Exchange rate expectations and economic policy uncertainty

This study provides a new angle on the relationship between political decisions and exchange rates. We link a conventional exchange rate modeling approach to the literature on the political economy of exchange rates and studies dealing with the role of policy announcements for financial market expectations by addressing the impact of policy uncertainty on exchange rate expectations and forecast errors of professionals. Our results show that expectations are not only affected by announcements but also by the degree of uncertainty regarding the future stance of economic policy. We find that forecast errors are strongly affected by policy uncertainty compared to expectations, suggesting that the effect of uncertainty is not efficiently accounted for in market expectations. Our main findings hold for economic policy uncertainty, fiscal policy uncertainty and monetary policy uncertainty. In addition, the estimates for the Japanese yen suggest a safe haven role of the yen since higher policy uncertainty in the US results in an expected appreciation of the yen.     

Elections, exchange rates and reform in Latin America

In this paper, we study the link between real exchange rate (RER) depreciation and elections in Latin America. Our contribution is threefold. First, we employ a statistical model that takes into account the pervasive conditional heteroskedasticity found in financial data and includes a wide range of macroeconomic variables as regressors. Second, we test whether the wave of central bank reform that swept the region has had any effect on the existence or strength of the electoral cycle in exchange rates. Third, we test an additional hypothesis, namely, that financial liberalization may also be an important variable explaining changes in electoral effects on the real exchange rate. In a panel of 9 Latin American countries with available macroeconomic data and a history of exogenous election dates, we confirm the previous findings that real depreciation intensifies after elections even when modeling the significant conditional heteroskedasticity in these data. We also show, for the first time in the literature, that post-election exchange rates are significantly less predictable. We go on to test whether central bank reform has influenced the way in which elections affect the RER in Latin America. If reform has been effective at reducing political manipulation of the exchange rate, then any relationship we see between elections and the RER before central bank reform should be mitigated in the post-reform era. We find that the relationship disappears after reform and that post-reform real exchange rates are also significantly less volatile. Finally, we show that financial liberalization seems to have a stronger effect on the conditional variance of the RER than does central bank reform, but reform has a stronger impact on the conditional mean.     

When do the USDA forecasters make mistakes?

This study analysed forecasts for all US corn, soya bean and wheat categories published within the World Agricultural Supply and Demand Estimates (WASDE ) reports over the 1987/88 through 2009/10 marketing years in an attempt to identify patterns and better understand when the USDA forecasters make mistakes. Two general sources of errors were investigated: behavioural and macroeconomic factors. The first objective was to examine how these factors affect the size of the forecast error and the second concentrated on the direction of the error due to these effects. Our findings suggest that the largest increase in the size of USDA forecast errors was associated with structural changes in commodity markets that took place in the mid-2000s. Corn, soya bean and wheat forecast errors also grew during the periods of economic growth and with changes in exchange rates, while inflation and changes in oil price had a much smaller impact. With respect to behavioural sources, we identified patterns consistent with leniency and pessimism across different categories. Predictability of forecast errors based on the information available at the time the forecasts are made provides evidence of inefficiency and suggests that these forecasts may be improved using the findings of this study.     

Trade flows,relative prices,and effective exchange rates: a VAR on Ethiopian data

The dynamic response of trade flows to price and effective exchange rate changes is examined via VAR using quarerly data from Ethiopia for the period 1973(i)–1985(iv). The results show one-way Granger-causality running from prices and exchange rates to imports and exports without significant feedback. Imports and exports exhibit similar response patterns to unexpected changes in relative prices and exchange rates. The responses of imports and exports are larger and the adjustment takes longer when relative prices rather than exchange rates caused a change in international prices. In the long-run, changes in prices account for a larger percentage of the forecast error variances in imports and exports than exchange rate changes. It is shown that devaluation may have an initial adverse effect on the trade balance.     

