The exchange rate and macroeconomic determinants: Time-varying transitional dynamics

In this paper, I consider modeling the effects of the macroeconomic determinants on the nominal exchange rate to be channeled through the transition probabilities in a Markovian process. The model posits that the deviation of the exchange rate from its fundamental value alters the market's belief in the probability of the process staying in certain regime next period. This paper further takes into account the ARCH effects of the volatility of the exchange rate. Empirical results generally confirm that fundamentals can affect the evolution of the dynamics of the exchange rate in a nonlinear way through the transition probabilities. In addition, I find that the volatility of the exchange rate is associated with significant ARCH effects which are subject to regime changes.     

Asymmetric effects of exchange rate changes on Turkish bilateral trade balances

Previous studies that have assessed the short-run and the long-run effects of exchange rate changes on Turkey’s trade balance with its major partners relied upon a linear adjustment process that could not find much support for favorable effects of exchange rate changes. In this paper, once we separate real appreciations from real depreciations via the partial sum concept and introduce nonlinearity into the estimation and testing procedure, we show that the effects of exchange rate changes are asymmetric. More precisely, while lira appreciation does not have any significant effects on Turkey’s bilateral trade balances, lira depreciation has significantly favorable effects on Turkey’s trade balance with its European partners (France, Germany, Italy, Portugal, and Great Britain).     

The Yen Real Exchange Rate may be Stationary after all: Evidence from Non‐linear Unit‐root Tests*

The empirical literature that tests for purchasing power parity (PPP) by focusing on the stationarity of real exchange rates has so far provided, at best, mixed results. The behaviour of the yen real exchange rate has most stubbornly challenged the PPP hypothesis and deepened this puzzle. This paper contributes to this discussion by providing new evidence on the stationarity of bilateral yen real exchange rates. We employ a non‐linear version of the augmented Dickey–Fuller test, based on an exponentially smooth‐transition autoregressive model (ESTAR) that enhances the power of the tests against mean‐reverting non‐linear alternative hypotheses. Our results suggest that the bilateral yen real exchange rates against the other G7 and Asian currencies were mean reverting during the post‐Bretton Woods era. Thus, the real yen behaviour may not be so different after all but simply perceived to be so because of the use of a restrictive alternative hypothesis in previous tests.     

Exchange Rate Pass‐through to Trade Prices: The Role of Nonlinearities and Asymmetries*

A standard assumption in the empirical literature is that exchange rate pass‐through is both linear and symmetric. This study tests these assumptions for export and import prices in the G7 economies. It focuses on non‐linearities in the reaction of profit margins to exchange rate movements, which may arise from the presence of price rigidities and switching costs. Nonlinearities are characterized by augmenting a standard linear model with polynomial functions of the exchange rate and with interactive dummy variables. The results suggest that nonlinearities and especially asymmetries cannot be ignored, although their magnitude varies noticeably across countries.     

Impact of an unexplained component of real exchange rate volatility on FDI: Evidence from transition countries

The aim of this paper is to examine the impact of an unexplained component of real exchange rate volatility on FDI in transition economies. We make an attempt to overcome some problems associated with previous studies; the aggregation problem, inadequate measures of volatility, short-run focus and the endogeneity problem. Using a GARCH specification, we focus on long-run volatility, while we control for the endogeneity problem by applying SYS-GMM estimation. The obtained results show that the impact of the unexplained component of real exchange rate volatility on FDI differs among economic activities since 2000. As part of the re-estimation exercise, we use two alternative measures of volatility to avoid arbitrariness. The obtained results are to a large extent in accordance with the first one.     

Foreign Currency Translation Reporting and the Exchange-Rate Exposure Effect

This study further explores a structural break in the relation between stock returns of firms with foreign currency positions and lagged exchange rate changes (exchange rate exposure effect) documented in Bartov and Bodnar (1994). We examine whether changes in the financial accounting reporting of foreign currency positions from SFAS No. 52 might have improved investors' ability to characterize firms' economic exchange rate exposures, and thus the impact of exchange rate movements on firm value. Our findings indicate that only firms reporting using the dollar as the functional currency (i.e., those reporting as if they were still under SFAS No. 8) retain a significant relation between the lagged change in the dollar and firm value in the post-SFAS No. 52 period. For firms reporting using the foreign currency as the functional currency (i.e., those who switched to the new translation method) the significant lagged relation disappears. This is consistent with the use of a foreign currency as the functional currency under SFAS No. 52 facilitating valuation of U.S. firms with foreign operations.     

Exchange rate pass-through: A generalization

The extent of exchange rate pass-through has been playing an increasingly pivotal role in the transmission of exchange rate shocks and adequate policy responses. We develop a model of exchange rate pass-through that allows the stochastic process of exchange rate to include the lagged values of the velocity of money. We show that the likelihood and extent of pass-through is sensitive to the lagged response.     

