Asymmetric response of the US–India trade balance to exchange rate changes: Evidence from 68 industries

The relationship between the trade balance and the exchange rate continues to attract attention by international economists and has entered into new territory, mostly due to advances in econometric methods. The introduction of asymmetric error‐correction modelling and asymmetric cointegration using the nonlinear ARDL approach of Shin et al. (Festschrift in Honor of Peter Schmidt: Econometric methods and applications, Springer, 2014, 281) as compared to the symmetric and linear ARDL approach of Pesaran et al. (Journal of Applied Econometrics, 2001, 16, 289) has led us in a new direction to discover relatively better results. We apply these methods to the bilateral trade balance model of each of the 68 industries that trade between India and the USA. The nonlinear approach not only provides more support to the J‐curve effect, but also yields support in favour of short‐run and long‐run asymmetric effects of exchange rate changes in most of the industries.     

Idiosyncratic risk and expected returns in frontier markets: Evidence from GCC

We investigate the pricing of idiosyncratic volatility of seven frontier markets in six GCC countries. We find a significant (marginal) negative relationship between expected returns and lagged idiosyncratic volatility for individual stocks in Saudi Arabia (Qatar) but none in Kuwait and Abu Dhabi. However, when we estimate conditional idiosyncratic volatility either by EGARCH or AR Models, the relationship turns positive. Introducing unexpected idiosyncratic volatility as an explanatory variable to control for any unexpected returns uncovers the true relationship between expected idiosyncratic volatility and expected returns. The evidence turns out to be robust for return reversals and other control variables. Moreover, the pricing of idiosyncratic risk is less evident in higher country governance and seems to be unrelated to the degree of financial development.     

Real and nominal effective exchange rates of African countries during 1971Q1–2012Q4

One of the macro variables that are included in most models is the exchange rate. Overall performance of a country’s exchange rate is measured by changes in nominal or real effective exchange rate (REER). These rates are constructed and published mostly for industrial countries by international organizations. Less developed countries have received little attention. In this article, the two rates are constructed for 21 African countries using quarterly data over the period 1971Q1–2012Q4. As an application, we use the REERs to show that even in Africa the movements of the real effective rates follow a nonlinear path.     

Currency depreciations and the U.S.–Italian trade balance: Industry-level estimates

As one of the indebted Southern European countries that have put pressure on the Euro in recent months, Italy would benefit from a reduction in its external trade deficit. One channel could be through a weakening of its currency—which would only work if the Euro depreciated against the currency of an outside importer, such as the U.S. dollar. This study examines the response of the trade balances of 106 individual industries to such depreciations, using annual data and applying cointegration analysis. We find that only 19 industries register a long-run improvement, with these concentrated in miscellaneous manufactures (SITC sector 8). Two major products in the automotive industry—petroleum and road motor vehicles, show evidence of a “J-curve” effect.     

Exchange rate volatility and its impact on domestic investment

The relationship between exchange rate uncertainty and domestic investment has attracted some attention in macro literature. Previous studies that investigated the relation concentrated on firm level data with mixed results. In this paper we argue that the relationship applies equally at the aggregate. We assess the short-run and long-run effects of exchange rate volatility on domestic investment in each of the 36 countries in our sample using time-series data. The application of the bounds testing approach indicates that exchange rate volatility has significant short-run effects on domestic investment in 27 countries. The short-run effects are translated into the long-run only in 12 countries.     

Stability of the money demand function in Asian developing countries

Previous studies that estimated the money demand function in Asian developing countries either employed traditional estimation techniques or recently popularized cointegration technique. While the first group suffers from ‘spurious regression’ problems, the second group interpreted their finding of cointegration as a sign of stability of estimated parameters. This study, after incorporating the CUSUM and CUSUMSQ tests into cointegration analysis, shows that in some Asian countries even though real M1 or M2 monetary aggregates are cointegrated with their determinants, the estimated parameters are unstable.     

How Sensitive is U.S.-Canadian Trade to the Exchange Rate: Evidence from Industry Data

Previous research has followed four distinct paths to investigate the impact of currency depreciation on the trade balance of a country, using mostly aggregate trade data. In this paper we choose one of those paths and consider the trade between the U.S. and Canada. However, unlike previous research we disaggregate the trade data between the two countries by commodity and consider 152 industries that trade. After estimating inpayment and outpayment schedules for all 152 industries, we find that real depreciation has short-run effects on inpayments of 72 and outpayments of 53 industries. However, the short-run effects translate into the long-run effects only in 43 of inpayment models and 36 of outpayment models. Further analysis reveals that 1% real depreciation of the U.S. dollar has 1.29% positive effects on the U.S. net export earnings.     

US–Thailand trade at the commodity level and the role of the real exchange rate

Previous studies that have investigated the impact of real depreciation of the Thai baht on Thailand's trade flows have either used aggregate trade data between Thailand and the rest of the world, or between Thailand and its major trading partners. These studies have provided mixed results. In this paper, we disaggregate the trade flows between Thailand and its major trading partner, the US, by commodity and investigate the impact of currency depreciation on the export earnings of 118 American exporting industries and the outpayments of 42 American importing industries. While most industries are affected in the short run, the short-run results last into the long run in several small industries. The inpayments of large exporting industries and the outpayments of large importing industries are not affected. Economic activity seems to be the major long-run determinant of the performance of most industries.     

Real and nominal effective exchange rates for 22 LDCs: 1971:1–1990:4

The International Monetary Fund constructs and publishes the real and nominal effective exchange rates, mostly for developed but not less developed countries. This paper employs a method of constructing real and nominal effective exchange rate from the literature to produce quarterly data over the 1971–1990 period for 22 developing nations. As an application, the stationarity of real effective exchange rates are determined to establish the empirical validity of the Purchasing Power Parity Theory (PPP). The results reveal that PPP fails to hold for most countries.