Structural breaks in volatility: Evidence for the OECD and non-OECD real exchange rates

This paper attempts to determine whether or not nominal exchange rate regimes affect the volatility of bilateral and effective real exchange rates. To that end, we examine the real exchange rate behaviour for a set of OECD and non-OECD countries during the 1960–2006 period, therefore covering both the Bretton Woods system of fixed exchange rates and the adoption of generalised floating exchange rates from 1973. We make use of an econometric methodology based on the Hansen's (Hansen, B.E., 1997. Approximate asymptotic P values for structural-change tests. Journal of Business and Economic Statistics 15 (1), 60–67) approximation to the p-values of the supreme, exponential and average statistics developed by Andrews (Andrews, D., 1993. Test for parameter instability and structural change with unknown change point. Econometrica 61 (4), 821–856) and Andrews and Ploberger (Andrews, D., Ploberger, W., 1994. Optimal tests when a nuisance parameter is present only under the alternative. Econometrica 62 (6), 1383–1414). This methodology allows us to obtain a profile of p-values and to delimit periods of stability and instability in the variance of real exchange rates. Results suggest that there is clear evidence in favour of the non-neutrality of nominal exchange rate regime regarding real exchange rate volatility for developed countries, but not in the case of developing or emerging countries.     

RIP and the shift toward a monetary union: Looking for a “euro effect” by a structural break analysis with panel data

This paper aims to evaluate how the ex ante real interest rates of Euro area countries have been modified by the introduction of the euro. We use cointegration analysis with endogenous breaks in a panel data context. Our results show that the “euro effect” is significant in our sample and that after the introduction of the euro, the real interest parity (RIP) holds. This last conclusion is due to a decrease in the nominal interest rate differentials rather than to a reduction in goods and services price differentials and in the exchange rate volatility.     

Inflation risk and international asset returns

We show that inflation risk is priced in international asset returns. We analyze inflation risk in a framework that encompasses the International Capital Asset Pricing Model (ICAPM) of Adler and Dumas (1983). In contrast to the extant empirical literature on the ICAPM, we relax the assumption that inflation rates are constant. We estimate and test a conditional version of the model for the G5 countries (France, Germany, Japan, the UK, and the US) over the period 1975–1998 and find evidence of statistically and economically significant prices of inflation risk (in addition to priced nominal exchange rate risk). Our results imply a rejection of the restrictions imposed by the ICAPM. In an extension of our analysis to 2003, we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999, differences in inflation rates across countries entail non-trivial real exchange rate risk premia.     

Real exchange rate persistence and monetary policy rules

The objective of this paper is to analyze the effects of alternative monetary rules on real exchange rate persistence. Using a two-country stochastic dynamic general equilibrium with nominal price stickiness and local currency pricing, we will show how the persistence of purchasing power parity deviations can be related to a monetary theory of these deviations. When monetary policy lean against the wind, there is no relationship of proportionality between the time during which prices remain sticky and the persistence of the response of the real exchange rate: in this case high nominal price rigidity is not sufficient, per se, in generating any persistence following a monetary shock. Moreover, we emphasize the role of interest rates smoothing policies and relative price stickiness within countries in understanding the relationship between the real exchange rate and monetary shocks. With reasonable parameters values, a wide range of monetary policy rules can generate real exchange rate autocorrelations around the ones observed in the data.     

Tracking exchange rate management in Latin America

One way to track exchange-rate deviations from its long-run value is to examine numerical patterns in exchange rates to see if those patterns appear to have been subjected to some degree of policy management. We apply Benford's Law to exchange rates in Latin American countries, computing and comparing the distribution of exchange-rate observed values with those of Benford's Law. For most cases we find that the exchange rate for the US dollar does not satisify Benford's Law, however this law holds when the euro is considered. This result may be explained by the fact that these countries are characterized for having different degrees of dollarization and intervention in the US dollar forex market while there is almost no policy intervention in the euro forex market. Our approach is an alternative view of how these characteristics play a role inducing deviations with respect to an implied equilibrium exchange rate.     

A re-examination on dissecting the purchasing power parity puzzle

The purpose of this paper is to examine the source of a real exchange-rate adjustment based on the impulse-response function constructed from local projections when the true data-generating process (DGP) is unknown. This work extends the local-projection method proposed by Jordà [2005. Estimation and inference of impulse responses by local projections. American Economic Review 95, 161-182] to allow for variables that are I(1) and exhibit cointegration. Our paper shows that nominal exchange-rate adjustments dominate in the reversion toward PPP regardless of a nominal exchange-rate shock or a price shock. It is also shown that the half-life of real exchange rates is close to that of nominal exchange rates. Since these results are consistent with those of Cheung et al. [Cheung, Y.W., Lai, K.S., Bergman, M., 2004. Dissecting the PPP puzzle: the unconventional roles of nominal exchange rate and price adjustments. Journal of International Economics 64, 135-150], we therefore conclude that their main findings are robust to possible misspecifications in the true DGP.     

