Exchange Market Pressure and Monetary Policy in Emerging Market Economies: New Evidence from Treatment‐effect Estimations

The way central banks react to exchange market pressure is likely to affect the subsequent economic development and the associated economic costs. In a situation of currency pressure the central bank can in principle decide to let the currency float freely, to maintain the peg or to implement a managed float policy, i.e. a mix of depreciation and intervention. As the central bank's choices are subject to self selection and endogeneity, we use propensity score matching to adequately cope with these methodical challenges. We find that monetary authorities have two options to keep down the economic costs in terms of output, namely stabilizing the exchange rate or letting the currency float freely. In contrast, a managed float under currency pressure is accompanied by the worst possible outcome with an average loss of gross domestic product (GDP) between 5% and 6%.     

On the Causality Between Exchange Rates and Stock Prices: A Note

This study uses a new Granger non–causality testing procedure developed by Toda and Yamamoto (1995) to contribute to the debate on exchange rates and stock prices in Sweden. It examines a possible causal relation between these variables in a vector autoregression (VAR) model. The results show that Granger causality is unidirectional running from stock prices to effective exchange rates. The results also reveal that an increase in Swedish stock prices is associated with an appreciation of the Swedish krona. Special attention is given to the estimation methodology and the lag choosing process.     

Price Adjustment to Exchange Rates and Forward‐looking Exporters: Evidence from USA–China Trade

This paper shows that the pricing behavior of exporting firms exhibits a “forward‐looking” nature with sticky prices. As a result, the expectations of future exchange rates affect current prices at both the product level and firm level. We find evidence by employing both highly disaggregated Harmonized System (HS) 10‐digit product‐level import data of the USA and firm–product level customs data on China's exports to the USA. These findings provide evidence for a previously unexplored micro‐level forward‐looking nature of trade price adjustment as response to future exchange rates, and suggest a potentially important factor in helping explain incomplete exchange rate pass‐through.     

Current Accounts and Exchange Rates: A New Look at the Evidence

A small literature has developed exploring nonlinearities in exchange rate data. This paper studies bivariate statistical relationships between current accounts, exchange rates, and cross–country ratios of GDP. The analysis differs from previous empirical work on these issues in using nonparametric methods to allow for nonlinearities, in employing a minimum of statistical assumptions, and in focusing on a fundamental characterization of the data. The authors present new evidence on the connections between exchange rates, the current account, and GDP. While the evidence loosely supports some common beliefs about the data, it conflicts with some common theoretical models. Thus the results pose new challenges for theory.     

Antidumping Regulations: Anti‐Competitive and Anti‐Export

In a Bertrand duopoly model, it is shown that an antidumping regulation can be strategically exploited by the home firm to reduce the degree of competition in the home market. The home firm commits not to export to the foreign market which gives the foreign firm a monopoly in its own market. As a result the foreign firm will increase its price allowing the home firm to increase its price and its profits. If the products are sufficiently close substitutes then the higher profits in the home market are large enough to compensate for the loss of profits on exports.     

Exchange Rates and Long‐Term Bonds*

There is tentative evidence to suggest that the well‐documented empirical failure of uncovered interest parity (UIP) is confined to short‐term interest rates. However, tests of UIP for long‐term bonds are thwarted by various data problems. These data problems can be avoided by focusing on short investments in long‐term bonds. This paper concerns the relationship between changes in the US dollar–Deutsche Mark exchange rate and returns to short investments in US and German long‐term government bonds. The hypothesis that expected returns to investments in bonds denominated in the two currencies are equal is not rejected, and the estimated slope coefficients are positive. For corresponding short‐term interest rates, the typical finding of negative and large Fama coefficients is confirmed. We conclude that it is the maturity of the asset, rather than the investment horizon, that matters for the results.     

