Unification of Dual Foreign Exchange Markets

In this paper I investigate the impact of overnight floating of the official rate and easing foreign exchange restrictions on post-unification domestic inflation rate. After analysing the behaviour of an economy under dual foreign exchange markets, an official market with a crawling foreign exchange rate and a free illegal parallel market. The paper also shows that maintaining a unified free exchange rate depends on the degree of foreign exchange restrictions under dual foreign exchange system and on the level of the official reserve that prompts foreign exchange liberalisation policy. This revised version was published online in July 2006 with corrections to the Cover Date.     

Fear of Floating in Brazil: Did Inflation Targeting matter?

Brazil implemented Inflation Targeting (IT) after the breakdown of a managed floating regime, showing a similar pattern to most of the emerging markets that adopted this framework. This unplanned policy change has led to some disbelief regarding the country's commitment to its inflation objective and to a floating exchange rate. In this paper we analyse whether the adoption of IT has led to an actual shift in the country's approach to the exchange rate. We find greater exchange rate flexibility and milder interventions in the foreign exchange market after IT. We conclude that possible interventions should not be seen as Fear of Floating, but as a required policy for the attainment of the inflation targets.     

Managed Floating as a Monetary Policy Strategy

Although there seems to be a broad consensus among economists that purely floating or completely fixed exchange rates (the so-called corner solutions) are the only viable alternatives of exchange rate management, many countries do not behave according to this paradigm and adopt a strategy within the broad spectrum of exchange rate regimes that is limited by the two corner solutions. Many of these intermediate regimes are characterized by significant foreign exchange market interventions and a certain degree of exchange rate flexibility with non-preannounced exchange rate targets. While academic research in this area usually concentrates on some specific aspects of intermediate regimes (such as the effectiveness of interventions or institutional aspects), managed floating has rarely been analyzed as a comprehensive monetary policy strategy. In this paper, we present a monetary policy framework in which central banks simultaneously use the exchange rate and the interest rate as operating targets of monetary policy. We explain the mechanics of foreign exchange market interventions and sterilization and we explain why a central bank has an interest of controlling simultaneously the two operating targets. We derive the monetary policy rules for the two operating targets from a simple open economy macro model in which the uncovered interest parity condition and the monetary conditions index play a central role.     

人民币汇率增加弹性和参考一篮子货币汇率形成机制研究

在央行货币政策目标下,可以确定最优汇率水平及汇率水平的调整。我国外汇体制改革要建立以市场供求为基础的,参考一篮子货币的有管理的浮动汇率制度,央行的汇率目标应由人民币对美元稳定转变为参考人民币有效汇率目标,确保人民币币值的总体水平稳定。实际上,参考篮子货币,人民币对美元汇率的弹性将显著增加。央行应逐步放宽人民币对美元和非美元货币的波动幅度,人民币汇率最终将由市场供求来决定,发挥汇率配置资源的基础作用。     

Second Generation Models of Currency Crises

Until the beginning of the 1990s, currency crises were typically analyzed within the framework of a generation of models that assumed that the foreign exchange reserves of a country that was running a fixed exchange rate policy were falling (because the government was running a deficit on its budget that was financed by printing money). When the foreign exchange reserves reached a lower bound, a speculative attack on the fixed exchange rate was launched. Today, this theory is no longer the benchmark when explaining the occurrence of a currency crisis. Actually, a new generation of models that seeks to take explicitly into account the costs and benefits associated with the maintenance of a fixed exchange rate has emerged. This paper surveys these 'second generation models of currency crises'. This generation of models emphasizes that it is an endogenous decision if a government chooses to abandon a policy of fixed exchange rates. The survey pays special attention to the fact that the second generation of currency crises models often generates multiple equilibria for the rate of devaluation given one state of the economic fundamentals. A currency crisis can thus occur even if no secular trend in economic fundamentals can be identified, as in recent currency crises.     