Further Evidence on PPP Adjustment Speeds: the Case of Effective Real Exchange Rates and the EMS*

Two different approaches intend to resolve the ‘puzzling’ slow convergence to purchasing power parity (PPP) reported in the literature [see Rogoff (1996) , Journal of Economic Literature, Vol. 34.] On the one hand, there are models that consider a non‐linear adjustment of real exchange rate to PPP induced by transaction costs. Such costs imply the presence of a certain transaction band where adjustment is too costly to be undertaken. On the other hand, there are models that relax the ‘classical’ PPP assumption of constant equilibrium real exchange rates. A prominent theory put together by Balassa (1964, Journal of Political Economy, Vol. 72) and Samuelson (1964 Review of Economics and Statistics, Vol. 46) , the BS effect, suggests that a non‐constant real exchange rate equilibrium is induced by different productivity growth rates between countries. This paper reconciles those two approaches by considering an exponential smooth transition‐in‐deviation non‐linear adjustment mechanism towards non‐constant equilibrium real exchange rates within the EMS (European Monetary System) and effective rates. The equilibrium is proxied, in a theoretically appealing manner, using deterministic trends and the relative price of non‐tradables to proxy for BS effects. The empirical results provide further support for the hypothesis that real exchange rates are well described by symmetric, nonlinear processes. Furthermore, the half‐life of shocks in such models is found to be dramatically shorter than that obtained in linear models.     

Beware of breaks in exchange rates: Evidence from European transition countries

We endogenously search for the single most decisive structural break in exchange rate for a group of European transition countries under the hypothesis that structural breaks in exchange rates are driven by exchange rate policies. Detected breaks were frequently associated with major changes in exchange rate regime. However, several breaks were found not to be driven by exchange rate policies. By this token, the lack of coincidence between policy step and exchange rate regime shift hints at imperfect timing of exchange regime modification. Further, since a one time break can lead to inconsistent results, structural breaks in exchange rates should be accounted for in empirical research.     

An assessment of another decade of capital controls in Colombia: 1998–2008

We explore the effectiveness of capital controls in Colombia. We analyze the impact of administrative restrictions to capital flows on aggregate capital flows, the composition of capital flows, the real exchange rate, and economic activity using restricted versions of vector error correction models (VEC) that control for exogenous global financial conditions. The models are estimated using monthly data ranging from August of 1998 to May of 2008. In addition we estimate GARCH models to identify if capital controls have had relevant impacts on the volatility of the nominal exchange rate and of other relevant asset prices. These models are estimated using weekly data covering the same time period. Results suggest that the capital controls used since 1998 have been ineffective in reducing capital flows and the trend of the Colombian peso to appreciate. In addition there is no evidence suggesting a change in the composition of capital flows induced by capital controls. We find some evidence in favor of capital controls reducing nominal exchange rate volatility at high frequencies.     

汇率制度选择及其通胀绩效的实证考察--以中东欧转轨国家为例

文章对20世纪90年代中东欧转轨国家汇率制度选择及其通胀绩效进行了实证考察。结果表明,这些国家在从计划经济向市场经济转轨的过程中,采取了几乎所有的汇率制度类型。对于转轨国家而言,汇率制度选择与通胀之间存在着非常密切的关系。在转轨的初期,通胀的压力和宏观经济的稳定性是政府主要考虑的因素,这些国家的政府都把稳定货币作为制定政策的出发点,汇率制度的选择也是围绕稳定货币进行的。这些国家的实践表明,钉住汇率制度反通胀的绩效要超过浮动汇率制度。     

How does Monetary Policy Respond to Exchange Rate Movements? New International Evidence*

This article analyzes how monetary policy has responded to exchange rate movements in six open economies, paying particular attention to the two‐way interaction between monetary policy and the exchange rate. We address this issue using a structural VAR model that is identified using a combination of sign and short‐term (zero) restrictions. Doing so we find that, while there is a instantaneous reaction in the exchange rate following a monetary policy shock in all countries, monetary policy responds significantly on impact to an exchange rate shock in only four of the six countries.     

Mexico’s balance of payments and exchange rates: a cointegration analysis

Mexico’s recurrent economic crises have cast serious doubts on the existence of a long-run relationship between the country’s balance-of-payments and exchange rates. In this paper, cointegration and vector autoregression techniques are applied to Mexico’s data covering the period 1971 through 1988. Despite the presence of nonstationarity, the statistical analysis supports a long-run relationship between changes in international reserves and the exchange rate and changes in domestic credit. Further multivariate Granger causality tests, together with innovation accounting, indicate that Mexico’s monetary authorities adjust domestic assets to sterilize balance-of-payments deficits in a futile attempt to control its monetary policy.     

