Will the Renminbi become a reserve currency?

In recent years, the authorities in the People’s Republic of China (PRC) have made great efforts to internationalize its currency. Will Renminbi (RMB) finally become a reserve currency? This paper addresses the above question from an institutional analytical framework. We find that if only economic fundamentals are used in the prediction, the expected share of the RMB in global currency reserves could reach 10% at the end of 2011. However, if institutional variables are included, the predicted share comes down to around 2%, which is a more realistic prediction. The work then proposes reform actions in developing China’s institutional environment so as to facilitate the RMB to realize the 10% potential. In general, we believe that the RMB’s international role should increase in the coming years, but it will take a relatively long period before it plays the role of a global reserve currency.     

Is East Asia an optimum currency area?

This paper assesses the empirical desirability of the East Asian economies to an alternative exchange rate arrangement (a monetary union) that can potentially enhance the exchange rate stability and credibility in the region. Specifically, the symmetry in macroeconomic disturbances of the East Asian economies is examined as satisfying one of the preconditions for forming an Optimum Currency Area (OCA). We extend the existing literature by improving the methodology of assessing the symmetry shocks in evaluating the suitability of a common currency area in the East Asian economies employing the Bayesian State-Space Based approach. We consider a model of an economy in which the output is influenced by global, regional and country-specific shocks. The importance of a common regional shock would provide a case for a regional common currency. This model allows us to examine regional and country-specific cycles simultaneously with the world business cycle. The importance of the shocks decomposition is that studying a subset of countries can lead one to believe that observed co-movement is particular to that subset of countries when it in fact is common to a much larger group of countries. In addition, the understanding of the sources of international economic fluctuations is important for making policy decisions. The falling share of country specific factor and the rising role of region factor indicate that East Asia has become increasingly favorable for a monetary union. However, the share of country-specific factor that is still significant implies that it could be costly to renounce individual currencies to advance into a monetary union in East Asia.     

Is currency seigniorage exogenous for inflation tax in Turkey?

This paper discusses the implications of the validity of the conditioning hypothesis for the maintained money demand equation for an inflation tax analysis. We also test the validity of the quantity-theoretical inflation tax model for the post-1980 quarterly Turkish data by using Johansen cointegration techniques. The results suggest that the tax rate (inflation) is weakly exogenous for the parameters of the long-run money demand (tax base) equation. This result, consistent with a Keynesian endogenous seigniorage-exogenous inflation tax rate theory prior, does not support the hypothesis that the Turkish inflation can be explained by the conventional inflation tax revenue-maximizing motive alone.     

Questions and an swers about Europe’s new currency

WillFrankfurtofParisdisplaceLondonasthefinancialcapitalofEurope?Thiswasoneofthebigpre-dictionsbefore1999 —admittedlyapredictionmademainlybyGermansandFrenchmen.WithBritainoutsidetheeurozone,thereasoningwent,London’sstatuswassuretofalter.Ithasnot.Sure,FrankfurtandParisbothhavestockexchangesthataremoreinnovativeanddynamicthanthestodgyLondonexchange.ButtheLSEhasplayedonlyaminorroleintherebirthofLondonasama-jorfinancialcapital.Thatrebirth,whichbeganinthe1960s,wasallaboutLondonbecomingacen…     

Do China and oil exporters influence major currency configurations?

This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs’ US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations.     

Is Canada an optimal currency area? An inflation targeting perspective

We propose a method, based on the currency union model of Galí and Monacelli ( 2008 ), to determine whether a region within an existing currency area belongs in the currency union. The method involves assessing the predictability of regional inflation rates at medium term horizons. We apply the method to the Canadian provinces and find that for all but Alberta there is little evidence of costs in terms of inflation arising from national monetary policy. For Alberta, the evidence suggests that they are not as well served by the inflation targeting framework and that a more flexible policy environment might improve inflation outcomes.     

Do hard pegs avoid currency crises? An evaluation using matching estimators

Using the bias-corrected matching estimators of Abadie and Imbens (2006) as a control for the self-selection problem of regime adoption, we estimate the average treatment effect of hard pegs on the occurrence of currency crises. We find the evidence that hard pegs significantly decrease the likelihood of currency crises compared with other regimes.     

Location,location, location: currency effects and return predictability?

Most international financial market studies that compare across countries utilize the US dollar as the common numeraire. We explore the little studied question of the appropriate choice for the base currency and ask if currency choice can affect the final conclusion of whether predictability exists. We provide empirical results for stock return predictability that demonstrate the importance of the numeraire. For example, the existence (absence) of predictability for a US investor does not necessarily imply the existence (absence) of predictability for other foreign investors.     

International bonds and the currency risk: How do macroshocks affect returns?