Japanese and U.S. interventions in the yen/U.S. dollar market: estimating the monetary authorities’ reaction functions

This paper uses recently released official data on the foreign exchange market interventions of the Japanese monetary authorities in the yen/U.S. dollar market during the period 1991–2001 to examine the motivation for the intervention policy. We also compare the Japanese intervention policy with the U.S. intervention policy. Our results suggest that the Japanese authorities regularly responded to deviations of the yen/U.S. dollar exchange rate from a short-term and a long-term exchange rate target. By contrast, the U.S. authorities intervened only occasionally and seemed to have merely reinforced Japanese interventions.     

从FCF看中国外贸均衡发展

全球经济危机迫使中国经济降低了对国外市场的依赖程度。制造业也同样必须适应国际需求的变化。外国子公司的加工出口容易受到西方需求放缓的影响,而中国的出口企业却在转型进入活跃的新兴市场中处于有利地位。同时,中国的一般进口正日益增长。亚洲国家扩大了其国内市场的份额,欧洲国家也留有强势地位,而北美国家却失去了自己的市场。中国成为了区域经济增长的动力。在中国的进口及工业生产中,外资企业起到了越来越重要的作用。中国对外国直接投资的政策与确定外国伙伴进入其国内市场的汇率政策至少是同等重要的。     

Exchange rate regimes and market integration: evidence from the dynamic relations between renminbi onshore and offshore markets

The Chinese renminbi (RMB) has been on the way of becoming a major international currency. This paper examines the impact of the RMB exchange rate regime and policy on the integration and information flows between RMB onshore and offshore markets. We employ a long sample of daily data encompassing multiple times of RMB exchange rate regime change (peg to managed float in 2005, re-peg in 2008, re-float in 2010, and the central parity reform in 2015), and study the dynamic conditional correlations and spillovers between RMB onshore spot market and offshore non-deliverable forward (NDF) market. It is found that the switch from exchange rate peg to managed float and a widening of the floating band strengthen cross-market correlation and information flows (especially offshore-to-onshore spillovers). A market-learning explanation is offered for the observation that the correlation collapse in the re-peg period was not as prompt as the correlation take-off in the 2005 reform period. These findings have important implications for China’s monetary and foreign exchange policies and shed light on the integration of China’s financial markets with the rest of the world.     

China's Exchange Rate Reform and Exports

The paper argues that exchange rate reform is a vital supply-side factor in China's export growth. It contributes to China's export expansion by affording a realistic exchange rate and allowing freer access to foreign exchange, thereby leading to the reduction of anti-export bias and strong supply response. In an imperfect substitutes model, China's long-run export supply and demand functions are estimated in a system context. Evidence is found that the exchange rate reform is one of the most influential factors in China's long-run export expansion, inducing significant response of exports supply. In the short-run, the exchange rate reform and the export volume are also cross-linked through the error-correction process. China's exchange rate policy adjusts speedily to ensure the long-run equilibrium of the supply-side relationship and is likely to have played a dominant role in the adjustment. The study confirms, thanks to the exchange rate reform, China's exchange rate policy has benefited China's remarkable growth of exports before 1994.     

The impact of the shutdown policy on the asymmetric interdependence structure and risk transmission of cryptocurrency and China’s financial market

By taking Bitcoin, Litecoin, and China’s gold and RMB/US dollar exchange rate market as research objects, this paper apply the MF-ADCCA and time-delayed DCCA methods to study the impact of China’s mainland shutdown of cryptocurrencies trading on the non-linear interdependent structure and risk transmission of cryptocurrencies and its financial market. Empirical results show that the cross-correlation between cryptocurrencies and China’s financial market has a long memory and asymmetric multifractal characteristics. After the shutdown, the long memory between cryptocurrencies and Chinese gold has weakened, and the long memory between cryptocurrencies and the RMB/US dollar exchange rate market was strengthened. China’s shutdown policy has a certain risk prevention effect. Specifically, after the implementation of the policy, the risk transmission of cryptocurrencies to China’s financial market has weakened, but the influence of China’s financial market has gradually strengthened.     

