fourier) frequency estimation, and maximum likelihood estimation of ARFIMA models in the time domain. We give a transparent assessment of the key selection parameters in each method, particularly estimation of the truncation parameters for the semi-parametric methods. Two other important developments are also included. We implement Tanaka's locally best invariant parametric tests based on maximum likelihood estimation of the long-memory parameter and include a recent extension of the Dickey,Fuller approach, referred to as fractional Dickey,Fuller (FD-F), to fractionally integrated series, which allows a much wider range of generating processes under the alternative hypothesis. With this more general approach, we find very little evidence of stationarity for 10 real exchange rates for developed countries and some very limited evidence of nonstationarity but non-persistence, and none of the FD-F tests leads to rejection of the null of a unit root. [source]

Trade Balance and Exchange Rate: Unit Roots, Co-integration and Long Memory in the US and the UK

ECONOMIC NOTES, Issue 1 2008
Luis A. Gil-Alana
This paper deals with the relationship between the balance of trade and the exchange rate in the US/UK case. Many authors have studied this issue for many countries, but despite the intensive research, there is still no agreement about the effectiveness of currency devaluation to increase a country's balance of trade. We first analyse the relationship between the two variables using unit roots and co-integration methods, and the results are ambiguous. We try a new approach based on fractional integration. The unit root hypothesis is rejected in case of the trade balance in favour of smaller orders of integration, while this hypothesis is not rejected for the exchange rate. Thus, the two series do not possess the same order of integration. We sort this problem out by taking the exchange rate as an exogenous variable, and including it in a regression model where the residuals might follow a fractionally integrated model. [source]

Macroeconomic News and the Euro/Dollar Exchange Rate

ECONOMIC NOTES, Issue 3 2003
Gabriele Galati
This paper investigates to what extent daily movements in the euro/dollar rate were driven by news about the macroeconomic situation in the USA and the euro area during the first two years of EMU. We examine whether market participants reacted to news in different ways depending on whether the news came from the USA or from the euro area, and whether the news was good or bad. Furthermore, we investigate whether traders' reaction to news has changed over time. We find that macroeconomic news has a statistically significant correlation with daily movements of the euro against the dollar. However, this relationship exhibits considerable time variation. There are indications of asymmetric response, but to different extents at different times. Our results also provide evidence that the market seemed to ignore good news and remain fixated on bad news from the euro area, as often claimed in market commentaries, but only for some time. Finally, we find evidence that the impact of macroeconomic news on the euro/dollar rate was stronger when news switches from good to bad or vice versa. (J.E.L.: F31). [source]

Capital Inflows, Resource Reallocation and the Real Exchange Rate,

INTERNATIONAL FINANCE, Issue 2 2008
Emmanuel K. K. Lartey
A large capital inflow to a developing economy can potentially cause a real exchange rate appreciation that is detrimental to the prospects of its tradable sector; a phenomenon known as the Dutch Disease. I analyse the effects of both the level and share of capital inflow on resource reallocation and real exchange rate movements in a small open economy. I find that there exists a trade-off between resource reallocation and the degree of real exchange rate appreciation. In particular, the less labour the tradable sector loses to the non-tradable sector, the greater is the real exchange rate appreciation. This result is driven by the share of investment accounted for by foreign capital, and suggests that an emerging market economy that adopts a production technique which utilizes a greater share of foreign capital relative to domestic capital will be more susceptible to the Dutch Disease following an increase in capital inflow. The results also imply that a policy designed to minimize real exchange rate appreciation during capital inflow episodes should encompass measures aimed at stabilizing prices of non-tradables. [source]

Exploring the Role of the Real Exchange Rate in Australian Monetary Policy

THE ECONOMIC RECORD, Issue 244 2003
Richard Dennis
An important issue in small open-economies is whether policymakers should respond to exchange rate movements when they formulate monetary policy. Micro-founded models tend to suggest that there is little to be gained from responding to exchange rate movements, and the literature has largely concluded that such a response is unnecessary, or even undesirable. This paper examines this issue using an estimated model of the Australian economy. In contrast to microfounded models, according to this model policymakers should allow for movements in the real exchange rate and the terms-of-trade when they set interest rates. Further, taking real exchange rate movements into account appears even more important with price level targeting than with inflation targeting. [source]

