Firm survival, performance, and the exchange rate

Abstract .  This paper examines the impact of exchange rate movements on firm survival and sales. We exploit detailed Canadian firm-level data from 1986 to 1997, a period in which the Canadian dollar appreciated approximately 30% in the first six years and depreciated 30% in the later six years. We find that survival and sales are negatively associated with appreciations in the Canadian dollar. The impact on survival is less pronounced for more productive firms. The magnitude of the impact of exchange rate changes on firm survival and sales was comparable to the effect of CUSFTA-mandated tariff changes.     

Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks

We use comprehensive firm‐level data to estimate the responses of heterogeneous Canadian retail firms to real exchange rate movements. Our analysis focuses on a period characterized by large fluctuations in the Canadian dollar, providing an opportunity to quantify both intensive and extensive margin responses in retail industries to real exchange rate shocks and to examine how those responses differ across firms, locations, and sub‐industries. Our results indicate that a real Canadian currency appreciation significantly reduces a retailer's sales, employment, and profits. The strength of this negative effect is decreasing in the distance of a retailer from the US‐Canada border. We do not find evidence of a strong relationship between real exchange rate movements and the number of operating firms nor the probability of firm survival. These findings are consistent with the view that a real Canadian dollar appreciation increases cross‐border shopping by Canadians, resulting in a negative demand shock for Canadian retailers, and the dominant response by firms to such a shock is through the intensive margin.     

An analysis of extreme movements of exchange rates of the main currencies traded in the Foreign Exchange market

This article analyses the extreme movements of exchange rates of the seven main currencies traded in the Foreign Exchange market against the US dollar: Euro, British pound, Canadian dollar, Japanese Yen, Swiss franc, Australian dollar and New Zealand dollar by using tail index indicators. Payaslio?lu (2009) considers the case of the Turkish exchange rate using the traditional Hill (1975) estimator as a tool. In this article, we employ also an alternative estimator proposed in Iglesias and Linton (2009) that is shown to have, in some cases, improved finite sample properties and it provides substantially different results versus the Hill estimator. We find that for the Euro, Japanese Yen, Swiss franc, Canadian, Australian and New Zealand dollars, the Hill estimator provides a better measure to analyse the extreme behaviour; while for the British pound, the Iglesias and Linton alternative estimator is superior by using Hausman-type tests of misspecification. Measures of value at risk are also provided for the seven markets. We also find that the largest estimated value at risk by far is for the Japanese Yen, followed by the Swiss franc, the Canadian dollar, the Euro, the New Zealand dollar and the Australian dollar. The UK pound has the smallest value at risk when extreme movements occur.     

汇率制度与宏观经济政策环境——以加拿大为例

加拿大属于典型的资源性经济,加元的汇率变化多受国际商品和石油价格的影响,超出了国内货币政策的控制范围,是独立浮动或是固定汇率？经过两次试验后,加拿大政府坚定地选择了独立浮动汇率制度,并最终实现了汇率政策与货币政策脱离,以此给予了加拿大银行较大的决策空间,使后者专注于维持较低的通货膨胀环境。同时,加拿大政府努力为汇率制度创造有利的宏观经济政策环境,财政政策和货币政策分工明确、相互支持,为汇率制度和经济增长奠定了可持续的坚实基础。本文以加拿大浮动汇率制度为主线,从财政政策、货币政策、政策搭配角度讨论其宏观经济政策框架,分析加元汇率制度的运行环境。在此基础上,本文探讨加拿大汇率政策及浮动汇率制度的作用与功能。本文第五部分对加拿大银行提出的汇率预测模型作出了较深入的分析。     

Exchange rates,central bank news and the zero lower bound*

The zero lower bound (ZLB) may restrict the responsiveness of exchange rates to news. A proxy for central bank communication is added as a determinant in a model of exchange rate movements. Two reserve currencies, the British pound and euro, and two currencies of small open economies, the Canadian dollar and Swedish krona, are examined. Reserve currencies are more vulnerable to the ZLB constraint, while the currencies of small open economies become more responsive to foreign central bank announcements. Certain unconventional monetary policy announcements were found to significantly impact exchange rates at the ZLB.     