REAL EXCHANGE RATE CYCLES AROUND ELECTIONS

We develop the implications of devaluation cycles for real exchange rates in a two-sector small open economy with a cash-in-advance constraint. Policy-makers are office-motivated politicians. Voters have incomplete information on the competence and the opportunism of incumbents. Devaluation acts like a tax, and is politically costly because it can signal the government is incompetent. This provides incumbents an incentive to postpone devaluations, and can lead to an overvalued exchange rate before elections. We compare the implied cycle of appreciated/depreciated exchange rates with empirical evidence around elections from Latin America.     

BLACK MARKET EXCHANGE RATES AND CAPITAL MOBILITY IN ASIAN ECONOMIES

This paper examines whether foreign exchange black markets have eroded the effectiveness of capital controls and contributed to an increase in the effective degree of capital mobility in a sample of Asian countries. Comparing the uncovered interest parity forecast errors between the official and black market exchange rates suggests that in those countries with more stringent capital controls, foreign exchange black markets have reached a maturity level to threaten the effectiveness of those controls.     

Dissecting models' forecasting performance

The fact that the predictive performance of models used in forecasting stock returns, exchange rates, and macroeconomic variables is not stable and varies over time has been widely documented in the forecasting literature. Under these circumstances excessive reliance on forecast evaluation metrics that ignores this instability in forecasting accuracy, like squared errors averaged over the whole forecast evaluation sample, masks important information regarding the temporal evolution of relative forecasting performance of competing models. In this paper we suggest an approach based on the combination of the Cumulated Sum of Squared Forecast Error Differential (CSSFED) of Welch and Goyal (2008) and the Bayesian change point analysis of Barry and Hartigan (1993) that tracks the contribution of forecast errors to the aggregate measures of forecast accuracy observation by observation. In doing so, it allows one to track the evolution of the relative forecasting performance over time. We illustrate the suggested approach by using forecasts of the GDP growth rate in Switzerland.     

The effects of exchange rate uncertainty on exports

We investigate the effects of exchange rate uncertainty on exports in the context of a multivariate framework in which a structural open economy vector autoregression is modified to accommodate multivariate GARCH-in-Mean errors, as detailed in Elder (Elder, J., 2004. Another perspective on the effects of inflation uncertainty. Journal of Money, Credit, and Banking 36, 912–928). Our measure of exchange rate uncertainty is the conditional standard deviation of the forecast error of the change in the exchange rate. We isolate the effects of exchange rate uncertainty on exports and also analyze how accounting for exchange rate uncertainty affects the response of exports to exchange rate shocks. We estimate the model using aggregate monthly data for the United States, over the flexible exchange rate period (since 1973). We use full information maximum likelihood estimation procedures and find that exchange rate uncertainty has a negative and significant effect on US exports. We also find that accounting for exchange rate uncertainty tends to strengthen the dynamic response of exports to shocks in the exchange rate and that exports respond asymmetrically to positive and negative exchange rate shocks of equal magnitude.     

A new multiscale decomposition ensemble approach for forecasting exchange rates

Due to the high complexity and strong nonlinearity nature of foreign exchange rates, how to forecast foreign exchange rate accurately is regarded as a challenging research topic. Therefore, developing highly accurate forecasting method is of great significance to investors and policy makers. A new multiscale decomposition ensemble approach to forecast foreign exchange rates is proposed in this paper. In the approach, the variational mode decomposition (VMD) method is utilized to divide foreign exchange rates into a finite number of subcomponents; the support vector neural network (SVNN) technique is used to model and forecast each subcomponent respectively; another SVNN technique is utilized to integrate the forecasting results of each subcomponent to generate the final forecast results. To verify the superiority of the proposed approach, four major exchange rates were chosen for model comparison and evaluation. The experimental results indicate that our proposed VMD-SVNN-SVNN multiscale decomposition ensemble approach outperforms some other benchmarks in terms of forecasting accuracy and statistical tests. This demonstrates that our proposed VMD-SVNN-SVNN multiscale decomposition ensemble approach is promising for forecasting foreign exchange rates.     

