Persistence of Current‐account Disequilibria and Real Exchange‐rate Misalignments

This paper aims at studying whether the persistence of the gap between the observed current‐account position and its equilibrium value nonlinearly depends on real exchange‐rate misalignments. Estimating a panel smooth transition regression model on a sample of 22 industrialized countries, we find evidence for this hypothesis, showing that persistence of current‐account imbalances strongly depends on the deviation of the real exchange rate from its long‐term equilibrium. More specifically, while there is no persistence in cases of currency undervaluation or weak overvaluation, persistence tends to augment for overvaluations higher than 11%. In addition, whereas disequilibria are persistent even for very low overvaluations in the euro area, persistence is observed only for overvaluations higher than 14% for non‐eurozone members.     

Currency Boards when Interest Rates are Zero

In a fixed exchange rate system, any expectation that the peg may be abandoned will normally be reflected in an interest rate differential between instruments denominated in domestic and anchor currencies: the possibility of a revaluation will drive domestic interest rates below those in the anchor currency, for example. However, when interest rates are close to the zero lower bound, there is limited scope for exchange rate expectations to be reflected in interest rate differentials. Here we introduce a new mechanism, based on the central bank balance sheet, which works to bring about equilibrium in currency markets even when interest rates are zero. An expectation of exchange rate appreciation will cause foreign exchange reserves to swell, increasing the cost to policy‐makers of allowing an appreciation and, therefore, lowering the likelihood of the fixed exchange rate being abandoned. Under normal circumstances, this channel reinforces the equilibrating effect of interest rate differentials. When interest rates cannot adjust only this channel operates, implying that much larger changes in reserves are required to equilibrate currency markets. We develop a simple model to illustrate these arguments and find support for the predictions of the model using data for Hong Kong, the world's largest economy with a currency board.     

Credit card cash‐out as informal financing: Evidence from China

Using a proprietary account‐level database from a commercial bank in China, we document that credit card holders can ease their credit constraints through the practice of cash‐out based on bogus transactions using credit cards. We find that such behaviour might be beneficial to both cardholders and banks. First, we find that a 1% increase in the cumulative number of credit card cash‐out transactions lowers the probability of default by 9.59%. Second, for private businesses, a 1% increase in the number of abnormal cash‐out transactions lowers overdue risk by 13.45%. Third, by lowering the overdue risk, the card‐issuing bank earns a larger profit. Our results are consistent with the notion that unconventional credit card cash‐out can mitigate the extent of capital misallocation in emerging markets.     

Mundell Revisited: a Simple Approach to the Costs and Benefits of a Single Currency Area

The paper evaluates the costs and benefits of a single currency area within a unified framework. Conventionally, it is argued that a single currency area carries a welfare loss owing to the sacrifice of exchange rate adjustment in the presence of country‐specific shocks. But in 1973 Mundell argued that a single currency area offers risk‐sharing benefits when capital markets are limited in their ability to facilitate consumption insurance. The authors construct a simple model and compare a system of independent national currencies to a single currency area. The presence of country‐specific shocks may either reduce or enhance the benefits of a single currency area, depending on the importance of exchange rate adjustment relative to risk‐sharing. In a simple quantitative analysis, we find that either regime may dominate, although the utility differences between the two regimes are very small.     

Exchange Market Pressure and Monetary Policy in Emerging Market Economies: New Evidence from Treatment‐effect Estimations

The way central banks react to exchange market pressure is likely to affect the subsequent economic development and the associated economic costs. In a situation of currency pressure the central bank can in principle decide to let the currency float freely, to maintain the peg or to implement a managed float policy, i.e. a mix of depreciation and intervention. As the central bank's choices are subject to self selection and endogeneity, we use propensity score matching to adequately cope with these methodical challenges. We find that monetary authorities have two options to keep down the economic costs in terms of output, namely stabilizing the exchange rate or letting the currency float freely. In contrast, a managed float under currency pressure is accompanied by the worst possible outcome with an average loss of gross domestic product (GDP) between 5% and 6%.     

Government Bonds in Domestic and Foreign Currency: the Role of Institutional and Macroeconomic Factors*

In contrast to some recent research, this paper finds that institutional and macroeconomic factors are related to the depth and currency composition of government bond markets. Using panel data for developed and emerging economies, we find several factors to be systematically associated with bond markets. Aside from economic size (already shown to affect the currency composition), this paper shows that investor bases matter. Economies with deeper domestic financial systems (measured by bank deposits and stock market capitalization) have larger domestic currency bond markets and issue less foreign currency debt, whereas foreign investor demand is positively related to the size and share of foreign currency bonds. Moreover, less flexible exchange rate regimes are associated with more foreign currency issuance. Other relevant variables include inflation, fiscal burden, legal origin, and capital account openness.     

