Predicting foreign exchange movements using historic deviations from PPP

The ability to forecast FX rates from historical exchange rate movements is examined. An eight nation study shows a currency's deviation from the rate predicted by PPP over a four year period can predict the direction of its movement in the subsequent one to four years. We show short term exchange rate movements of freely floating currencies are large in comparison with changes in economic fundamentals and these movements accumulate to create pressure which results in a predictable pattern of reversal. The results are robust across currencies and relatively insensitive to the time parameters used in the estimation.     

储备型汇率制度:发行非国际货币的发展中国家(地区)之选择

国际货币与非国际货币之区分构成了当前国际金融体系典型的非对称特征。该种区分必将影响不同国家间汇率及汇率制度的选择。本文试图提出一种观点:发行非国际货币的发展中国家所选择的汇率制度可以形容为"储备型汇率制度"。在该种制度下,中央银行对外汇市场不断进行干预以实现其国际货币储备的不断积累,由此而造成本币长期贬值(或低估)和贸易的持续顺差。该种观点不仅与当今世界汇率与汇率制度分布之事实相一致,而且还可通过一个反映发展中国家中央银行行为的动态优化模型进行严格的理论证明。尽管"储备型汇率制度"可能与当前IMF所规定的反"货币操纵"条款相冲突,但是在当前这种不公正和非对称的国际货币体系下,该制度无疑是发展中国家的最优选择。     

Financial crises,exchange rate linkages and uncovered interest parity: Evidence from G7 markets

This paper examines the dynamic linkages among major exchange rates during the Global Financial Crisis and Eurozone Sovereign Debt Crisis. We extend the previous literature on volatility spillover linkages among the currencies by taking into account the uncovered interest-rate parity hypothesis for 2004–2015. The results indicate that the Canadian Dollar and Great British Pound were affected mainly by the US Dollar across the two crises due to strong financial and economic ties among the three economies, while the Japanese Yen shows evidence of a safe-haven currency. We also provide evidence of varying vulnerability of currencies to both crises, implying increased portfolio diversification benefits, since holding a portfolio with diverse currencies is less subject to systematic risk. These results show that the policy makers need to adopt a stricter form of monetary policy coordination among central banks, since the different vulnerability of currencies across turbulent periods reveals possible non-cooperative monetary policies.     

The impact of subprime mortgage on correlation between stock and FX markets

Our researching period contains the American subprime mortgage crisis, an insignificant financial crisis and the Asian financial crisis periods. We analyse and compare the interrelations between the stock and Foreign Exchange (FX) markets in Taiwan by the daily data of stock prices and NTD/US exchange rates. The empirical results found that there is no effect on the long-term equilibrium between the stock and FX markets during the American subprime mortgage crisis. It also shows that, whether financial crisis occurs or not, there is no cointegration between the stock and FX markets. Furthermore, the results find that there exists bidirectional causality between the stock and FX markets among the American subprime mortgage crisis and the Asian financial crisis period. However, there is only unidirectional relationship from stock prices to exchange rates during insignificant financial crisis period. Such results imply that two financial crises do significantly affect the short-term interrelationships between the stock and FX markets and lead to more importance for the connection between two markets.     

Exchange market pressure and primary commodity – exporting emerging markets

This paper studies short-term sensitivity between exchange market pressure and various domestic and external factors in primary commodity-exporting emerging markets. The paper focuses on the top country-commodity groups in sugar, cereal, fuels, ores and coffee during the pre-peak and post-peak commodity price periods across floating and pegged exchange rate regimes, using the price of crude oil as a general benchmark. Employing a panel model and panel VAR analysis, the paper finds the heterogeneity of response patterns unique to country-commodity groups and exchange rate regimes. According to the results, in flexible regimes, volatility occurs via the foreign exchange market, interest rates, and domestic credit cycles, feeding into the social costs for structurally weaker economies. Hard exchange-rate pegs often result in a drain on international reserves as the terms of trade deteriorate following post-price peaks, leading to unpopular depreciation. These results accentuate concerns over uneven international trade patterns, an open economy’s short-term foreign exchange policy, and speculative capital flows. Such sensitivity has broad implications for macroeconomic balance and the sustainability of implied exchange rate targets in the presence of a foreign exchange constraint across emerging markets.     