Exchange Rate Populism

East Asian and Latin American economies present opposite exchange rate electoral cycles: exchange rates tend to be more depreciated before and appreciated after elections among East Asian economies, while the opposite is true in Latin America. We propose an explanation for these empirical findings where the driving force of the opposite exchange rate populism in these two regions is their difference in the relative size of tradable and non‐tradable sectors, coupled with the distributive effect of exchange rates. In a setup where policy‐makers differ in their preference bias toward non‐tradable and tradable sectors, the exchange rate is used a noisy signal of the incumbent's type in an uncertain economic environment. The mechanism behind the cycle is engendered by the incumbent trying to signal he is median voter's type, biasing his policy in favor of the majority of the population before elections.     

Survey Data and the Interest Rate Sensitivity of US Bank Stock Returns

In this paper, we provide empirical evidence on the interest rate sensitivity of the stock returns of the twenty largest US bank holding companies. The main contribution of the paper is the use of survey data to model the unexpected interest rate variable, which is an alternative approach to the existing literature. We find evidence of significant negative interest rate sensitivity during the early 1980s, and evidence of declining significance in the late 1980s and early 1990s. This result is also obtained when using the forecast errors of ARIMA processes to model the unexpected movement in the interest rate.     

Macroeconomic uncertainty indices for the Euro Area and its individual member countries

This paper introduces the Rossi and Sekhposyan (Am Econ Rev 105(5): 650–655, 2015) uncertainty index for the Euro Area and its member countries. The index captures how unexpected a forecast error associated with a realization of a macroeconomic variable is relative to the unconditional distribution of forecast errors. Furthermore, it can differentiate between upside and downside uncertainty, which could be relevant for addressing a variety of economic questions. The index is particularly useful since it can be constructed for any country/variable for which point forecasts and realizations are available. We show the usefulness of the index in studying the heterogeneity of uncertainty across Euro Area countries as well as the spillover effects via a network approach.     

Local elections and consumption insurance

During our sample period from 1987 to 2002, Chinese villages completed the transition from government‐appointed village leaders to elected ones. This article examines if and how much democratic elections of the village leaders affected consumption insurance by Chinese village residents. Exploring a panel dataset of 1,400 households from this period, we find that consumption insurance is around 20 percent more complete with elected village leaders. Furthermore, local elections improve consumption insurance only for the poor and middle‐income farmers, but not for the rich. The results are robust when we allow for pretrending, potential endogeneity of elections, and higher measurement errors for rich residents. We also find that the effects on consumption insurance are stronger when closer to the upcoming election year and when the village committees consist largely of non‐Communist Party members. These findings suggest that the election effects on consumption insurance partly come from increasing accountability to local constituents.     

Electoral systems and the effects of political events on the stock market: The Belgian case

Efficient stock markets react to news. News about future economic policies can be derived from political events such as elections, the formation of new governments, changes in the composition of governments, etc. However, the news content of these events depends on the electoral system. In the American electoral system, characterized as it is by majority representation and single–party governments, elections generate news to the extent that the results are unexpected. In countries with proportional representation, governments are frequently multi–party coalitions whose composition is difficult to predict from the election results. These results therefore contain much less information about future policies. Our results, obtained for the Brussels stock market, support this distinction. Furthermore, the ideological composition of the government also matters; these effects support a rational partisan approach.     

ELECTIONS AND EXCHANGE RATE POLICY CYCLES

This paper presents a theoretical model based on the distributive effects of real exchange rate (RER) changes that generates RER electoral cycles of the type identified in Latin American countries: more appreciated RER before elections and more depreciated after elections. Typically, a RER depreciation favors exporters and import-competing domestic industries, to the detriment of consumers. These RER cycles are generated by imperfect information on policy-makers' preferences, which are concealed from voters with the help of an unstable macroeconomic environment. Exchange rate cycles result from the interplay between the electoral power of the non-tradable sector and the tradable sector's ability to lobby the government.     