Volatile and persistent real exchange rates with or without sticky prices

The flexible-price two-country monetary model is extended to include a consumption externality with habit persistence. Two methodologies are employed to explore this model's ability to generate volatile and persistent exchange rates. In the first, actual data is used for the exogenous driving processes. In the second, the model is simulated using estimated forcing processes. The theory, in both cases, is capable of explaining the high volatility and persistence of real and nominal exchange rates as well as the high correlation between real and nominal rates.     

Rational speculation and exchange rates

Models of exchange rates have typically failed to produce results consistent with the key fact that real and nominal exchange rates move in ways not closely connected to current (or past) macroeconomic variables. Models that rely on the same shocks to drive fluctuations in macroeconomic variables and exchange rates typically imply counterfactually-strong co-movements between them. We develop a model in which new information leads agents to change their rational beliefs about risk premia on foreign exchange markets. These changes in risk premia work through asset markets to cause real and nominal exchange rates to change without corresponding changes in GDP, productivity, money supplies, and other key macro variables.     

Foreign exchange intervention and equilibrium real exchange rates

Monetary authorities intervene in the currency markets in order to pursue a monetary rule and/or to smooth exchange rate volatility caused by speculative attacks. In the present paper we investigate for possible intervention effects on the volatility of nominal exchange rates and the estimated equilibrium behaviour of real exchange rates. The main argument of the paper is that omission of intervention effects – when they are significant – would bias the ability to detect any PPP-based behaviour of the real exchange rates in the long run. Positive evidence for this argument comes from the experience of six Central and Eastern European economies, whose exchange markets are characterised by frequent interventions.     

Nonlinear exchange rate predictability

We study whether the nonlinear behavior of the real exchange rate can help us account for the lack of predictability of the nominal exchange rate. We construct a smooth nonlinear error-correction model that allows us to test the hypotheses of nonlinear predictability of the nominal exchange rate and nonlinear behavior on the real exchange rate in the context of a fully specified cointegrated system. Using a panel of 19 countries and three numeraires, we find evidence of nonlinear predictability of the nominal exchange rate and of nonlinear mean reversion of the real exchange rate. Out-of-sample Theil’s U -statistics show a higher forecast precision of the nonlinear model than the one obtained with a random walk specification. Although the robustness of the out-of-sample results over different forecast windows is somewhat limited, we are able to obtain significant predictability gains—from a parsimonious structural model with PPP fundamentals—even at short-run horizons.     

完美货币与完美经济

没有完美的货币或者完美的经济组织形式。欧元和欧元区经济的问题,都是在全球化过程中所必须经历的阶段。一个好的经济体制,应该使＂国民生活水平＂最大化。但是,如果要具体到现实世界,＂生活水平最大化＂往往意味着很多,很可能意味着对其他经济体利益的侵蚀。本文从信用约束、经济一体化等角度,论述了欧元的使用对欧元区经济的益处;并指出了欧元使用带来的南欧国家财政赤字和贸易逆差问题。中国对外投资应该辩证地看待欧美经济体的长处和不足,合理配置外汇资产的比例。     

Price level convergence and regional Phillips curves in the US and EMU

We use panel estimates of regional Phillips curves of the hybrid New Keynesian type to study price level convergence within the US and EMU. Regional inflation rates tend to eliminate PPP deviations in both monetary unions, with average half-lives around 3½ years. The start of EMU did not greatly affect PPP reversion in the euro area. Where changes in nominal exchange rates accounted for the bulk of the adjustment process before 1999, this role was largely taken over by regional inflation differences since. Notwithstanding clear evidence of forward-lookingness in the US, inflation persistence is substantial in both monetary unions.     

Understanding the Backus–Smith puzzle: It's the (nominal) exchange rate,stupid

Backus, Kehoe and Kydland (BKK 1992) demonstrated that if international capital markets are complete, consumption growth correlations across countries should be higher than their corresponding output growth correlations. In stark contrast to the theory, however, in actual data the consumption growth correlation is lower than the output growth correlation. By assuming trade imperfections due to non-traded goods, Backus, D.K., Smith, G.W. [1993 Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics 35(3–4), 297–316] showed that there is an additional impediment at work that can lower the consumption growth correlation. While their argument was successful in partially explaining the puzzlingly low cross country correlation of consumption growth rates, it contributed to generating another puzzle because the data forcefully show that consumption growth is negatively correlated with the real exchange rate, which is also a violation of the theory. Using data for OECD countries, we decompose real exchange rate growth into its nominal exchange rate growth and inflation differential components, and find that nominal exchange rate movements are the main source for the Backus-Smith puzzle. We demonstrate the robustness of this finding by examining sub-samples of the data, by allowing for imperfect risk sharing due to ‘rule of thumb’ consumers, and by examining intranational data across the U.S. states where the nominal exchange rate is fixed.     

