Emerging floaters: Pass-throughs and (some) new commodity currencies

In spite of early skepticism on the merits of floating exchange rate regimes in emerging markets, 8 of the 25 largest countries in this group have now had a floating exchange rate regime for more than a decade. Using parsimonious VAR specifications covering the period of floating exchange rates, this study computes the dynamics of exchange rate pass-throughs to consumer price indices. We find that pass-throughs have typically been moderate even though emerging floaters have seen considerable nominal and real exchange rate volatilities. Previous studies that set out to estimate exchange rate pass-throughs ignored changes in policy regimes, making them vulnerable to the Lucas critique. We find that, within the group of emerging floaters, estimated pass-throughs are higher for countries with greater nominal exchange rate volatilities and that trade more homogeneous goods. These findings are consistent with the pass-through model of Floden and Wilander (2006) and earlier findings by Campa and Goldberg (2005), respectively. Furthermore, we find that the Indonesian Rupiah, the Thai Baht and possibly the Mexican Peso are commodity currencies, in the sense that their real exchange rates are cointegrated with international commodity prices.     

Dollarization and currency exchange

We use a dual currency money search model to study dollarization. Agents hold portfolios consisting of two currencies, one of which is risky. We use numerical methods to solve for the steady-state distributions of currency portfolios, transaction patterns, and value functions. As risk increases, agents increasingly use the safe currency as a medium of exchange—dollarization occurs. Furthermore, the safe currency trades for multiple units of the risky currency. This type of currency exchange, and the corresponding nominal exchange rate, are often observed in black market or unofficial currency exchange markets in developing countries. Due to decentralized trading, a distribution of exchange rates arises, whose mean and variance change in predictable ways when currency risk increases.     

Exchange rate variability and monetary policy under rational expectations: Some Euro-American experience 1973–1979

We analyze the sources of changes in nominal and real rates of exchange between six European currencies and the U.S. dollar. We conclude that over the period 1973–1979 unexpected changes in the price of oil, together with unanticipated monetary shocks at home or in the U.S. were the most important causes of changes in exchange rates. A multi-state Kalman filter technique is used to compute empirical proxies for unanticipated changes in the exogenous variables. Since both oil price shocks and changes in U.S. monetary trends effect the European currencies in different degrees, it follows that differential domestic rates of inflation are not the only reason why arrangements to restrict exchange rate fluctuations, such as the European Monetary System, may run into trouble.     

Commodity Trade and the Carry Trade: A Tale of Two Countries

Persistent interest rate differentials account for much of the currency carry trade profitability. “Commodity currencies” offer high interest rates on average, while countries that export finished goods tend to have low interest rates. We develop a general equilibrium model of international trade and currency pricing where countries have an advantage in producing either basic inputs or final goods. In the model, domestic production insulates commodity‐producing countries from global productivity shocks, forcing final‐good producers to absorb them. Commodity‐currency exchange rates and risk premia increase with productivity differentials and trade frictions. These predictions are strongly supported in the data.     

人民币汇率的巴拉萨-萨缪尔森效应——基于弹性价格货币模型的分析

本文在汇率的弹性价格货币模型基础上,加入非贸易品与贸易品价格差异因素进行扩展,运用OLS回归方法分析了产出、货币供给、利率对1994-2005年人民币对美元汇率的影响。分析表明,弹性价格货币模型较好的解释了影响人民币对美元汇率的各个因素。贸易品非贸易品的价差显著影响着货币模型的购买力平价和名义汇率的偏离,但是BS效应并不存在。主要原因是作为政策手段的人民币汇率一直被低估,名义汇率低于贸易品购买力平价。     

International monetary trade and the law of one price

We endogenize circulation of currencies and price formation in a decentralized trading environment with two countries and two currencies. In equilibrium sellers of homogeneous goods may post prices in the national or also in the foreign currency, given unobservable buyers’ valuations. We prove that, under different monetary regimes, the absence of well integrated international goods markets doesn't necessarily imply a violation of the law of one price. We also illustrate the behavior of prices across regimes characterized by different degrees of monetary integration.     

Real exchange rates under alternative nominal exchange-rate systems

The paper develops an equilibrium model of the determination of exchange rates, the relative price of nontraded goods, and the current account. The focus is on the effects of various real and nominal disturbances and the conditions under which the nominal exchange-rate system is neutral with respect to real variables in the economy. The model demonstrates an assymetry in the roles of trade and nontraded goods in affecting exchange rates. An econometric investigation of the raltion between the exchange-rate system and the variability of real exchange rates provides some evidence against the neutrality hypothesis.     