Extreme risk spillovers between crude palm oil prices and exchange rates

This study is the first attempt to examine the extreme risk spillovers between Malaysian crude palm oil (CPO) and foreign exchange currencies of the three largest CPO importers: India, the European Union and China throughout the global financial crisis. Using daily data of three currencies, CPO spot and futures from 2000 to 2018, our results show: First, before the crisis, the unexpected change in foreign exchange rates is the primary driver of risk spillover to the CPO market. Second, during the crisis, the extreme movement of CPO spot returns is dominant in the Malaysian exchange rates relative to the euro. Third, after the crisis, the spillover flows from the CPO market to the foreign exchange market. Overall, our findings show the importance of CPO pricing dynamics in mitigating foreign exchange risk over the crisis period. This paper contributes to the extant literature by recognizing the effect of risk spillover on the targeted foreign exchange rate for portfolio allocation.     

Exchange rate bifurcation in a stochastic evolutionary finance model

This paper analyzes the stability and fluctuations of the exchange rate with a speculative bubble using the methods of evolutionary finance and stochastic differential equations. It constructs a hybrid stochastic system for the financial market involving a discrete time process and a continuous time process. The discrete process models the bubble and is meant to capture the behavior of less sophisticated investors who trade infrequently. The continuous time process is a stochastic differential equation for monetary policy together with a backward stochastic equation for the exchange rate. Monetary policy is affected by the bubble and in turn affects the exchange rate as well as speculation. The bubble and exchange rate exhibit a form of bifurcation. This means the bubble and exchange rate experience fluctuations as the propensity to chase trends or switch predictors changes.     

Black market exchange rate,currency substitution and the demand for money in LDCs

Mundell's conjecture in 1963 that the demand for money could depend on the exchange rate in addition to income and interest rate has received some attention in the literature by including the official exchange rate and estimating the money demand in a few developed countries. In less developed countries, since there is a black market for foreign exchange, it has been suggested that the black market exchange rate rather than the official rate should be the determinant of the demand for money in LDCs. This proposition is tested by estimating the demand for money for 25 LDCs using the bounds testing approach to cointegration. The main conclusion is that while in some LDCs, the black market rate enters into the formulation of the demand for money, in some others the official rate is the determinant. The black market premium also played a role in some countries.     

The Conduct of Monetary Policy Without Monetary Aggregates

A central dilemma for the monetary authorities is how to determine monetary policy. The increasing unreliability of monetary aggregates has led over the past few years to less concern for monetary targeting, both in the UK and elsewhere, and a greater influence for the exchange rate on monetary policy. But in the UK, most recently, there has been a move away from setting monetary policy in relation to the exchange rate and external considerations in favour of setting monetary policy in relation to domestic demand. Not surprisingly, this shift has occurred at a time of rising concern about domestic overheating. It illustrates the dilemma of whether monetary policy should be driven by domestic demand considerations or by external, exchange rate considerations. This dilemma is not just confined to the UK for it is a real source of conflict underlying the Louvre Accord and its successors that seek to determine G7 exchange rates in a cooperative manner. In what follows, we argue that exchange rate developments should have an appreciable influence on monetary policy, since this is helpful in attaining stable inflation. But we also suggest that this influence should not go too far, since this stability of inflation may be at the expense of stability of domestic demand and output. Targeting of exchange rates within narrow bands is unlikely to be desirable, unless fiscal policy can be used more flexibly to stabilize domestic demand. This suggests that, in the period up to the spring, the use of monetary policy to hold the £/JDM exchange rate within narrow limits may have been overdone. More seriously, international exchange rate agreements among the G7 countries are likely to founder under adverse market pressures, unless current imbalances in fiscal policy are adjusted. In the absence of greater flexibility in fiscal policy, policy makers will have to trade off domestic and exchange rate considerations in determining monetary policy. An important outstanding issue that needs further consideration is what indicators should be used for monetary policy, in a world in which monetary aggregates provide unreliable signals.     