Testing the Purchasing Power Parity Hypothesis for the New Member and Candidate Countries of the European Union: Evidence from Lagrange Multiplier Unit Root Tests with Structural Breaks

This paper investigates the validity of purchasing power parity (PPP) for the eleven Central and East European transition countries and three market economy countries, Cyprus, Malta, and Turkey. Unlike previous studies on PPP, this study uses Lagrange multiplier (LM) unit root tests that incorporate structural breaks in the data series. The findings indicate that in cases of one and two structural breaks, for a U.S. dollar-based real exchange rate series, there is little evidence supporting the validity of PPP. For a deutsche mark-based real exchange rate series, for the cases of both one and two breaks, there is evidence of stationarity of real exchange rates for eight sample countries, which is consistent with PPP. The results also indicate that the estimated half-life of a shock to the real exchange rate ranges from 1.25 (15.05 months) to 2.72 (32.72 months) years across countries. The empirical findings may provide direction for policy makers to coordinate monetary policies for the process of European monetary integration.     

Volatility‐Spillover Effects in European Bond Markets

Volatility spillover from the US and aggregate European bond markets into individual European bond markets using a GARCH volatility‐spillover model is analysed. Strong statistical evidence of volatility spillover from the US and aggregate European bond markets is found. For EMU countries, the US volatility‐spillover effects are rather weak (in economic terms) whereas the European volatility‐spillover effects are strong. The bond markets of EMU countries have become much more integrated after the introduction of the euro, and in recent years they have become close to being perfectly integrated. The main driver of the integration appears to be convergence in interest rates.     

A fundamental theory of exchange rates and direct currency trades

In this paper we construct a two-country search model to determine the nominal exchange rate between two fiat monies. Our model allows agents to use any currency to trade for goods in all countries. However, search frictions restrict agents’ opportunities for instantaneous arbitrage, and hence make the nominal exchange rate determinate. The nominal exchange rate depends on the two countries’ economic fundamentals, including the stocks and growth rates of the two monies. Direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets. There are persistent violations of the law of one price and purchasing power parity in equilibrium, despite the fact that prices are perfectly flexible and all goods are tradeable between countries. Nominal and real exchange rates can move together in the steady state in response to money growth shocks.     

Testing for volatility spillover between the British pound and the euro

This paper examines volatility spillover between two nominal U.S. dollar exchange rates: the British pound and the euro. Using the residual cross-correlation approach, we observe that the euro Granger-causes the British pound in variance, whereas the British pound does not Granger-cause the euro in variance. Our findings support unidirectional volatility spillover from the euro to the British pound; thus, the euro volatility has a one-sided impact on the British pound volatility. Moreover, the findings suggest that euro traders succeed in the efficient processing of information derived from the British pound.     

Dual Exchange Rates in Europe and Latin America

This article uncovers some important empirical regularitiessurrounding the operation of formal dual exchange rates in Europeand Latin America in the 1970s and 1980s. Although there areparallels between the European and Latin American experiences,there are also interesting differences in terms of the sizeand nature of the distortion created by two official exchangerates; the response of the distortion to foreign interest rates,real commercial exchange rates, and domestic budget deficits;and the motives for adopting this exchange rate regime. Empiricalwork on dual exchange rate regimes is made difficult by thetransitory nature of these regimes and by frequent changes ininstitutional practices.     

Monetary union, price level convergence, and inflation: How close is Europe to the USA?

The pattern of price dispersion across European and US cities from 1990 to 2004 is documented. There is a striking decline in dispersion for traded goods prices in Europe, most of which took place prior to the launch of the euro. Dispersion in the euro area is now quite close to that of the USA. This evidence provides useful facts for future work assessing the importance of various developments in Europe: harmonization of tax rates, convergence of incomes and labor costs, liberalization of trade and factor markets, and increased coherence of monetary policy.     

Financial Integration and EMU

This paper investigates the effect of European Monetary Union on the integration of the financial services industry within European using data on the announcements of M&A's within the industry. We find some evidence that EMU has helped financial integration within the euro area. In addition, financial institutions in EMU countries became more active in initiating integration between EMU and non‐EMU partners, which also contributed to overall regional integration within European. The more active role of EMU institutions suggests that institutions residing in the eurozone became stronger players in the corporate control market. However, EMU does not facilitate the entry of non‐European institutions into European.