Understanding the Backus–Smith puzzle: It's the (nominal) exchange rate,stupid

Backus, Kehoe and Kydland (BKK 1992) demonstrated that if international capital markets are complete, consumption growth correlations across countries should be higher than their corresponding output growth correlations. In stark contrast to the theory, however, in actual data the consumption growth correlation is lower than the output growth correlation. By assuming trade imperfections due to non-traded goods, Backus, D.K., Smith, G.W. [1993 Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics 35(3–4), 297–316] showed that there is an additional impediment at work that can lower the consumption growth correlation. While their argument was successful in partially explaining the puzzlingly low cross country correlation of consumption growth rates, it contributed to generating another puzzle because the data forcefully show that consumption growth is negatively correlated with the real exchange rate, which is also a violation of the theory. Using data for OECD countries, we decompose real exchange rate growth into its nominal exchange rate growth and inflation differential components, and find that nominal exchange rate movements are the main source for the Backus-Smith puzzle. We demonstrate the robustness of this finding by examining sub-samples of the data, by allowing for imperfect risk sharing due to ‘rule of thumb’ consumers, and by examining intranational data across the U.S. states where the nominal exchange rate is fixed.     

Nominal exchange rate volatility,relative price volatility,and the real exchange rate

We model real exchange rate, nominal exchange rate, and relative price volatility using real and nominal factors. We analyze these volatility measures across developing and industrialized countries. We find that the inclusion of nominal factors achieves a sizable reduction in the real exchange rate volatility spread between developing and industrialized countries. In addition, we find that nominal factors matter to real exchange rate volatility in the short run and the long run, and that for developing countries, a higher share of real exchange rate volatility stems from relative price volatility.     

The intrinsic value of gold: An exchange rate-free price index

In this paper, we propose a gold price index that enables market participants to separate the change in the ‘intrinsic’ value of gold from changes in global exchange rates. The index is a geometrically weighted average of the price of gold denominated in different currencies, with weights that are proportional to the market power of each country in the global gold market. Market power is defined as the impact that a change in a country’s exchange rate has on the price of gold expressed in other currencies. We use principal components analysis to reduce the set of global exchange rates to four currency ‘blocs’ representing the U.S. dollar, the euro, the commodity currencies and the Asian currencies, respectively. We estimate the weight of each currency bloc in the index in an error correction framework using a broad set of variables to control for the unobserved intrinsic value. We show that the resulting index is less volatile than the USD price of gold and, in contrast with the USD price of gold, has a strong negative relationship with global equities and a strong positive relationship with the VIX index, both of which underline the role of gold as a safe haven asset.     

Cointegration test of oil price and us dollar exchange rates for some oil dependent economies

This study examines the long-run dynamics between oil price and the bilateral US dollar exchange rates for a group of oil-dependent economies before and after the 2008–2009 Global Financial Crises. Exchange rates are for the euro, Indian rupee, Russian ruble, South African rand, Ghanaian cedi and the Nigerian naira. The dependence on crude oil of these economies is either because fiscal revenues are primarily reliant on oil export receipts or because industrial production is heavily dependent on petroleum. Empirical results show evidence of a long run equilibrium relationship between oil price and exchange rate, especially for currencies of the key oil-exporting countries. This relationship is more evident in the post crisis period, which is also the period when both exchange rate volatility and the inverse relationship between oil price and exchange rate experienced a significant increase.     

Can trade costs explain why exchange rate volatility does not feed into consumer prices?

If countries specialize in imperfectly substitutable goods, trade costs increase the share of expenditure devoted to domestic output, reducing the exposure of consumer price inflation to exchange rate changes. I present a multi-country flexible-price model where expenditure shares are inversely related to trade costs through a gravity equation. In this setting, consumer price inflation can be approximated as an expenditure-share-weighted average of the contributions to inflation from all countries. I use data from 24 OECD countries, 1970-2003, to estimate a structural gravity model. I combine the fitted expenditure shares from the estimation with actual data on exchange rates to construct predictions of inflation. The behavior of these predictions indicates that trade costs can explain both qualitatively and quantitatively the failure of exchange rate volatility to feed into inflation.     

A model of the Federal Reserve Act under the international gold standard system

Freeman (Am. Econom. Rev. 86 (1996a) 1126) shows that an elastic money supply enhances the efficiency of monetary equilibrium by clearing default-free debts at par value in the domestic credit market. This research adds a foreign exchange market to Freeman's model and extends his analysis into a two-country model, in which the arrival rates of agents are not equal between the two countries. In this model, an elastic money supply in the foreign exchange market to clear the exchange of fiat monies at gold standard parity, accompanied by an elastic money supply in the domestic credit market, could improve the efficiency of monetary equilibrium.     

