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.     

The real exchange rate in the long run: Balassa-Samuelson effects reconsidered

Historical data for over hundred years and 14 countries is used to estimate the long-run effect of productivity on the real exchange rate. We find large variations in the productivity effect across four distinct monetary regimes in the sample period. Although the traditional Balassa-Samuelson model is not consistent with these results, we suggest an explanation of the results in terms of contemporary variants of the model that incorporate the terms of trade mechanism. Specifically we argue that changes in trade costs over time may affect the impact of productivity on the real exchange rate over time. We undertake simulations of the modern versions of the Balassa-Samuelson model to show that plausible parameter shifts consistent with the behavior of trade costs can explain the cross-regime variation of the productivity effect.     

World food prices and monetary policy

How should monetary policy respond to large fluctuations in world food prices? We study this question in an open economy model in which imported food has a larger weight in domestic consumption than abroad and international risk sharing can be imperfect. A key novelty is that the real exchange rate and the terms of trade can move in opposite directions in response to world food price shocks. This exacerbates the policy trade-off between stabilizing output prices vis a vis the real exchange rate, to an extent that depends on risk sharing and the price elasticity of exports. We characterize implications for dynamics, optimal monetary policy, and the relative performance of practical monetary rules. While CPI targeting and expected CPI targeting can dominate PPI targeting if international risk sharing is perfect, even seemingly mild departures from the latter make PPI targeting a winner.     

Consumption heterogeneity,employment dynamics and macroeconomic co-movement

Real-business-cycle models rely on total factor productivity (TFP) shocks to explain the observed co-movement among consumption, investment and hours. However an emerging body of evidence identifies “investment shocks” as important drivers of business cycles. This paper shows that a neoclassical model consistent with observed heterogeneity in labor supply and consumption across employed and non-employed can generate co-movement in response non-TFP shocks. Estimation reveals fluctuations in the marginal efficiency of investment that explain the bulk of business-cycle variance in consumption, investment and hours. A corollary of the model׳s empirical success is the labor wedge that is not important at business-cycle frequencies.     

Liquidity determination in an order-driven market

We exploit full order level information from an electronic FX broking system to provide a comprehensive account of the determination of its liquidity. We not only look at bid-ask spreads and trading volumes, but also study the determination of order entry rates and depth measures derived from the entire limit order book. We find strong predictability in the arrival of liquidity supply/demand events. Further, in times of low (high) liquidity, liquidity supply (demand) events are more common. In times of high trading activity and volatility, the ratio of limit to market order arrivals is high but order book spreads and depth deteriorate. These results are consistent with market order traders having better information than limit order traders.     

The confusing time-series behaviour of real exchange rates: Are asymmetries important?

Evidence regarding the time-series properties of real exchange rates is mixed. There is evidence that such rates exhibit both non-stationary and stationary behaviour. The current dominant belief is that rates are non-linear stationary, however, this is not accepted without question. This paper re-examines the time-series properties of five US dollar real exchange rates and argues that the confusing time-series properties arise largely as each series examined exhibits periods of non-stationary and stationary behaviour such that the sample over which any empirical exercise is conducted is of importance. However, extending a typical non-linear model used within the literature to allow for asymmetries improves the models ability to fit the data. Therefore, our results suggest that modelling asymmetries between positive and negative real exchange rate deviations is of importance, whereas extant research has typically rules out asymmetry. Indeed a forecasting exercise conducted over a 1-year horizon is particularly supportive of this model. Such a finding is of importance not only for academics but also finance practitioners involved in trading and portfolio management and finance managers who act in the foreign exchange market for goods market trading. It remains for future research to theoretically motivate the asymmetries found here.     

Macroeconomic shocks, structural change and real exchange rates: Evidence from historical data

We present empirical evidence on the forces driving real exchange rates in the long-run. Using data from the US, UK and Italy across different exchange rate regimes, we find support for the hypothesis that productivity and fiscal shocks matter. However, in some cases fiscal shocks cause depreciations, likely triggered by the monetary accommodation of fiscal shocks. We also find that the traditional Harrod–Balassa–Samuelson effect of productivity on real exchange rates is reversed in some cases, which confirms the importance of the distributive sector in driving productivity gains.     

U.S. real exchange rate fluctuations and relative price fluctuations

Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. This paper studies the relation between the United States’ bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.     

New evidence on nominal exchange rate predictability

The Meese–Rogoff puzzle, one of the well-known puzzles in international economics, concerns the weak relationship between nominal exchange rates and market fundamentals. The purpose of this paper is to show that market fundamentals do in fact matter in forecasting nominal exchange rates. In particular, we emphasize the importance of the Harrod–Balassa–Samuelson effect in modeling deviations from purchasing power parity. Based on the post-Bretton Woods period, we provide solid out-of-sample evidence that rejects the random walk forecast model at medium-term and long-term forecast horizons. We also find mild evidence for out-of-sample predictability of nominal exchange rates over the short term.     

Home production,labor wedges,and international business cycles

Non-separabilities due to home production break the link between market consumption and its marginal utility and help explain several stylized facts of the open economy. In an estimated two-country model with complete asset markets in which home production generates a labor wedge that mimics its empirical counterpart, output is more correlated than consumption across countries, labor inputs and labor wedges are positively correlated across countries, and relative market consumption is negatively related to the real exchange rate. Evidence from time use surveys corroborates some of the predictions of the model.     