Determinants of Anti‐Trafficking Policies: Evidence from a New Index

We develop an index measuring the three main dimensions – prosecution, protection, and prevention – of the anti‐trafficking policies of the governments of up to 180 countries over the 2000?2010 period. Overall, developed countries perform better than the rest of the world; compliance with prosecution policy is highest, while governmental efforts to protect victims of human trafficking remain weakest. We employ the new indices to investigate which factors determine anti‐trafficking policies. We find that compliance with anti‐trafficking policies significantly decreases with corruption and is higher in countries that also respect the rights of women. We also find some tentative evidence for spatial dependence in anti‐trafficking policies.     

The Power of the Euro–Sterling Rates in Explaining Asset Market Rates: A High‐frequency Analysis

This article makes use of high‐frequency asset market data to explain unexpected changes in interest rates using the methodology proposed by Cochrane and Piazzesi (2002) . This work departs from the existing literature because it uses UK market expectations to capture unexpected movements in the base rate, and explores its effect on a large number of asset market variables. Results indicate that the relation between asset market data and unexpected base rate changes is stronger and more consistent than the relation between asset market data and raw base rate changes. Results appear to be robust to extreme value changes.     

Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies

This paper investigates the effect of exchange rates on US foreign direct investment (FDI) flows to a sample of 16 emerging market countries using annual panel data for the period 1990–2002. Three separate exchange rate effects are considered: the value of the local currency (a cheaper currency attracts FDI); expected changes in the exchange rate (expected devaluation implies FDI is postponed); and exchange rate volatility (discourages FDI). The results reveal a negative relationship between FDI and more expensive local currency, the expectation of local currency depreciation, and volatile exchange rates. Stable exchange rate management can be important in attracting FDI.     

Non‐linearities,Business Cycles and Exchange Rates

This paper conjoins the disparate empirical literatures on exchange rate models and monetary policy models, with special reference to the importance of output, inflation gaps and exchange rate targets. It focuses in on the dollar/euro exchange rate, and the differential results arising from using alternative measures of the output gap for the US and for the Euro area. A comparison of ‘in‐sample’ prediction against alternative models of exchange rates is also conducted. In addition to predictive power, I also assess the various models' plausibility as economic explanations for exchange rate movements, based on the conformity of coefficient estimates with priors. Taylor rule fundamentals appear to do as well, or better, than other models at the 1‐year horizon.     

The First and Second Stage Pass‐through of Exchange Rates: A Developing Country Perspective

This paper investigates the validity of the conventional wisdom that, unlike in developed countries, exchange rate pass‐through (ERPT) should be ‘complete’ for developing economies. To test this hypothesis, we construct new variables as well as original data sets, which are not readily available in the literature, and employ an alternative error correction model technique for a typical small open developing economy—Bangladesh. The transmission of exchange rate movements to import prices is found to be ‘complete’; however, the ‘second stage pass‐through’ is ‘partial’ both in the short and long run. The response of traded goods prices to exchange rate shocks is found to be significant and larger in the long run compared with the short run. Trade liberalization is also a significant phenomenon for ERPT. The analysis has wider applicability to other small open economies.     

Market Efficiency and Apparent Unit Roots: An Application to Exchange Rates

Prices in efficient markets are influenced by trading based on past patterns in the series. This induces parameter instability and near-random-walk behaviour in any time-series model of such data. Simulation results suggest that this parameter instability makes stationary series more likely to be erroneously classified as nonstationary, according to standard unit root or stationarity tests. It is shown that individual real exchange rate series appear individually non-stationary, especially for tests based on a null of stationarity, even though they appear stationary when treated as a panel.     

Black Market and Official Exchange Rates: Long-run Equilibrium and Short-run Dynamics

This paper presents further empirical evidence on the relationship between black market and official exchange rates in six emerging economies (Iran, India, Indonesia, Korea, Pakistan, and Thailand). First, it applies both time series techniques and heterogeneous panel methods to test for the existence of a long-run relationship between these two types of exchange rates. Second, it tests formally the validity of the proportionality restriction implying a constant black-market premium. Third, it also analyses the short-run dynamic responses of both markets to shocks. Finally, it tries to shed some light on the determinants of the market premium. Evidence of slow reversion to the long-run equilibrium is found. Further, it appears that capital controls and expected currency devaluation are the two main factors affecting the size of the premium and determining the breakdown in the proportionality relationship.     