The Impact of Monetary Surprises on Australian Financial Futures Markets: An Insight into Cash Rate Target Announcements

This paper investigates the impact of unanticipated Australian monetary policy changes on AUD/USD exchange rate futures, and 3‐year and 10‐year Australian Treasury bond futures, during the period from January 1997 to April 2010. Our study contributes to the literature by using both the 30‐day and the 90‐day bank accepted bill (BAB) rates to disentangle the unexpected surprise component of monetary policy changes from overall cash rate target changes in the Australian money market, and by concurrently modelling the effects of monetary surprises and other key macroeconomic announcements in Australia. The empirical results suggest that the 30‐day BAB rate is the best proxy for the expected monetary policy actions. We find that the effect of monetary surprises on the volatility of the 3‐ and 10‐year bond future instruments is significant and persistent. We have also documented a strong monetary policy effect on the mean returns of the exchange rate futures, indicating that unexpected monetary policy adjustments have a significant impact on the level of the exchange rate movements rather than on the volatility of the FX futures market.     

How do oil price forecast errors impact inflation forecast errors? An empirical analysis from US,French and UK inflation forecasts

This paper proposes an empirical investigation of the impact of oil price forecast errors on inflation forecast errors for three different sets of recent forecast data: the median of SPF inflation forecasts for the United States and the Central Bank inflation forecasts for France and the United Kingdom. Mainly two salient points emerge from our results. First, there is a significant contribution of oil price forecast errors to the explanation of inflation forecast errors, whatever the country or the period considered. Second, the pass-through of oil price forecast errors to inflation forecast errors is typically multiplied by around 2 when the oil price volatility is large.     

Professional forecasts of interest rates and exchange rates: Evidence from the Wall Street Journal’s panel of economists

We analyze economists’ forecasts of interest rates and exchange rates from the Wall Street Journal. We find that a majority of economists produced unbiased forecasts but that none predicted directions of changes more accurately than chance. Most economists’ forecast accuracy is statistically indistinguishable from a random walk model in forecasting the Treasury bill rate, but many are significantly worse in forecasting the Treasury bond rate and the exchange rate. We also find systematic forecast heterogeneity, support for strategic models predicting the industry employing the economist matters, and evidence that economists deviate less from the consensus as they age.     

Determinants of County-Level Voting Patterns In the 2012 and 2016 Presidential Elections

ABSTRACT

County-level data are used to estimate the incumbent-party share of the two-party vote in the 2012 and the 2016 U.S. Presidential elections. Using a ‘seemingly unrelated estimation’ procedure the regression results for the two elections show that there were some clear differences in the size of marginal effects for several key covariates. For example, income inequality, the size of the black male and black female populations, the size of the Hispanic male population and percent of the population with a college degree all had significantly larger coefficients in 2016 than in 2012, producing a larger marginal effect in favour of the Democratic candidate’s vote share. On the other hand, counties with increased poverty rates and counties located on the periphery of urban centres had a significantly larger marginal effect favouring the Republican’s vote share in 2016 compared to 2012. Finally, the regression results show that the effects of third-party vote shares, though not statistically different across the two elections, had a positive impact on the Democratic vote share in both elections.     

Exchange rate volatility and United Kingdom trade: evidence from Canada,Japan and New Zealand

This paper investigates the influence of exchange rate volatility on the real imports of the United Kingdom from Canada, Japan and New Zealand during the period 1980–2003. The Johansen multivariate cointegration method and the constrained error correction (general-to-specific) method are applied to study the relationship between real imports and its determinants (including exchange rate volatility). Conditional variance from the GARCH(1,1) model is applied as exchange rate volatility. Both nominal and real exchange rates are employed in the empirical study. Results indicate a significant effect of the exchange rate volatility on real imports. These exchange rate volatility effects are mostly positive. The author thanks an anonymous referee, the editor and Myles Wallace for several useful comments and suggestions. Any remaining errors and omissions are the author’s responsibility alone.