Financial factors in foreign direct investments: A dynamic analysis of international data

In contrast to existing empirical foreign direct investment (FDI) studies that examine the static effects of strategic or real economic variables, this paper focuses on the impacts of financial variables on FDI outflows for four largest industrial countries using dynamic time series methods. The results show that FDI outflows are non-stationary but have a long-run cointegrating relationship with real exchange rates. In addition, there are causal effects of exchange rates on direct investments in the short run. Multivariate cointegration analysis shows the significance of financial channels such as cost of capital and real wealth through which the real exchange rate effects operate. The effects of financial channels are comparable to those of the real wage rate channel. Overall, the present paper provides significant and methodologically consistent international evidence for dynamic interactions between FDIs and financial variables.     

The Black Market for Dollars in Venezuela

In February 2003, the Venezuelan government imposed a strict capital controls policy to stem the outflow of dollars. We describe the mechanics and structure of the resulting black market and analyze the comparative performance of alternative models in explaining and forecasting the black market premium. Robustly significant determinants of the premium include the lagged premium, the official real exchange rate, the implied returns from arbitrage, and the oil price. Our preferred model exhibits outstanding out-of-sample forecasting performance, with an average prediction error of -0.9 percent, and an error standard deviation of 7.8 percent, during the ten-month period until July 2009. We provide evidence that the exogenous change of the black market swap vehicle to government bonds in 2007 induced a significant shift in the relative importance of the determinants of the premium, causing shocks to become significantly more persistent, the coefficient on the implied returns from arbitrage to double, and rendering the beneficial effect of oil price increases insignificant.     

Sequential American Exchange Property Options

Property development activities often occur in stages, which are appropriately modeled as sequential American exchange property options, where there are interim expenditures required in order to keep the property development options “alive”. Normally American exchange options require a numerical solution, but herein there is a new closed-form approximate solution, which is computationally efficient and accurate. This method combines repeats of Margrabe European exchange and Geske compound option solutions with tight upper boundaries of either American perpetuities or European exchange options with a high volatility. Illustrations are provided of the sensitivity of the real sequential options and optimal timing to changes in several parameters, which provide a framework for property policy (tax, subsidy and regulatory) guidelines and for property development strategy evaluation. There are several plausible applications of these real option models in commercial and residential property development, within commercial property leases, with regard to switching tenants, and agricultural alternatives.     

Trade Openness and Exchange Rate Regimes

The paper evaluates the net welfare gains of inflation targeting over a fixed exchange rate as a function of a country's trade openness, using a multisectoral structural model calibrated to Chile. For most calibrations with separable preferences, net welfare gains are increasing in trade openness. The reason is that in more open economies terms of trade shocks, which favor inflation targeting, become quantitatively more important, while price markup shocks in the imperfectly competitive nontradables sector, which favor exchange rate targeting, become less important. The most important exception is heavily indebted countries, where net welfare gains are decreasing in trade openness.     

资本账户开放会扩大收入不平等吗?——基于跨国面板数据的研究

在金融一体化的背景下,各国的资本账户开放程度在不断加深,这对收入分配是否会产生明显的影响?对此,本文搜集和整理了1980—2014年的数据,构建面板数据模型后发现,资本账户开放扩大了收入不平等程度,这在非OECD国家中表现得尤为显著。进一步的分析表明,资本账户开放通过促进非OECD国家高技术产业的发展,提高了对高技能劳动力的相对需求,从而增加了高技能劳动力的相对工资,加剧了贫富差距,但这一作用在经过收入再分配的调整后会被削弱。     

Nonlinear trends in real exchange rates: A panel unit root test approach

We analyze the possibility of nonlinear trend stationarity as the alternative to unit roots in 23 OECD real exchange rates, 1974–1998, by adding nonlinear time terms to the CIPS panel unit root test of Pesaran (2007). We follow a thorough bootstrapping approach and propose a technique to adjust statistical significance for the use of multiple tests over several time trend orders. The unit root null that all real exchange rates have unit roots is rejected at better than the 0.05 level. Bootstrapped results from a procedure of Chortareas and Kapetanios (2009) suggest that the hypothesis that all are stationary is reasonable. We argue that nonlinear trend stationarity is the most likely alternative hypothesis for at least some of the real exchange rates because: (1) the strongest CIPS rejection occurs when quadratic trends are specified; (2) nonlinear time terms are statistically significant at the 0.10 level; (3) the actual CIPS statistics are more consistent with CIPS sampling distributions from bootstrapped nonlinear trend stationary processes than from linear trend or mean stationary processes.     

Currency Crisis in Korea – When and Why It Happened

Two possible causes of the Korean financial crisis are examined: (1)deterioration of the macroeconomic indicators andinconsistent policies and (2) sudden shifts in the market expectation andconfidence. Although the truthseems to lie between these causes, we conclude that the Korean currency crisisresulted from aserious mismanagement of foreign exchange rates and foreign currency reservesas well as theaccumulation of short-term foreign debts. Although it is generally believedthat the exchange rate ofthe won started depreciating drastically on 8 November 1997, depreciationstarted three monthsearlier when the international market conditions put the pressure on the won.