Exchange rate volatility and regime change: A Visegrad comparison

We analyze exchange rate volatility in the Visegrad Four countries during the period in which they abandoned tight regimes for more flexible ones. We account for path dependency, asymmetric shocks, and movements in interest rates. In addition, we allow for a generalized error distribution. The overall findings are that path-dependent volatility has a limited effect on exchange rate developments and that the introduction of floating regimes tends to increase exchange rate volatility. During the period of flexible regimes, volatility was mainly driven by surprises. Asymmetric effects of news tend to decrease volatility under the floating regime. Interest differentials impact exchange rate volatility contemporaneously under either regime, although we find no intertemporal effect of interest differentials. Journal of Comparative Economics 34 (4) (2006) 727–753.     

MONETARY CREDIBILITY VS. VOTER APPROVAL: POLITICAL INSTITUTIONS AND EXCHANGE‐RATE STABILIZATION DURING CRISES

This paper analyzes how political institutions affect the execution of exchange‐rate policy. By focusing on policy‐makers' responses to the emergence of speculative pressure on their currencies, we argue that the effect of democratic institutions on exchange‐rate stability is likely to be conditioned by the officially announced exchange‐rate regime. Officially fixed exchange rates are the main instrument of autocrats to signal commitment to long‐term stability. Autocratic governments with strictly fixed exchange rates are thus more likely to defend their exchange rates than autocrats with an intermediate regime because the latter implicitly signal that they care less about monetary stability. In contrast, democrats defend more often in intermediately than in fully fixed official regimes by using a combination of external and internal adjustments, which reduce the negative effects of a devaluation on voters. Our analysis of 189 currency crises between 1975 and 1999 supports this conditional effect.     

Exchange rate sensitivity of the demand for money in developing countries

There is consensus among researches that under the present floating exchange rate system although developing countries peg their exchange rate to a major currency, they cannot avoid fluctuation in their effective exchange rates as long as major currencies fluctuate against one another. Few authors have investigated the effects of changes in effective exchange rates of developing countries on their imports, exports, trade balance, demand for international reserves, inflation etc. In this paper we try to inestigate the effects of effective exchange rates of developing countries on their demand for money. Previous authors who have estimated a money demand function, inclusive of an exchange rate variable (bilateral or effective), have restricted themselves to industrial countries only. By using quarterly data over the 1973–85 period, it is shown that in most developing countries, while the short-run effcts of depreciation could be in either direction, its long-run effects are negative indicating that depreciation causes a decline in the demand for domestic currency.     

Currency Substitution: A Multicurrency Study for Canada

In this paper we examine currency substitution in Canadian money demand ls-a-vis the currencies of seven industrialized countries. A multicurrency variant of the money demand function is estimated to test for the presence and extent of this substitution. The results (except for the British pound) conform to expectations and show complementarity between currencies. It is also found that the degree of currency substitution under flexible rates exceeds that under fixed rates. We also question the validity of the tests for the presence of currency substitution which do not distinguish between exchange rate regimes. [430]     

Systemic risk contagion in FX market: A frequency connectedness and network analysis

In this study, we analyse systemic risk contagion between a set of most actively traded currencies (EURO, JPY, GBP, AUD, CAD and CHF) by application of VAR based frequency connectedness proposed by Baruník and K?ehlík. By using this novel approach, we gauge foreign exchange (FX) market connectedness in 200‐day frequency band using spectral representation of variance decompositions of VAR and identify directional spillovers between the most actively traded foreign exchange rates. Dynamics of the overall spillover index reveals that the index capture well‐known financial stress incidents properly. Finally, network topology of directional spillovers between currency pairs is provided for visulalization interconnectedness between them.     