Exchange Rate Movements and Unemployment in the EU Accession Countries—A Panel Analysis

According to the traditional “optimum currency area” approach, not much will be lost from a very hard peg to a currency union if there has been little reason for variations in the exchange rate. This paper takes a different approach, and highlights the fact that high exchange rate volatility may as well signal high costs for labor markets. The impact of exchange rate volatility on labor markets in the CEECs is put to the test, finding that volatility vis‐à‐vis the euro significantly increases unemployment. Hence, the elimination of exchange rate volatility could be considered as a substitute for a removal of employment protection legislation. However, labor market reform could be argued to be an equally worthy strategy, backed up by central bank independence and the adoption of an anti‐inflation monetary policy rule.     

Asymmetric Effects of Exchange Rate Changes and the J‐curve: New Evidence from 61 Malaysia–Thailand Industries

Research on the impact of currency depreciation on the trade balance is now moving in a new direction by incorporating nonlinear dynamic adjustment of the exchange rate and by using a nonlinear approach to error‐correction modeling and cointegration. Using these advances, researchers find not only more evidence of the J‐curve effect, but also new evidence of asymmetric effects of exchange rate changes on the trade balance. We contribute to this line of research by using monthly trade flow data from 61 two‐digit industries that trade between Malaysia and Thailand, and show that not only does currency depreciation have favorable effects on the trade balance of more industries, but the long‐run effects are asymmetric in 26 out of 61 cases. In line with current literature, our nonlinear model performs much better than the linear model when industry level data are used.     

Export Market Dynamics and Plant‐Level Productivity: Impact of Tariff Reductions and Exchange‐Rate Cycles*

In this paper, we examine how changes in tariff rates and industry‐specific real exchange rates affect the entry/exit process to export markets and productivity growth. Using the experience of the Canadian manufacturing sector over three decades, we find that firms in export markets enjoy faster productivity growth than non‐participants. The size of the growth advantage depends on whether real exchange rates are increasing or decreasing. The increase in the value of the Canadian dollar during the post‐2000 period almost completely offset the productivity growth advantages enjoyed by new exporters during this period.     

CURRENCY UNION WITH OR WITHOUT BANKING UNION

We build a symmetric two‐country monetary model with credit to study the interplay between currency integration and credit markets integration. The currency arrangement affects credit availability through default incentives. We capture credit markets integration by the extra cost incurred to obtain credit for cross‐border transactions and, with the euro area context in mind, label as banking union a situation where this cost is low. For high levels of the cross‐border credit cost, currency integration may magnify default incentives, leading to more credit rationing and lower welfare. The integration of credit markets restores the optimality of the currency union.     

Do Exchange Rate Shocks Have Asymmetric Effects on Reserve Accumulation? Evidence from Emerging Markets*

It is generally argued that central banks in emerging market countries, motivated by a desire to defend export competitiveness, tend to intervene in foreign exchange markets to limit currency appreciations rather than depreciations. Using panel data from 13 emerging market countries for the period 1998:M1 to 2016:M12, we find that exchange rate shocks play an important role in determining the accumulation of international reserves. Moreover, we find evidence that central banks in emerging markets tend to follow a “leaning against the depreciation wind” policy, rather than the appreciation wind (i.e., we provide evidence of a “fear of depreciation”).     

Bi‐currency versus Single‐currency Targeting: Lessons from the Russian Experience

This paper examines how the 2005 shift in Russian exchange rate policy from US dollar (USD) single‐currency to USD–EUR (euro) bi‐currency targeting has impacted domestic interest rates. The finding show that this policy shift has disconnected Russian interest rates from US dollar‐denominated interest rates, while instead linking them to a synthetic interest rate composed of USD and EUR rates at the same proportion as that of these two currencies in the currency basket against which the ruble's exchange rate is set. The Russian experience shows that while the adoption of bi‐currency targeting may help ensure that domestic interest rates are less dependent on the monetary cycle of a single country, these rates are instead likely to reflect financial developments in all countries whose currencies are included in the currency basket. This insight is likely to be relevant for other countries that pursue basket‐targeting policies.     