Out‐of‐Sample Exchange Rate Forecasting and Macroeconomic Fundamentals: The Case of Japan

This study explores the respective out‐of‐sample exchange rate forecasting abilities of five macroeconomic fundamental models in comparison to a naïve random walk model for Japan during the post‐Bretton Woods era. To assess the influence of major economic changes, we estimate both linear and nonlinear models for all the macroeconomic fundamentals. Overall, most structural exchange rate models outperform a naïve random walk model in terms of forecasting accuracy in the short horizon. When the fundamentals are only linearly modelled, the forecasting ability of the Taylor rule is generally superior to other fundamental models. When the fundamentals are nonlinearly specified, the predictability of some other models rises dramatically to match that of the Taylor rule models in short and/or long horizons. Of importance, we determine that the yen/dollar exchange rate forecasting performance effectively improves in several fundamental models when influential economic changes are incorporated.     

Monetary Integration in East Asia: Evidence from Real Effective Exchange Rates

This paper investigates the feasibility of forming a monetary union in East Asia by examining the cointegration and causality of the real effective exchange rates of local currencies. A “pentagon” group of five countries is found—South Korea, the Philippines, Thailand, Indonesia, and Malaysia—which may have potential for success for further monetary integration. Singapore is loosely tied to this group. The Greater China area—China, Hong Kong and Taiwan—does not show any significant degree of integration either internally or externally. Neither a yen bloc nor a US dollar bloc is forming in East Asia.     

Mean Reversion of Short‐run Interest Rates in Emerging Countries*

In this paper we examine the stochastic behavior of short‐run interest rates in several emerging countries using fractional integration techniques. We allow for a much richer flexibility in the dynamic behavior of the series than the classical representations based on I(0) or I(1) processes. It appears that for Singapore and Thailand nominal interest rates are mean‐reverting, whereas for Mexico, Malaysia, the Philippines, and Korea, the presence of a unit‐root test depends on the assumptions regarding the residuals’ autocorrelation. The results also suggest that uncovered interest parity (UIP) can only hold for two emerging countries. For the other countries, the stabilization policies in the aftermath of the currency crises have led to the rejection of the UIP hypothesis.     

A Note on Exchange Rate Trend-Stationarity *

This note extends Goodfriend (1987) to a small open economy to demonstrate that the exchange rate may be non-trend-stationary if the monetary authorities attempt to smooth both the price level and the exchange rate. [431]     

Breaking Trend Functions in Real Exchange Rates: Evidence from Seventeen OECD Countries

This paper tests for unit roots in dollar-based and DM-based real exchange rates using quarterly data (from 1957:i to 1995:iv) for seventeen OECD countries. The results show that the unit root hypothesis cannot be rejected even if allowance is made for the possibility of a one-time change in the mean of the series at an unknown point in time. This is evidence against the hypothesis of absolute long-run purchasing power parity over this period.     

Capital Structure and Value of Advertising Expenditures: Evidence from an Emerging Market

International Advances in Economic Research - This paper documents a non-linear impact of capital structure on the value of advertising expenditures in India during the period between 2004 and...     

新兴市场引入卖空机制对股市的冲击效应--来自香港证券市场的经验证据

卖空交易机制作为证券市场中的重要交易制度,对完善市场功能起着不可或缺的作用,那么在新兴市场国家中引入卖空交易机制是否会加剧整个市场的波动?文章利用我国香港股票市场上的数据进行实证检验,发现卖空交易机制对整个市场的影响是一个相当复杂的过程,最终的影响方向(加剧市场波动还是平抑市场波动)取决于市场中卖空交易者类型、操作策略及交易信息的公开程度.如果仅考虑投机性卖空者的操作对整个市场的影响,则卖空交易机制的存在会对整个市场的波动起到"缓冲"作用,在一定程度上会对市场上的暴涨暴跌现象起到平抑作用,而不会加剧整个市场的波动.