The incidence of income taxes on high earners in Canada

This article explores the “brain drain” explanation for the concentration of incomes in Canada during the past 30 years, namely, that high-skilled Canadians make use of high salaries on offer in the United States to extract higher salaries at home. If this is the case, then for a given level of US salaries, the threat to accept outside offers should be more credible when the Canadian dollar is depreciating against the US dollar, and weaker when the Canadian dollar is appreciating. The data are broadly consistent with this claim: income concentration worsened during the depreciations of the 1980s and 1990s, and eased when the Canadian dollar began to appreciate in value. The article develops a simple two-parameter model based on the propositions that high earners in Canada can use US salaries to bargain for higher salaries, and that Canadian high earners can shelter part of their income from personal income taxes. It also offers some preliminary evidence about the parameter values consistent with available data. The results suggest that higher top marginal personal income tax rates may potentially accentuate top-end after-tax income inequality. If high earners are able to use their bargaining power to extract pay increases to offset higher tax rates, then the burden of increased personal income taxes will be deflected elsewhere, and may even have the perverse effect of making the after-tax income distribution more unequal than it was before.     

The administered Bank rate and the Canada-U.S. spot exchange rate: 1975–1979

This paper analyzes, for the period 1975–1979, the announcement effect of the unanticipated Canadian administered Bank rate changes (the Bank rate is analogous to the discount rate in the U.S.) on the Canada-U.S. dollar spot exchange rate. Leading and/or lagged announcement effects are also investigated. By examining the behaviour of the residuals, on and surrounding the announced Bank rate changes, derived from an autoregressive equation of the daily changes (4:30 p.m. to noon the following day) in the logarithm of the spot $ Canadian/$ U.S. rate the evidence seems to indicate, on the average, a significant adjustment (appreciation of the Canadian dollar for Bank rate increases and depreciation for Bank rate decreases) of the exchange rate on the day of the effective unanticipated administered Bank rate changes regardless of the assumptions made with respect to the probability distribution of the residuals — whether it be normal, symmetric stable with a characteristic exponent of 1.8, or nonparametric.     

Dynamic forecasting of monetary exchange rate models: Evidence from cointegration

The Frenkel-Bilson and Dornbusch-Frankel monetary exchange rate models are used to estimate the out-of-sample forecasting performance for the U.S. dollar/Canadian dollar exchange rate. By using Johansen's multivariate cointegration, up to three cointegrating vectors were found between the exchange rate and macroeconomic fundamentals. This means that there is a long-run relationship between the exchange rate and economic fundamentals. Based on error correction models, two monetary models outperform the random walk model at the three-, six-, and 12-month forecasting horizons. Therefore, monetary exchange rate models are still useful in forecasting exchange rates.     

Sources of Exchange Rate Movements in Japan: Is the Exchange Rate a Shock‐Absorber or a Source of Shock?

This paper investigates the sources of movements of the yen–dollar exchange rate using a structural vector autoregression (VAR) with a combination of short‐run and long‐run zero restrictions. We find that real shocks dominate nominal shocks in explaining the exchange rate movements, with relative real demand shocks as the major contributor. The exchange rate market does not seem to be a major source of disturbances to the Japanese economy. The overall results support the view that the bilateral dollar exchange rate in Japan is a shock‐absorber rather than a source of shocks.     

A prototype model of the foreign exchange market of Canada: Forecasting capital flows and exchange rates

A balance-of-payments structural model of the foreign exchange market of Canada, endogenizing capital flows, the spot and forward exchange rates and the entities of the monetary sector, is developed using quarterly data for 1971–81. The capital flows have been disaggregated into ten categories and the exchange rates of the Canadian dollar have been analysed against five major currencies. While the model does not adhere strictly to purchasing power or interest rate parity, it does recognize them and it also incorporates other economic fundamentals, expectations and risk. Government interventions, although generated endogenously, are quantified implicitly and globally. The model tracks the post-Bretton Woods in-sample experience and generates ex post predictions reasonably well.     

Macroeconomic News and the Euro/Dollar Exchange Rate

This paper investigates to what extent daily movements in the euro/dollar rate were driven by news about the macroeconomic situation in the USA and the euro area during the first two years of EMU. We examine whether market participants reacted to news in different ways depending on whether the news came from the USA or from the euro area, and whether the news was good or bad. Furthermore, we investigate whether traders' reaction to news has changed over time. We find that macroeconomic news has a statistically significant correlation with daily movements of the euro against the dollar. However, this relationship exhibits considerable time variation. There are indications of asymmetric response, but to different extents at different times. Our results also provide evidence that the market seemed to ignore good news and remain fixated on bad news from the euro area, as often claimed in market commentaries, but only for some time. Finally, we find evidence that the impact of macroeconomic news on the euro/dollar rate was stronger when news switches from good to bad or vice versa.
(J.E.L.: F31).     

