The Sensitivity of U.S. Inpayments and Outpayments to Real Exchange Rate Changes: Asymmetric Evidence From Africa

ABSTRACT

A strand of the literature concentrates on assessing the impact of exchange rate changes on a country’s inpayments from and outpayments to its trading partners. Most studies have considered the U.S. experience with partners from OECD but not for those from Africa. We fill this gap by including 14 African partners in our study. We assess not only the symmetric effects of exchange rate changes on the U.S. inpayments from and outpayments to each African partner, but also the asymmetric effects which requires incorporating nonlinear adjustment of the exchange rate. While we found asymmetric effects in the trade with almost all partners in the short run, in a limited number of cases the short-run effects lasted into long-run asymmetric effects. All in all, our findings are partner specific, but they provide more support for using nonlinear models.     

Exchange-rate sensitivity of commodity trade flows: Does the choice of reporting country affect the empirical estimates?

While the effects of currency fluctuations on trade have long been of interest to economic researchers, the most recent trend in the literature is to estimate commodity trade flows between pairs of countries. This raises an important question: Does it matter which country reports the data? This study investigates 96 industries that are reported both as exports by the United States and as imports by South Korea. Since export data are FOB and import data are CIF, the Korean imports are expectedly larger than the US exports. Correspondingly, our cointegration analysis produces drastically different results between specifications. Nonparametric analysis shows that the Korean imports are more sensitive to real exchange-rate fluctuations than US exports, signifying the importance of cost of insurance and freight, as well as the data's conversion into dollars.     

Economic Uncertainty,Monetary Uncertainty,and the Demand for Money: Evidence From Asian Countries

In 1984 Nobel Lauriat Milton Friedman claimed that the decline in velocity of money or an increase in the demand for money was due to volatility of money supply. Another study argued that if monetary volatility could impact the demand for money, so can output volatility (as a measure of economic uncertainty). Both measures of uncertainty can cause people to reallocate their assets between cash and real assets that are less risky. If public become more cautious about the future, they will hold more cash today. However, if they chose to hedge against uncertain prices, they may hold more real assets and less cash. These two hypotheses are tested for Asian countries using bounds testing approach. While both measures are found to have short‐run significant effects on the demand for money in almost all countries, the short‐run effects last into the long run in half of the countries. Furthermore, we find positive and negative effects of both measures which are in line with previous research related to a few developed countries.     

Is there a J-curve for Azerbaijan? New evidence from industry-level analysis

This paper estimates the J-curve for Azerbaijan using quarterly industry-level data over the 2000–2009 period. Empirical results show that in 3 of the 10 strategic industries there is strong evidence for the fulfilment of the Marshall–Lerner condition, as the trade balance improves in the long run in reaction to a currency devaluation. In most industries the J-curve pattern is observed in the short run. All 10 cases exhibit long-run cointegration and are stable according to the CUSUM and CUSUMSQ stability tests. These findings are largely consistent with the existing literature on the Azerbaijani J-curve and carry important policy implications.     

Over-investment in corporate R&D,risk, and stock returns

Large-size firms which significantly increase their R&D expenditures experience subsequently three-year-long negative abnormal stock returns on the magnitude of 56 basis-points per month. We find no robust evidence of significant event-induced abnormal returns for small-size sample firms or any systematic risk changes for the small- and large- size firms. We also find that the large-size sample firms generate relatively much larger cash flows (i.e., have significantly greater over-investment discretion) and have significantly larger (over-) valuation multiples than the small-size firms. Moreover, some of their operating performance measures show signs of deterioration instead of improvement following these R&D programs. These findings are consistent with the view that investors initially underestimate the over-investment in R&D by some large-size firms that appear to be overvalued and have high cash flows at the time of the investment, only to be disappointed later.     

Understanding the dynamics of the macroeconomic trilemma

This paper tests the autonomy of domestic monetary policy in the context of the macroeconomic policy trilemma for a large data-set of developing and developed countries covering three different time periods characterized with different exchange rate regimes and capital controls. The existing literature uses fixed coefficient methodologies to examine monetary policy independence; whereas we show that the coefficients of interest are unstable as countries switch between different exchange rate regimes and/or capital controls over time. The contribution is in using a time-varying parameter model that better captures the effects of the heterogeneity in different exchange rate regimes and capital mobility restrictions on monetary policy independence over time, allowing a more accurate test of the macroeconomic trilemma.     

Impact of Exchange Rate Uncertainty on Trade Flows: Evidence from Commodity Trade between the United States and the United Kingdom

Previous studies that investigated the impact of exchange rate volatility on the trade flows employed aggregate trade data and standard estimation techniques. They provided mixed results. In this paper we use disaggregated import and export data for 177 commodities traded between the United States and the United Kingdom to investigate whether volatility of the real bilateral dollar–pound exchange rate has any detrimental effect on trade flows at the commodity level. Additionally, we employ the bounds testing approach to cointegration and error‐correction modelling that is suitable for the models used mostly because it does not require pre‐unit‐root testing and variables in the model could be stationary, non‐stationary or a combination of the two. In most trade flow models estimated, we found a negative effect of exchange rate volatility on commodity trade.     

The S‐curve Dynamics of US Bilateral Trade*

A few studies in dynamic general‐equilibrium setting have argued that the trade balance is negatively correlated with current and future movements in the terms of trade but positively correlated with past movements, hence the S‐curve phenomenon. Using aggregate trade data and the terms of trade has not provided strong empirical counterpart. However, in this paper, when we disaggregate the trade data between the US and her trading partners we find stronger results in support of the S‐curve.     

The bilateral J‐curve: Canada versus her 20 trading partners

There is a common belief that currency depreciation worsens the trade balance in the short run and improves it in the long run resulting in the so called J‐curve phenomenon. Early studies employed aggregate data and provided mixed results. Recent studies, however, have employed disaggregated data to remove any aggregation bias from their analysis. In this article we consider the Canadian experience and test the phenomenon between Canada and her 20 major trading partners. Using quarterly data and the bounds testing approach to cointegration, and error‐correction modelling we were able to provide support for the J‐curve in 11 out of 20 cases.     

Demand for international reserves: a review article

This paper examines the twofold role of the labour market in household economic risk management: as a source of household consumption risk, and as an instrument for insuring consumption against contingencies. It outlines a framework for analysing this twofold role of the labour market, and uses data from the British Household Panel Survey 1991–1996 to explore this empirically. It identifies the relative importance of the labour market, and other factors, in producing changes in the financial situation of individuals. It also implements ‘full insurance’ tests of whether unemployment and other external shocks to the household are correlated with consumption growth. It concludes that labour market factors are a dominant source of change in individuals financial situation, with a predominantly positive effect on the financial situation of the better off, and a predominantly negative impact on the financial situation of the less well off. It also finds that households are unable to fully insure their consumption against unemployment, and that as a result labour market factors pose a significant economic risk.