The impact of foreign interest rates on the economy: The role of the exchange rate regime

It is often argued that many economies are affected by conditions in foreign countries. This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high foreign interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which major-country interest rates affect other economies. The effect of foreign interest rates on domestic interest rates is the most likely channel when compared with other possibilities, such as a trade effect.     

Does the exchange rate regime matter for real shocks? Evidence from windstorms and earthquakes

Does the choice of exchange rate regime affect an economy's adjustment to real shocks? Exploiting the unpredictability and economic exogeniety of windstorms-hurricanes and typhoons-and earthquakes this paper assesses the often contrasting answers found in the theoretical literature. There is robust evidence that exchange rate flexibility helps an economy better adjust to real shocks. And consistent with the channels emphasized in the classic literature on exchange rates and shocks, differences in the behavior of the export sector help explain the different reactions between the two regimes.     

Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy

Industrial countries moving from fixed to floating exchange rate regimes experience dramatic rises in the variability of the real exchange rate. This evidence, forcefully documented by Mussa [Nominal exchange regimes and the behavior of real exchange rates: evidence and implications. Carnegie-Rochester Conference Series on Public Policy 25 (1986) 117], is a puzzle because it is hard to reconcile with the assumption of flexible prices. This paper lays out a dynamic general equilibrium model of a small open economy that combines nominal price rigidity with a systematic behavior of monetary policy able to approximate a continuum of exchange rate regimes. A version of the model with complete exchange rate pass-through is broadly consistent with Mussa’s findings. Most importantly, this holds independently of the underlying source of fluctuations in the economy, stressing the role of the nominal exchange rate regime per se in affecting the variability of the real exchange rate. However, only a model featuring incomplete exchange rate pass-through can account for a broader range of exchange rate statistics. Finally there exist ranges of values for either the degree of openness or the elasticity of substitution between domestic and foreign goods for which the baseline model is also consistent with the empirical insensitivity of output volatility to the type of exchange rate regime, as documented by Baxter and Stockman [Journal of Monetary Economics 23 (1989) 377].     

Terms of trade and exchange rate regimes in developing countries

Since Friedman [Essays in Positive Economics, University of Chicago Press, Chicago (1953) 157-203] an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks. I use a post-Bretton Woods sample (1973-96) of 75 developing countries to assess whether the responses of real GDP, real exchange rates, and prices to terms-of-trade shocks differ systematically across exchange rate regimes. I find that responses are significantly different across regimes in a way that supports Friedman’s hypothesis. The paper also examines the importance of terms-of-trade shocks in explaining the overall variance of output and prices in developing countries.     

The impact of parallel market exchange rate volatility and oil exports on real GDP in Syria: Evidence from the ARDL approach

This paper investigates the impact of parallel market exchange rate volatility and trade on real GDP and real GDP growth in the Syrian economy over the period of 1990Q1–2010Q4. To this end, we first construct a parallel market exchange rate volatility indicator. Second, we estimate an autoregressive distributed lag (ARDL) model where we include our indicator of volatility among the main determinants of real GDP. Our findings imply that real GDP can be explained by three main variables: parallel market exchange rate, money supply, and oil exports. The long-run equilibrium reveals that parallel market exchange rate volatility has a negative impact on real GDP compared to the positive impact of money supply and oil exports. In contrast, the short-run impact of parallel market exchange rate volatility on real GDP growth is positive and very small counter to the long-run impact. Furthermore, the coefficient of the error correction term of the estimated ARDL model indicates that real GDP deviation from the equilibrium level will be corrected by about 10% after each quarter.     

Exchange rate regime and external adjustment: An empirical investigation for the US

This paper analyses the relationship between the US net external position and the exchange rate regime. I find a structural break in the US net external position at the end of the Bretton Woods system of fixed exchange rates that changed both the mean and variance of the series. On average, the US changed from a creditor to a debtor position and the variance of the external position increased during the floating period. This increase is to a large extent due to the valuation component of external adjustment that accounts for 54% of the variance of the US external position during the floating period but only 29% during the fixed exchange rate period. Further analysis shows that the exchange rate regime mainly affects the valuation channel of external adjustment. There is also evidence of another structural break in the US external position around the time of the introduction of the euro. Finally, I document asset pricing implications from the relationship between the exchange rate regime and the external adjustment process, as external imbalances predict the foreign exchange once the exchange rate regime is taken into account.     