Dollar-Deutschemark Polarisation: Comparing The Pound And Franc

The extent to which movements in the sterling and franc bilateral exchange rates are associated with changes in the dollar‐deutschemark exchange rate is measured. In the case of the pound we find, in contrast to the impression that might be gained from previous studies, that its linkage to the dollar has been, since the late 1990s, as high as it was in the late 1970s. In the case of the franc, we find that it has for some time been a powerfully deutschemark‐linked currency. This calls into question the view that there has been significant ‘dollar‐deutschemark polarity’ with respect to the franc in the recent past. We suggest that policymaker guidance and market rules of thumb may partially explain the developments we observe.     

Currency substitution and transactions costs

This paper examines currency substitution in Canadian money demand vis-à-vis the U.S. dollar. A variant of the model developed by Bordo and Choudhri (1982) is estimated to test for the presence and extent of this substitution. The modified model is enhanced by the introduction of foreign exchange transactions costs. The resulting increased explanatory power indicates that previous tests which have omitted such costs understate the extent of currency substitution.     

Exchange rate fluctuations and labour market adjustments in Canadian manufacturing industries

We estimate the link between exchange rate fluctuations and the labour input of Canadian manufacturing industries. The analysis is based on a dynamic model of labour demand and the econometric strategy employs a panel two‐step approach for cointegrating regressions. Our data are drawn from a panel of 20 manufacturing industries from the KLEMS database and cover a long sample period that includes all cycles of appreciation and depreciation of the Canadian dollar over the last 50 years. Our results indicate that exchange rate fluctuations have significant long‐term effects on the labour input of Canada's manufacturing industries, especially for trade‐oriented industries, but that these long‐term impacts materialize very gradually following shocks.     

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 Canadian Dollar and Purchasing Power Parity during the Recent Float

This paper re-examines the purchasing power parity (PPP) concept for five bilateral Canadian dollar exchange rates. The Johansen cointegration technique is employed. Evidence is found in favor of PPP when wholesale prices are used but not when consumer prices are utilized; whereas, in all but one case, it is not possible to reject the symmetry and proportionality hypotheses. Furthermore, it is shown that the dimension of the cointegration space may exhibit sample dependency, but the estimated coefficients are stable in recursive estimations. Finally, by implementing the multivariate KPSS test for the null hypothesis of cointegration, Johansen's results are overturned.     

The turning black tide: energy prices and the Canadian dollar

Abstract.  This paper revisits the relationship between energy prices and the Canadian dollar, using an equation first developed by Amano and van Norden (1995) . They found evidence of a negative relationship between these two variables, such that higher real energy prices led to a depreciation of the Canadian dollar. Based on structural break tests, we find a break point in the sign of this relationship, which changes from negative to positive in the early 1990s. The timing of the break is consistent with major changes in Canada's energy policies and in energy-related cross-border trade and investment.     

Collective Perception and Exchange Rates

The authors' research suggests that people search online for information on currency exchange rates and that this information-seeking process can be translated into data on people's interest for a given currency. The authors utilize Google Trends data to capture the level of interest in 3 currency pairs: the euro, the pound sterling, and the Canadian dollar against the U.S. dollar and conduct a multivariate data analysis in the context of vector-autoregressive models. The findings suggest that there is a small but significant impact on collective perception on exchange rates. The authors show that Google Trends data could be an important source of information for investors looking into exchange rate trends.     

Gaussian Estimation of a Two-factor Continuous Time Model of the Short-term Interest Rate

This paper considers the econometric estimation of a two-factor model of the short-term interest rate. We develop a procedure for the time series estimation of its parameters, based on recently developed Gaussian estimation methods which are extended to handle unobservable state variables. The main methodological contribution is the derivation of an exact discrete model and the exact Gaussian likelihood function in terms of the discrete observations and structural parameters of the two-factor model. The model is estimated on one month euro-currency interest rate data for seven currencies – the Belgium franc, Canadian dollar, Dutch guilder, French franc, German mark, Italian lira, and the US dollar over the period February 1981 to December 1995 – and our results indicate that the method works well in practice. The empirical estimates reported in this study can be used to compare estimates from the calibration of an arbitrage-free analogue of the model to market prices of interest rate caps and swaptions for use in the financial markets. (J.E.L.: C13, E43).     

An Analysis of Recent Changes in the Australian Exchange Rate: Nominal and Real

Recent movements in the Trade Weighted Indexes (MI) of Australia's nominal and real exchange rates are documented. The volatility of the nominal rate in the pre-float and post-float periods is examined. Decompositions are made of the most recent depreciations of the Twls into compenents due to depreciations against the United States dollar ($US) and other major currencies. The extent to which the recent changes can be understood as necessary to correct misalignment in the Australian balance of payments is investigated.