Purchasing Power Parity Adjustment Speeds in High Frequency Data when the Equilibrium Real Exchange Rate is Proxied by a Deterministic Trend

THE MANCHESTER SCHOOL, Issue 2003
Ivan Paya
Rogoff suggested in 1996 that the dollar,yen real exchange rate represented a ,canonical' case of a trend in the equilibrium real exchange rate. The implied speed of adjustment of the dollar,yen real exchange rate is found to be substantially faster, with half-life shocks of less than 2 years, from estimates of a non-linear model which incorporates a deterministic trend proxying the equilibrium level. We also examine the power of unit root tests against smooth transition non-linear models which incorporate a deterministic trend and the robustness of such non-linear estimations using Monte Carlo and bootstrap simulations. [source]

On Public Investment, the Real Exchange Rate and Growth: Some Empirical Evidence from the UK and the USA

THE MANCHESTER SCHOOL, Issue 3 2003
Sugata Ghosh
This study is based on a two-country endogenous growth model with optimizing agents, where public investment affects the real exchange rate and the long-run growth rate, and does so in a non-linear fashion. Non-parametric regression analysis of quarterly data from the UK and the USA suggests that there is a significant non-linear relationship between public investment and the real exchange rate, and also between public investment and the growth rate. This is also supported by our parametric generalized method of moments model that jointly determines the real exchange rate, growth rate and net foreign assets in terms of public investment. [source]

Assessing the Equilibrium Exchange Rate of the Malaysian Ringgit: A Comparison of Alternative Approaches

ASIAN ECONOMIC JOURNAL, Issue 2 2008
Isabell Koske
F3; F31; F32 Drawing on the behavioral equilibrium exchange rate and the fundamental equilibrium exchange rate approaches, this paper assesses the equilibrium value of the real effective exchange rate of the Malaysian ringgit over the past 25 years. For 2005, when the Malaysian authorities exited from the peg with the US dollar, both models determine a slight undervaluation of the currency. Openness and real GDP per capita have been the main drivers of real exchange rate movements in the past, although non-tradable productivity, government consumption, and net foreign assets have also had a sizable impact. The paper also highlights the limitations of applying the two approaches in the context of emerging countries. [source]

The Effect of Exchange Rate on Bilateral Trade Balance: New Evidence from Malaysia and Thailand

ASIAN ECONOMIC JOURNAL, Issue 3 2001
Ahmad Zubaidi BaharumshahArticle first published online: 18 DEC 200
This paper attempts to identify the major economic factors that influence the bilateral trade balances of Malaysia and Thailand with the US and Japan. To this end, an unrestricted VAR model was estimated using quarterly frequency data from 1980: I to 1996: IV. The Johansen results indicate a stable long-run relation between trade and three macro variables: exchange rate, domestic income and foreign income. The main findings of this paper are: (i) the real effective exchange rate is an important variable in the trade balance equation and devaluation improves the trade balances of both economies in the long-run; (ii) the other important variables that determine trade balance include domestic and foreign incomes; (iii) the results indicate no J-curve effect and causal run from exchange rate to trade balance, (iv) the real effects of devaluation are distributed over a period of eight to nine quarters. [source]

Supramolecular Assembly of an Amphiphilic GdIII Chelate: Tuning the Reorientational Correlation Time and the Water Exchange Rate