The Penn Effect revisited: New evidence from Latin America

In this paper, we examine the role of relative productivity growth in real misalignment of exchange rates in Latin American countries. Specifically, we verify the validity of the Penn Effect for selected countries in this region. Our sample consists of 15 countries for the period 1951 to 2010. We employ both short‐ and long‐panel data techniques, which allow us to experiment with estimators suitable for short and long time dimensions of panel data. The Penn Effect is found to be supported for the entire sample, and for subsamples. Relative productivity growth is dominant in the real exchange rate movement during periods of mild or weak speculative attacks, as compared with periods of severe speculative attacks. To correct for real misalignment of currencies in Latin America under speculative attacks, relative productivity growth must be sizeable.     

Currency Misalignments and Exchange Rate Regimes in Emerging and Developing Countries*

Pegged exchange rates are often pointed out as more prone to risk of overvaluation, because their real exchange rates have a tendency to appreciate. We check this assumption empirically over a large sample of emerging and developing countries, by using two databases for de facto classifications by Levy‐Yeyati and Sturzenegger (2003 ) and by Reinhart and Rogoff (2004 ). We assess currency misalignments by estimating real equilibrium exchange rates taking into account a Balassa effect and the impact of net foreign assets. Pegged currencies are shown to be more overvalued than floating ones.     

Cryptocurrency and African fiat currencies: A peaceful coexistence?

This study examines the asymmetric behaviour of Bitcoin relative to six major African fiat currencies (Egyptian Pound, Cedi, ZAR, Naira, Rupee and Dinar) for the period 10 August 2015 to 31 December 2022. The time and frequency information in the time series of the currencies were captured applying the ensemble empirical mode decomposition. The quantile regression (QR) and quantile-in-quantile regression (QQR) were applied on the decomposed series to examine the connections among the currencies at different currency regimes across time. The empirical results show that both QR and QQR can adequately capture the time-varying asymmetric behaviour of the currencies across time. The results range from weak to very strong dependencies albeit both negative and positive across different quantiles. Our findings suggest that except for ZAR, Bitcoin is a viable alternative currency to African reserve currencies from the medium-term since it can hedge depreciation and forex risk of the fiat currencies. Based on the findings of this study, we recommend that forex traders and policymakers in Africa should adopt Bitcoin as an alternative currency to African currencies in the medium-term to mitigate currency crises in the continent.     

Are Flexible Exchange Rate Regimes more Volatile? Panel GARCH Evidence for the G7 and Latin America

This paper investigates empirically the relationship between exchange rate (ER) regimes and volatility of real exchange rate depreciation (RERD), comparing the G7 and 17 Latin American (LA17) countries, during 1970–2010. We estimate a panel autoregressive model with generalized autoregressive conditional heteroskedasticity (GARCH) errors and regime‐specific effects on both the conditional mean and conditional variance. For the G7, we find that, relative to the fixed ER regime, only the freely floating regime shows higher RERD volatility; under the managed floating regime the RERD is equally volatile and under the crawling peg it is actually less volatile. Instead, in the case of the LA17, more flexible ER regimes are associated with more volatile RERD rates, with higher volatility under the managed floating regime than under the crawling peg and with extremely high volatility under the “freely falling” ER regime.     

Pass-through in dollarized countries: should Ecuador abandon the US dollar?

In this article, we examine the convenience of dollarization for Ecuador today. As Ecuador is strongly integrated financially and commercially with the United States, the exchange rate pass-through should be zero. However, we sustain that rising rates of imports from trade partners other than the United States and subsequent real effective exchange rate depreciations are causing the pass-through to move away from zero. Here, in the framework of the Vector Error Correction Model, we analyse the impulse response function and variance decomposition of the inflation variable. We show that the developing economy of Ecuador is importing inflation from its main trading partners, most of them emerging countries with appreciated currencies. We argue that if Ecuador recovered both its monetary and exchange rate instruments, it would be able to fight against inflation. We believe such an analysis could be extended to other countries with pegged exchange rate regimes.     