RMB exchange rate and trade balance

Gang Yi—Deputy Governor and Administrator, State Administration of Foreign Exchange (SAFE), People's Bank of China—returned to Indiana University-Purdue University Indianapolis (IUPUI)—where he was awarded an honorary degree. Following are remarks and a lecture on the Chinese economy he presented on April 18, 2012.     

Chaos and the exchange rate

Chaotic exchange rate models are structural models built in discrete time (difference equations), and show that with orthodox assumptions (PPP, interest parity, etc) and introducing plausible nonlinearities in the dynamic equations, it is possible to obtain a model capable of giving rise to chaotic motion. However, none of these models is estimated, and the conclusions are based on simulations: the empirical validity of these models is not tested. In this paper, a continuous time (the exchange rate is obviously a continuous variable) exchange rate model is built as a non-linear set of three differential equations and its theoretical properties (steady state, stability, etc,) analysed. The model is then econometrically estimated in continuous time with Italian data and examined for the possible presence of chaotic motion. This paper also shows that the continuous time estimation of economic models built as systems of nonlinear differential equations is a very powerful tool in the hands of the profession.     

Financial integration and the wealth effect of exchange rate fluctuations

Recent years have witnessed a large increase in international financial integration in the form of largely offsetting cross-holdings across countries. We assess how such financial leverage affects the international transmission of monetary shocks, and find that it leads to sizable welfare differentials that far exceed the impact due to nominal rigidities. We document the relevance of the exact nature of holdings, with bond holdings associated with larger effects than equity holdings. The impact of financial leverage on welfare is also sensitive to the extent of exchange rate pass-through and the substitutability between goods produced in different countries.     

Can the new open economy macroeconomic model explain exchange rate fluctuations?

This paper explores the successes and failures of the new open economy macroeconomics more critically by addressing the performance of the model at all frequencies along the line of Watson's [Watson, M.W., 1993. Measures of Fit for Calibrated Models, Journal of Political Economy 101, 1011-1041] measures of fit. This paper shows that the NOEM model with either PCP or PTM is not successful in generating the spectral density of the selected variables calculated from the data. In particular, the model cannot generate mass spectra of the exchange rates at low frequencies as in the data. It shows that the NOEM model with either separable preference or incomplete asset market cannot generate the typical hump-shaped spectra of exchange rates.     

The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms

This paper argues that when the exchange rate and projected sales in the host country are jointly determined by underlying macroeconomic variables, regressions of FDI flows on both exchange rate levels and volatility are subject to bias. The results demonstrate that a multinational firm's response to exchange rate volatility will differ depending on whether the volatility arises from shocks in the firm's native or host country. It is the first study to depart from the representative-firm framework in an analysis of direct investment behavior with money.     

Exchange rate policies in Asia in an era of financial globalisation: An empirical assessment

Ebbs and flows of capital have complicated macroeconomic policy management for all emerging market and developing economies (EMDEs) regardless of whether they have adopted flexible or managed exchange rate regimes. In the light of the renewed interest in the trilemma versus dilemma debate, we contribute to the related literature by presenting an empirical analysis of exchange rate flexibility and intervention for selected Asian EMDEs over the time period 2001–2016. In addition to estimating augmented Frankel–Wei regressions, we employ a generalised auto‐regressive conditional heteroscedasticity (GARCH) model to assess the extent of foreign exchange (FX) intervention and whether there exist any asymmetries in the way countries intervene. Our results show that although there is greater flexibility in exchange rates, there is evidence of some countries potentially using FX intervention to manage currency movements. We also find evidence of asymmetry in intervention where exchange rate volatility responds more emphatically to FX sales than purchases.     

Antecedents of patent value using exchange option models: Evidence from a panel data analysis

This paper examines the patent impact factor by an empirical study using panel data. To investigate the impact factor of patent value, this study conducts a sensitivity analysis of a patent evaluation model within the framework of a real option, while considering the uncertainties associated with both patent counts and the amount of R&D per patent, and develops an empirical analysis method for examining the impact factor of a patent using an unbalanced two-way fixed effects model. The empirical results indicate that the increase of patent value accords with the increase in the patent counts, volatility and patent lifetime. Although patent value declines with the amount of R&D per patent, the impact is not significant. However, reducing cost, raising patent counts and enhancing innovation efficiency offer a feasible method for a firm to increase patent value.     