Exchange Rate Passthrough to Export Prices: Assessing Cross‐Country Evidence*

A growing empirical literature reports evidence of a decline in exchange rate passthrough to import prices in a number of industrial countries. Our paper complements this literature by examining passthrough from the other side of the transaction; that is, we assess the exchange rate sensitivity of export prices (denominated in the exporter's currency). We find that the prices charged on exports to the United States are more responsive to the exchange rate than are export prices to other destinations, which is consistent with results in the literature that import price passthrough in the US market is relatively low. In addition, the exchange rate sensitivity of export prices over time has been significantly affected by country‐ and region‐specific factors, including the Asian financial crisis (for emerging Asia), deepening integration with the United States (for Canada), and the effects of the 1992 ERM crisis (for the United Kingdom).     

New estimates of time-varying currency betas: A trivariate BEKK approach

This paper examines the conditional time-varying currency betas from five developed markets and four emerging markets. We employ a modified trivariate BEKK-GARCH-in-mean model of Engle and Kroner (1995) to estimate the time-varying conditional variance and covariance of returns of stock index, the world market portfolio and changes in bilateral exchange rate between the US dollar and the local currency. It is found that currency betas are more volatile than those of the world market betas. Currency betas in emerging markets are more volatile than those in the developed markets. Moreover, we find evidence of long-memory in currency betas. The usefulness of time-varying currency betas are illustrated by two applications.     

Commitment and the adoption of a common currency*

In contrast to Mundell's inquiry on the optimality of currency areas, this article aims to understand under what circumstances a Pareto‐dominant monetary union will be established. Using a multicountry overlapping generations model, we highlight gains from monetary union arising from reduced transactions costs and lower inflation. Despite these gains, countries acting independently will impose barriers to exchange through local currency restrictions, thereby creating transactions costs and providing an incentive for inflation. Therefore, the gains from monetary union are most likely to be lost without collective effort.     

货币国际化水平的影响因素分析——来自国家层面多边数据的经验证据

本文从货币发行国与使用国角度入手，基于国家层面多边（多种货币在多个国家使用)外汇交易数据，采用货币发行分布和货币使用分布指标衡量货币国际化水平，对影响货币国际化水平的因素进行实证分析，结果表明：货币发行国的经济体量越大、金融市场发展程度越高、货币网络外部性越大，其货币国际化水平越高。同时货币发行国与使用国间汇率波动越小、贸易投资额越大、地理和文化间距离越近，则使用国越倾向使用该货币。     

Exchange Rate Pass‐Through And The Welfare Effects Of The Euro*

This article explores the implications of the European single currency within a simple sticky price intertemporal model. We focus on the question of how the euro may change the sensitivity of consumer prices in Europe to exchange‐rate changes. Our central conjecture is that the acceptance of the euro will lead European prices to become more insulated from exchange‐rate volatility. We find that this affects both the volatility and levels of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and the U.S. shares in Europe's good fortune.     

Does the currency board matter? US news and Argentine financial market reaction

Using a Generalized Autoregressive Conditional Heteroscedasticity (GARCH) model, we study the effects of the US monetary policy and macroeconomic announcements on Argentine money, stock and foreign exchange markets over the period January 1998 to July 2007. We show, first, that both types of news have a significant impact on all markets. Second, there are noticeable differences in reaction for different subsamples: Argentine money markets were more dependent on US news under the currency board than after it was abandoned as the floating exchange rate partly absorbs spillover effects from the US. Finally, we find that the US-dollar-denominated assets react less to US news than peso-denominated assets, which suggests that the currency board was not completely credible during its final years.     

Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework

From an original data set on the euro–dollar and on the won–dollar currency pairs (2008–2010), we conduct a threshold quantile autoregressive model to explain the role of a Tobin tax (TT) on the exchange rate volatility, taking into account two types of nonlinearity (regimes and quantiles). We find evidence that the impact of a TT would not be monotonic. A TT may be a good instrument to stabilize foreign exchange volatility only in normal times and/or in efficient markets. In contrast, a TT could be counterproductive in turbulent periods by increasing the volatility. In addition, by comparing a major currency pair (euro/dollar) and a minor currency pair (won/dollar), it appears that the potential stabilizing effect of a TT would be more clear‐cut in the low volatility regime of a major currency pair, similar to the euro/dollar. Our results do not corroborate the previous studies that derived a monotonic and positive impact of a TT on volatility.     

Export Subsidies and Exchange Rate Pass‐through

This paper investigates effects of exchange rate on optimal trade policies and market prices within a standard export subsidy model. Shifts in exchange rate change relative efficiencies of firms in different countries. We show that depreciation of own currency increases subsidy levels when marginal cost is constant. Import dependency weakens this relationship, decreasing sensitivity of subsidy levels to depreciation. In general, subsidies reduce exchange rate pass‐through. Additionally, perverse exchange rate pass‐through effect arises with sufficiently intensive subsidies.