An empirical behavioral model of household’s deposit dollarization

We use the behavioral concept to endogenously model the evolution of the link between households’ deposit dollarization and exchange rate developments in Russia. We estimate the model empirically and show that the reaction of households to exchange rate appreciation weakens when exchange rate developments become more volatile. The proposed model outperforms the contemporary nonlinear time series models in forecasting the changes in dollarization during the Bank of Russia’s transition to a flexible exchange rate regime.

     

International foreign exchange agreements and nominal exchange rate volatility: a GARCH application

For eight major national currencies, this study estimates, and tests several hypotheses with, a t-distribution GARCH model of daily spot nominal exchange rate changes. The sample period covered is June 1, 1982 through September 30, 1992. By using likelihood ratio and parameter stability tests, it finds that for most of the currencies considered, both the conditional means and variances of unexpected exchange rate changes experienced statistically significant structural breaks across the five subperiods that are associated with four episodes of international foreign-exchange policy coordination. The study also finds that the orderings of the GARCH-estimated unconditional standard deviations roughly match the orderings of the sample standard deviations across the five subperiods. An explanation is provided for what underlying factors contributed to these structural shifts.     

Risk and return under changing regulation: An empirical analysis

It has been observed that utility executives generally argue for inflation-adjusted rate bases while consumer groups advocate original-cost valuation methods. Recent analytical and empirical studies indicate rate-base valuation methods should not and do not account for differences in utilities-accounting-realized rates of return. However, there is evidence that changes in valuation methods may cause changes in realized returns due to over- or under-compensation for the effects of inflation. This study examines the impact of changes in rate-base valuation methods on (1) systematic risk, (2) expected shareholder returns and (3) realized shareholder returns. A unique time series data set and a new statistical procedure are utilized. Overall, the results are consistent with the earlier analytical and empirical studies. However, the results for utilities in one state provide support for the argument that investors fare better under fair-value regulation.     

Pricing‐to‐Market and Market Structure*

Stimulated by imperfect competition/sticky prices framework of the new open economy macroeconomics, empirical research has reconsidered the role of exchange rates in international adjustment. This paper reassesses the link between exchange rates and traded good prices by estimating pricing‐to‐market equations for the five main euro area countries over the period 1990–99. We minimize selection biases by keeping all manufacturing products and all destination markets and show that exchange rate pass‐through (ERPT) is much larger, almost complete, than previously estimated. Thanks to a huge variability in terms of exchange rate variations, products and destination markets, we can map differences in ERPT into market structures and, at the same time, reconcile our results with the empirical literature. We find that ERPT is highly incomplete for sales by oligopolistic industries into advanced economies, indeed in the order of 50–60% as previously estimated. ERPT is instead almost complete in emerging and developing economies where therefore exchange rate movements can help adjust external imbalances. We also find that ERPT is largely asymmetric: it is almost complete after an appreciation of the exporter's currency, rather incomplete after a depreciation. This result is very robust across specifications.     

The effects of exchange rate fluctuations on the stock market and the affecting mechanisms: Evidence from BRICS countries

Using data from BRICS countries, we apply the TVP-VAR model to analyze the effects of exchange rate fluctuations on their stock markets and the mechanisms leading to those effects. We find that for BRICS countries, there are similarities as well as differences in the extent, direction, and duration of the effects of exchange rate changes on the stock market. As for the affecting mechanisms, Brazil is almost entirely driven by the financial account, while the current account is dominant for Russia, whereas India, China, and South Africa depend on both mechanisms.     

The Adjusted Big Mac Methodology: A Clarification

The Economist's adjusted Big Mac index takes GDP into account in currency valuation, but the methodology is not explained. We show that the key to understanding the methodology is to distinguish between a currency's bilateral valuation (versus a specific currency) and the currency's overall valuation (versus a “basket” of a large number of currencies). Also, the adjusted Big Mac estimates of intrinsic foreign exchange (FX) rates have been better forecasts of actual FX changes than those of the original “raw” Big Mac index.     

Asymmetric effects of exchange rate changes on the Malaysia-China commodity trade

Previous research that considered the response of the trade balance between Malaysia and China to exchange rate changes used a linear model and did not find any significant long-run link. Suspecting that the results suffer from aggregation bias as well as ignoring nonlinear adjustment of the exchange rate, we consider the trade balance of 59 industries that trade between the two countries and use a nonlinear ARDL model to show that almost a third of the industries are affected by ringgit depreciation against the yuan, in an asymmetric manner. The largest industry, which accounts for more than 25% of the trade, is found to benefit from ringgit depreciation while not being hurt by appreciation. In total, 15 industries that account for 40% of the trade enjoy this property.