Exchange rate jumps and exports: Evidence from China

We apply the autoregressive conditional jump intensity (ARJI ) model to monthly exchange rate returns of China against 81 countries and investigate the impact of exchange rate volatility on exports over the period of 1995–2004. We decompose bilateral exchange rate volatility into continuous and discrete components and find that only the discrete part of exchange rate volatility, that is, the exchange rate jumps, has a significantly negative effect on exports, which to some extent reconciles the old yet unsettled debate in previous literature on the role of exchange rate volatility in international trade. There is also some evidence suggesting that the development of domestic financial market will boost international trade, but it does not help attenuate the negative effect of bilateral exchange rate jump risk on exports.     

The temporal pattern of trading rule returns and exchange rate intervention: intervention does not generate technical trading profits

This paper characterizes the temporal pattern of trading rule returns and official intervention for Australian, German, Swiss and U.S. data to investigate whether intervention generates technical trading rule profits. The data reject the hypothesis that intervention generates inefficiencies from which technical rules profit. In particular, high frequency data show that abnormally high trading rule returns precede German, Swiss and U.S. intervention. Australian intervention precedes high trading rule returns, but trading/intervention patterns make it implausible that intervention actually generates those returns. Rather, intervention responds to exchange rate trends from which trading rules have recently profited.     

The dynamics of exchange rate regimes: Fixes, floats, and flips

The impermanence of fixed exchange rates has become a stylized fact in international finance. The combination of the “mirage” view that pegs do not really peg with the “fear of floating” view that floats do not really float generates the conclusion that exchange rate regimes are, in practice, unimportant for the behavior of the exchange rate. This is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance. Recent studies, however, show that the exchange rate regime matters. This can be understood by considering the dynamics of exchange rate regimes. We demonstrate that the “mirage” view is somewhat misleading and incomplete. Pegs frequently break, but many do last. Also, there is a high degree of flipping, that is, the re-formation of pegs that have broken. Thus, a fixed exchange rate today is a good predictor that one will exist in the future. We also investigate the quantitative effect of fixed exchange rates. While the “fear of floating” view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility, we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates, both today and in the future.     

Arbitrage in the foreign exchange market: Turning on the microscope

This paper provides real-time evidence on the frequency, size, duration and economic significance of arbitrage opportunities in the foreign exchange market. We investigate deviations from the covered interest rate parity (CIP) condition using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency. The analysis unveils that: i) short-lived violations of CIP arise; ii) the size of CIP violations can be economically significant; iii) their duration is, on average, high enough to allow agents to exploit them, but low enough to explain why such opportunities have gone undetected in much previous research using data at lower frequency.     

Non-linear relationships between growth opportunities and debt: Evidence from quoted Portuguese companies

This paper analyses the relationship between growth opportunities and debt of quoted Portuguese companies using various panel estimators. The results show a cubic relationship between growth opportunities and debt. When companies' growth opportunities are low and high, the relationship between growth opportunities and debt is positive. For intermediate levels of growth opportunities, the results show the existence of a negative relationship between growth opportunities and debt. These results suggest that the relationship between companies' growth opportunities and debt is influenced by complex aspects in companies' capital structure decisions. The empirical results suggest that creditors recognize high growth opportunities when such opportunities exist, and debt is a way to discipline managers' actions in the presence of low investment opportunities. For intermediate levels of growth opportunities, the subinvestment problems seem to be relevant in explaining the relationship between growth opportunities and debt.     

我国国际资本流动影响因素的实证研究

本文对1982-2004年期间我国的国际资本流动状况及其影响因素进行了实证研究。研究结果表明:我国国际资本流动存在着数量上波动性和方向上双向性之特点,其主要影响因素是人民币汇率预期,其次是物价水平和名义汇率,而利率因素的影响并非显著。其政策含义是,在当前内外经济条件下,人民币升值并非可举之策;但在长远,资本流动的双向性决定了浮动汇率制度是我国汇率制度改革的必然选择。