CHEMISTRY - A EUROPEAN JOURNAL, Issue 3 2006
Susana Torres
Abstract We report the synthesis and characterization of the novel ligand H5EPTPA-C16 ((hydroxymethylhexadecanoyl ester)ethylenepropylenetriaminepentaacetic acid). This ligand was designed to chelate the GdIII ion in a kinetically and thermodynamically stable way while ensuring an increased water exchange rate (kex) on the GdIII complex owing to steric compression around the water-binding site. The attachment of a palmitic ester unit to the pendant hydroxymethyl group on the ethylenediamine bridge yields an amphiphilic conjugate that forms micelles with a long tumbling time (,R) in aqueous solution. The critical micelle concentration (cmc = 0.34 mM) of the amphiphilic [Gd(eptpa-C16)(H2O)]2, chelate was determined by variable-concentration proton relaxivity measurements. A global analysis of the data obtained in variable-temperature and multiple-field 17O NMR and 1H NMRD measurements allowed for the determination of parameters governing relaxivity for [Gd(eptpa-C16)(H2O)]2,; this is the first time that paramagnetic micelles with optimized water exchange have been investigated. The water exchange rate was found to be = 1.7×108 s,1, very similar to that previously reported for the nitrobenzyl derivative [Gd(eptpa-bz-NO2)(H2O)]2, ( = 1.5×108 s,1). The rotational dynamics of the micelles were analysed by using the Lipari,Szabo approach. The micelles formed in aqueous solution show considerable flexibility, with a local rotational correlation time of = 330 ps for the GdIII segments, which is much shorter than the global rotational correlation time of the supramolecular aggregates, = 2100 ps. This internal flexibility of the micelles is responsible for the limited increase of the proton relaxivity observed on micelle formation (r1 = 22.59 mM,1,s,1 for the micelles versus 9.11 mM,1,s,1 for the monomer chelate (20 MHz; 25,°C)). [source]

Real Exchange Rate in China: A Long-run Perspective

CHINA AND WORLD ECONOMY, Issue 4 2006
Haihong Gao
F14; F31; F43 Abstract This paper investigates the RMB exchange rate from a long-run viewpoint. Whether China's rapid economic growth brought about real exchange rate appreciation between 1975 and 2002 is empirically examined, based on a supply-side model, the Balassa,Semuelson Hypothesis (BSH). The same test is conducted on Japan, Hong Kong, Korea, Malaysia, Singapore, Thailand, the Philippines, Indonesia and India. Our result indicates that the BSH only exists where the industrial structure has been upgraded and the economy has been successfully transformed from an agricultural economy to a manufacturing economy. Interestingly, China, among those where the BSH does not present, appears to be upgrading its industrial and trade structure. We then try to answer the question of why past rapid growth has no significant relationship with the RMB real exchange rate and what factors are underlying the trend of the RMB real exchange rate. We expect an appreciating trend of RMB real exchange rate in the foreseeable future, presuming that China's industrial upgrading process continues and the factors pertaining to the BSH's prediction, such as rise of wage rates in both tradables and nontradables, become more significant. (Edited by Xiaoming Feng) [source]

Fixed Exchange Rates and Banking Crises: When Does the Former Prevent the Latter?

ECONOMIC NOTES, Issue 3 2009
Victoria Miller
Because monetary policy is constrained in fixed exchange rate regimes, banks should expect fewer money-financed bailouts and therefore manage their risks more carefully when exchange rates are fixed than when they are flexible. It follows that we should observe fewer banking crises in countries with formal currency pegs. The 1990s however are littered with occurrences of banking crises in countries with fixed exchange rates. This paper asks whether banks in those countries could have adopted excess risk expecting money-financed bailouts or whether their pegs discouraged such moral hazard-type risks. [source]

Non-linearities, Business Cycles and Exchange Rates

ECONOMIC NOTES, Issue 3 2008
Menzie D. Chinn
This paper conjoins the disparate empirical literatures on exchange rate models and monetary policy models, with special reference to the importance of output, inflation gaps and exchange rate targets. It focuses in on the dollar/euro exchange rate, and the differential results arising from using alternative measures of the output gap for the US and for the Euro area. A comparison of ,in-sample' prediction against alternative models of exchange rates is also conducted. In addition to predictive power, I also assess the various models' plausibility as economic explanations for exchange rate movements, based on the conformity of coefficient estimates with priors. Taylor rule fundamentals appear to do as well, or better, than other models at the 1-year horizon. [source]

Exchange Rates under the East Asian Dollar Standard.