The currency translation risk borne by international investors and the riskiness of returns on long-term bonds both affect international investors' decisions. For the U.S. investor, excess returns on German, Japanese, Canadian, and U.K. bonds have been positively correlated with the respective excess local currency returns (1978–1997). However, for investors who measure their performance in the currencies of these countries, the comparable correlation between U.S. bond returns and positions in U.S. dollars has been negative. Traditional interest rate or portfolio flow models fail to explain the asymmetry. A sticky-price model with spillover effects from the U.S. to other countries is used to explore the effect of macroshocks on these returns.     

Is energy consumption sensitive to foreign capital inflows and currency devaluation in Pakistan?

This study investigates the relationship between foreign capital inflows and energy consumption by incorporating economic growth, exports and currency devaluation in energy demand function for the case of Pakistan. The long-run and short-run effects are examined via ARDL bounds testing procedure. Foreign capital inflows and currency devaluation (economic growth and exports) decrease (increase) energy consumption in long-run. The results confirm a feedback effect between foreign capital inflows and energy consumption. These findings would be helpful to policy makers in designing comprehensive economic and energy policies for utilizing foreign capital inflows as a tool for optimal use of energy sources to enhance economic development in long run.     

Banking,currency, stock market and debt crises in Spain, 1850–1995

What type of crisis is generated when debt increases? We extend the literature by framework by introducing currency and stock market crises in the analysis. We apply our proposal to the case of Spain, since this is a country that has experienced a very important amount of financial crises from the nineteenth century onwards. We find the same results as the previous literature for the determinants of banking and debt crises but substituting external and public debt with perpetual debt and where perpetual debt has a less important role than crises in the private sector. Moreover, we find evidence in favour of the hypothesis that currency crises depend strongly and positively on financial centre crises and negatively and mildly on perpetual debt. We justify the negative relalionship due to an inflation tax. We also find evidence in favour of the hypothesis that stock market crises depend only positively and strongly on financial centre crises.     

Regime changes and the impact of currency depreciations: the case of Spanish–US industry trade

Over the past half century, Western Europe has been part of varying currency regimes. Yet, whether under Bretton Woods, the European Monetary System, or the Euro, exchange-rate fluctuations have had an influence on these countries’ trade flows with the United States at the national and the industry level. This study looks at the case of Spain, examining the role of real exchange-rate fluctuations on trade with the United States for 74 industries. We find that the trade balances of only 40 industries are cointegrated with their macroeconomic determinants, but that 26 of these respond positively in the long run to a real depreciation. While industry characteristics do not seem to explain which industries are more likely to do this, we find that a relatively large share of industries in the Machinery sector see their trade balances improve after a depreciation.     

Same currency,different strategies? The (asymmetric) role of the exchange rate in shaping European agri-food exports

This article uses a nonlinear autoregressive distributed lag (NADRL) model introduced by Shin, Yu, and Greenwood-Nimmo (2014) to assess the role that the exchange rate plays in shaping European agri-food exports after the introduction of the Euro. Although the 10 countries of this study share the same currency (and thus a single nominal exchange rate with the US), cross-country discrepancies of exports’ reactions to exchange rate changes are evident. Moreover, I find that exchange rate changes influence exports asymmetrically in the long run. Euro appreciations are harmful to a lesser extent than Euro depreciations are beneficial for European agri-food exports. The magnitude of this effect is country-specific and varies considerably between individual exporting countries. Exported quantities are less affected by exchange rate fluctuations than export values, which is in line with local currency price stabilization strategies of the exporters. This finding is interpreted as a sign of an incomplete exchange rate pass-through due to strategic (asymmetric) markup adjustments by firms with heterogeneous productivity. Besides that, the outcomes suggest that nonprice competition might be in play in some cases.     

On the feasibility of monetary union: Does it make sense to look for shocks symmetry across countries when none of the countries constitutes an optimum currency area?

Usually, a monetary union is not considered feasible between countries if the correlations of shocks are positive but weak. This may not be so if the country with the larger output gap converges to full-employment equilibrium faster than the country with the smaller gap. We argue that common monetary policy can be destabilizing when countries' responses to non-monetary shocks are perfectly symmetric with a correlation of 1 but exhibit differing investment sensitivities to the real interest rate. We use Canada, Mexico and the United States to test the feasibility of a monetary union by documenting whether: 1) gross investments in Canada and Mexico are equally responsive to the real fund rate, and 2) Canada and Mexico's output growth and inflation respond differently to US monetary policy shocks and oil price shocks. This approach implicitly dictates whether the shocks themselves are symmetric or asymmetric. Using quarterly data and SVAR methodology, we conducted two layers of analysis. We estimated SVARs for the periods 1970–2008, 1970–1990 and 1991–2008 to find that a monetary union is feasible between Canada and the US for the first two sample periods. For Canada and Mexico, we find similar responses of output growth to US monetary policy shocks. We conducted further robustness tests by estimating two identified VARs with common US variables and oil prices for Canada and Mexico to assess commonality in responses to shocks with the US. These results affirm that a monetary union is also feasible between Canada and the US.