THE THREE FACES OF THE INTERNATIONAL COMPARISON PROJECT

Purchasing power parities (PPPs), this article confirms, arethe correct converters for translating GDP and its componentsfrom own-currencies to dollars (the usual numeraire); the alternativemeasure, exchange rates, obscures the relationship between thequantity aggregates of different countries. Drawing on the reportsof the United Nations International Comparison Project (ICP),the article contends that exchange rates systematically understatethe purchasing power of the currencies of low-income countriesand thus exaggerate the dispersion of national per capita incomes.Where full-scale (benchmark) PPP estimates are not available,estimates based on shortcut methods better approximate whatthe benchmark estimates would be than do the exchange rate conversions.The ICP results also illuminate price and exchange rate relationshipsamong countries by providing a measure of the difference inthe levels of prices in different countries. ICP price comparisonsfor components of GDP make possible the analysis of comparativeprice and quantity structures of different countries and providethe raw materials for many types of analytical studies.      

Pricing currency risk in the stock market: Evidence from Finland and Sweden 1970-2009

We investigate the role of currency risk on stock markets in two interlinked Nordic countries exhibiting a gradual move from fixed to floating exchange rates. We apply the Ding and Engle (2001) covariance stationary specification in a multivariate GARCH-M setup to test a conditional international asset pricing model. Using a sample period from 1970 to 2009, we find that the currency risk is priced in both stock markets, and that the price and the risk premium are lower after the floatation of the currencies, especially for Finland. We also find the cross-country exchange rate shock from Finland to affect the price of currency risk in Sweden, but not vice versa. Finally, we discuss some of the potential issues in applying multivariate GARCH-M specifications in tests of asset pricing models.     

信息传递效率、货币传染与东亚汇率波动溢出分析

本文运用Cheung和Ng交叉相关系数方法,对东亚六国货币①——人民币、日元、韩元、泰国铢、新加坡元和林吉特的名义美元汇率波动溢出进行检验,发现东亚汇率波动溢出普遍存在且具有不对称性和多层次溢出特征。实证结果还表明,日元交易商能更加有效处理来自人民币、韩元、泰铢、新加坡元和林吉特五种货币的信息,而人民币交易商对处理来自日元、泰铢、新加坡元等货币的信息效率不高。     

人民币与东盟国家货币直接挂牌交易推进路径研究

基于演化博弈理论,构建博弈模型,运用仿真分析法,考量人民币与东盟国家货币直接挂牌交易推进路径.结果表明,稳定价差、增强激励、削减成本,是博弈双方均衡推进人民币直接挂牌交易的有效策略.鉴此,宜在成本调控基础上,稳定汇率价差,再创新金融产品,适时推动汇率市场化改革,最终实现规模化、市场化的人民币与东盟国家货币直接挂牌交易.     

European monetary integration and persistance of real exchange rates

The aim of this paper is to analyze whether the persistence properties of the European real exchange rates changed when their currencies joined the euro or during the monetary integration process. More specifically, we investigate whether, as a result of the single currency or the previous macroeconomic stability, nominal price rigidities have decreased and the persistence of real exchange has fallen. We test for stationarity against a change in the integration order on different competitiveness measures during the period that runs from the middle of the seventies to nowadays. The results show that the real exchange rates of the European periphery (Spain, Italy, Portugal, Greece and Finland) underwent a change in their order of integration from I(1) to I(0) at some time around the middle of the 1990s. On the other hand, the real exchange rates of the Central European countries, with a greater stability in the 1980s and 1990s, changed their integration order earlier, if at all, mostly during the 1980s. So, the euro seems to have had, on the whole, little influence on the persistence of real exchange rates. Only for a few countries do our findings detect a significant decrease in persistence related with the nominal convergence process.     

Real Exchange Rates and Fundamentals: A Cross‐Country Perspective

This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the consumer price index‐based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets, government consumption, and trade restrictions tend to be associated with appreciating real exchange rates.     

Expenditure switching versus real exchange rate stabilization: Competing objectives for exchange rate policy

This paper develops a view of exchange rate policy as a trade-off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment. We show that optimal nominal exchange rate volatility will reflect these competing objectives. The key determinants of how much the exchange rate should respond to shocks will depend on the extent and source of price stickiness, the elasticity of substitution between home and foreign goods, and the amount of home bias in production. Quantitatively, we find the optimal exchange rate volatility should be significantly less than would be inferred based solely on terms of trade considerations. Moreover, we find that the relationship between price stickiness and optimal exchange rate volatility may be non-monotonic.