ECONOMICA, Issue 297 2008
By RON McKINNON
No abstract is available for this article. [source]

Fixed versus Flexible Exchange Rates: Evidence from Developing Countries

ECONOMICA, Issue 295 2007
MATHIAS HOFFMANN
This paper investigates the hypothesis that in a small open economy flexible exchange rates act as a ,shock absorber' and mitigate the effects of external shocks more effectively than fixed exchange rate regimes. Using a sample of 42 developing countries, the paper assesses whether the responses of real GDP, the trade balance and the real exchange rate to world output and world real interest rate shocks differ across exchange rate regimes. The paper shows that there are significant differences in the variability of macroeconomic aggregates under fixed and flexible exchange rate regimes. [source]

Market Sentiment and Macroeconomic Fluctuations under Pegged Exchange Rates

ECONOMICA, Issue 292 2006
PIERRE-RICHARD AGÉNOR
The effects of an adverse change in market sentiment, defined as a temporary increase in the premium faced by domestic borrowers on world financial markets, are studied in an intertemporal optimizing framework with imperfect capital mobility. Firms' demands for working capital are financed by bank credit. The shock leads to a rise in domestic interest rates, capital outflows and a drop in official reserves, a reduction in bank deposits and loans, a contraction in output, and an increase in unemployment. These predictions are consistent with Argentina's economic downturn in the immediate aftermath of the Mexican peso crisis of December 1994. [source]

Book Reviews: The Economics of Exchange Rates

ECONOMICA, Issue 281 2004
Article first published online: 6 MAY 200
No abstract is available for this article. [source]

A Structural Investigation of Third-Currency Shocks to Bilateral Exchange Rates,

INTERNATIONAL FINANCE, Issue 1 2008
Martin Melecky
An exchange rate between two currencies can be materially affected by shocks emerging from a third country. A US demand shock, for example, can affect the exchange rate between the euro and the yen. Because positive US demand shocks have a greater positive impact on Japanese interest rates than on euro area rates, the yen appreciates against the euro in response. Using quarterly data on the United States, the euro area and Japan from 1981 to 2006, this paper shows that the third-currency effects are significant even when exchange rates evolve according to uncovered interest parity. This is because interest rates are typically set in response to output and inflation, which are in turn influenced by other exchange rates. More importantly, third-currency effects are also transmitted to the actual exchange rate through the expected future exchange rate, which is, in a multi-country set-up, influenced by third-countries' fundamentals and shocks. Third-currency effects have a stronger impact on the currency of a relatively more open economy. The analysis implies that small open economies should avoid strict forms of bilateral exchange rate targeting, since higher trade and financial openness work as a force intrinsically amplifying currency fluctuations. [source]

Pass-Through of Exchange Rates and Competition between Floaters and Fixers

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 2009
PAUL R. BERGIN
pass-through; exchange rates; translog; China This paper studies how a rise in the share of U.S. imports from China, or any country with a fixed exchange rate, can explain a disproportionate fall in exchange rate pass-through to U.S. import prices. A theoretical model provides an explanation working through changes in markups, showing that a particular "local bias" condition is necessary and that free entry amplifies the effect. The model produces a structural equation for pass-through regressions including the China share; panel regressions over 1993,2006 indicate that the rising share of trade from China or other exchange rate fixers can explain as much as one-half of the observed decline in pass-through for the United States. [source]

Further Evidence on PPP Adjustment Speeds: the Case of Effective Real Exchange Rates and the EMS,

OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 4 2003
Ivan Paya
Abstract Two different approaches intend to resolve the ,puzzling' slow convergence to purchasing power parity (PPP) reported in the literature [see Rogoff (1996), Journal of Economic Literature, Vol. 34.] On the one hand, there are models that consider a non-linear adjustment of real exchange rate to PPP induced by transaction costs. Such costs imply the presence of a certain transaction band where adjustment is too costly to be undertaken. On the other hand, there are models that relax the ,classical' PPP assumption of constant equilibrium real exchange rates. A prominent theory put together by Balassa (1964, Journal of Political Economy, Vol. 72) and Samuelson (1964 Review of Economics and Statistics, Vol. 46), the BS effect, suggests that a non-constant real exchange rate equilibrium is induced by different productivity growth rates between countries. This paper reconciles those two approaches by considering an exponential smooth transition-in-deviation non-linear adjustment mechanism towards non-constant equilibrium real exchange rates within the EMS (European Monetary System) and effective rates. The equilibrium is proxied, in a theoretically appealing manner, using deterministic trends and the relative price of non-tradables to proxy for BS effects. The empirical results provide further support for the hypothesis that real exchange rates are well described by symmetric, nonlinear processes. Furthermore, the half-life of shocks in such models is found to be dramatically shorter than that obtained in linear models. [source]