A CONSUMER PRICE INDEX FOR SWEDEN, 1290–2008

This paper presents a Consumer Price Index for Sweden 1290–2008. Constructing an index that covers more than seven centuries poses conceptual and empirical problems, and demands some methodological innovations. For example, during numerous occasions the currency unit was changed, and in some periods multiple currencies were used at floating exchange rates relative to each other. This paper also presents two different price indices, one that mainly serves the purposes of estimating real prices and real wages, and another that provides a measure of inflation. While the former follows the main currency unit, the latter also takes into account that debased coins were devalued during recoinage.     

Currency Regime and Monetary Autonomy. Empirical Evidence Using Recent and Global Data from 1990 to 2007

This paper analyzes the exchange rate regimes from the perspective of monetary independence. To be specific, using recent and global data, we examine the sensitivity of domestic interest rates to the international interest rate, by conducting co-integration tests and by estimating the adjustment speeds through error-correction model, for different de facto currency regimes and for different types of capital markets. Our estimation results basically support the traditional views of ‘impossible trinity’, as far as the cases with open capital markets are concerned. The floating regime shows the less sensitivity of domestic interest rates to the international interest rate than the fixed regime does, which implies some capacity for domestic monetary autonomy under the floating regime. The cases with closed capital markets, on the other hand, include the cases showing high sensitivity of interest rates in some emerging market economies, which might imply the ‘fear of floating’ hypothesis.     

Does purchasing power parity hold sometimes? Regime switching in real exchange rates

Standard unit root tests are not very powerful in drawing conclusions regarding the validity of Purchasing Power Parity (PPP). Rather than asking whether PPP holds throughout the whole sample period, we examine, in this study, if PPP holds sometimes by employing Hamilton-type (1989) Markov regime switching models. When at least one of multiple regimes is stationary, PPP holds locally within the regime. There are indeed various reasons that we should expect that the persistence of real exchange rates changes over time. Employing five real exchange rates spanning more than 100 years, we find herein strong evidence that the strength of PPP varies during the sample periods and that there exist stationary regimes in which PPP holds. Throughout the article, we also make comparisons to previous Markov regime switching estimation results by Kanas (2006) on the same data series. The new Markov switching model selection criterion of Smith et al. (2006), which is devised especially for discriminating Markov regime switching models, unambiguously indicates a preference for the Hamilton-type Markov regime switching model employed in this study. We also find that the evidence for PPP is not much different across different nominal exchange rate arrangements.     

EXCHANGE RATE REGIME AND MONETARY POLICY INDEPENDENCE IN EAST ASIA

Abstract.  This paper investigates whether the choice of exchange rate regimes influences the sensitivity of domestic interest rates to international interest rates. We empirically analyse this issue in the context of East Asian economies by employing a regime switching model. We find that the sensitivity of local interest rates to international interest rates declined in Korea and Thailand after they adopted floating exchange rate regimes. We also find that Japan, with a floating exchange regime, has greater independence in monetary policy than a pegged economy such as Hong Kong. These empirical findings suggest that exchange rate flexibility provides greater monetary independence.     

Output stabilization in fixed and floating regimes: Does trade of new products matter?

This paper studies the dynamics of output and export margins in the aftermath of global shocks in fixed and floating exchange rate regimes. Using a panel vector autoregressive model with exogenous factors, it traces the mean responses of output, terms of trade, extensive and intensive margins to real and nominal shocks in 22 developed economies over the period 1988–2011. We find remarkable differences in the transmission of shocks across exchange rate regimes. Adjustment takes place mainly at the extensive margin in fixed regimes, and implies a crowding out of intensive margins that is not present among floaters. Large movements at the extensive margin are associated with a weaker performance in terms of output stabilization. Our findings are robust to alternative sample selections and identification of the shocks. The evidence in the paper stresses a novel advantage of flexible exchange rates based on their ability to smooth the fluctuations in trade of new products.