Sovereign rating changes—Do they provide new information for stock markets?

The purpose of this paper is to examine the impact of sovereign rating changes on international financial markets using a comprehensive database of 42 countries, covering the major regions in the world over the period 1995–2003. In general, we find that rating agencies provide stock and foreign exchange markets with new tradable information. Specifically, rating upgrades (downgrades) significantly increased (decreased) USD denominated stock market returns and decreased (increased) volatility. Whereas the mean response is contributed evenly by the local currency stock returns and exchange rate changes that make up the USD returns, only the foreign exchange volatility was behind the USD denominated return volatility. In addition, we find significant asymmetric effects of rating announcements. The market responses – both return and volatility – are more pronounced in the cases of downgrades, foreign currency debt, emerging market debt, and during crisis periods. This study has important policy implications for international investors’ asset allocation plans and for regulatory bodies such as the Basel Committee who increasingly rely upon Moody's, Standard and Poor's and Fitch's ratings for their regulatory regimes.     

The political economy of exchange rate regime determination: Theory and evidence

This paper studies exchange rate regime choice from a positive perspective by modeling the interplay of monetary and fiscal policy, credibility and financial market microstructure as factors influencing the decision on de facto regime. The model shows how a small open economy reliant on foreign sources of financing is likely to opt for a stable regime. Furthermore, a stable political environment with a high degree of accountability is conducive to choosing a flexible regime. The findings suggest that flexible rather than fixed exchange rate regimes provide more fiscal discipline.     

金融危机背景下我国外汇储备增长的研究

进入新世纪以来,我国的外汇储备保持了较快的增长速度。造成这种增长过快的原因是多方面的,有内在成因,也有外在压力。外汇储备增长过快给我国经济发展、人民币币值稳定都有着巨大的影响。回顾我国近年来外汇储备增长的过程,分析过快增长的原因,探讨在金融危机背景下我国应该形成一种怎样的汇率制度,具有现实意义。     

Asset price targeting in an open economy with cognitive limitations: The best for macroeconomic and financial stability?

The choices of policy targets and the formation of agent expectations have been critical issues addressed by monetary policy management since the financial crisis of 2008. This paper evaluates macroeconomic stability in a new Keynesian open economy in which agents experience both cognitive limitations and asset market volatility. The (im)perfect credibility of various monetary policies (e.g., a Taylor-type rule with- or without asset price targeting, strict domestic inflation targeting, strict CPI inflation targeting, and exchange rate peg) may lead agents to react according to their expectation rules, and thus create various degrees of booms and busts in output and inflation. Simulations confirm that a Taylor-type CPI inflation targeting including an asset price target is the best choice. In contrast, the business cycles induced by Keynesian “animal spirits” are enhanced by strict inflation targeting. Furthermore, a credible exchange rate pegging system with an international reserve pooling arrangement can improve social welfare and stability in an open economy, even though its absolute value of the loss function is slightly lower than a Taylor-type CPI inflation targeting including an asset price target.     

基于利率平价理论视角研究人民币汇率问题

贸易顺差会导致汇率升值,这是许多人从西方经济学理论中得到的认识。随着我国的外贸连年顺差、外汇储备不断扩大,大量的外贸顺差和外汇储备使得外汇市场上人民币升值压力很大,人民币汇率成为全球瞩目的焦点。近年来西方政界与学术界屡屡以中国贸易顺差为由要挟人民币升值。而实际是欧美人以所谓的"全球经济再平衡"为幌子想要中国通过让人民币进一步升值来为金融危机买更多单。然而人民币是否真正存在升值压力,我们通过实际测算一下来得出结论。本文依据利率平价理论,构造出一种估计货币汇率升值或贬值压力的方法,并运用升值压力指标对人民币对美元汇率变动进行了检验,得出人民币对美元确实存在升值压力。     

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。