Exchange rate volatility in high inflation economies: An econometric study of Poland and Brazil

This paper analyses exchange rate series for Poland and Brazil. The Polish series, related to the period soon after the first liberalizing measures, presents a high volatility which is not accounted for by some selected fundamentals. The Brazilian series, though also keeping evidence of excessive volatility, is cointegrated with fundamentals similar to those of the Polish case. This raises the issue of a learning process taking place during persistent inflations. Unsuccessful one-shot stabilization plans can reinforce this process, leaving a lasting imprint in the excessive volatility pattern. The message seems clear, though maybe not easy to implement: agents take some time to learn to live in non-stable environments; to avoid this by one-shot measures — if unsuccessful — can have a very high cost and pre-empt future corrections.     

Exchange rate volatility and Spanish-American commodity trade flows

A number of recent studies have tested the impact of exchange rate volatility on trade flows, particularly for individual commodities, for various country pairs. These have found that risk can increase as well as decrease trade, but that oftentimes industries are not affected. This study examines trade between the United States and Spain over the period from 1962 to 2009, for 131 U.S. export industries and 88 import industries. We find that exchange rate volatility has short-run and long-run effects in only a fraction of the cases, but that exports respond more to increased uncertainty than imports do. In all, only 35 of the 74 U.S. export industries are affected (11 positive, 24 negative), whilst only three out of 37 import industries have positive coefficients and 11 have negative ones. We find no evidence that durable or nondurable goods are more likely to respond to volatility, whilst small industries or specialized goods might show more of a positive response.     

Exchange rate volatility and demand for money in less developed countries

One implication of currency substitution is that the exchange rate could serve as another determinant of the demand for money. Indeed, many studies have justified this empirically for the majority of countries. If the exchange rate serves as a determinant of the demand for money, exchange rate volatility could also influence money demand. By using annual data from 15 less developed countries and the bounds testing approach, we show that exchange rate volatility has short-run effects on the demand for real M2 monetary aggregate in LDCs. However, in most countries, short-run effects are not sustained.     

Exchange rate volatility and domestic consumption: Evidence from Japan

In 1952, Alexander provided an argument that since inflationary effects of depreciation could shift income from workers to producers it could lead to a decline in aggregate domestic consumption. This was based on the assumption that wages do not adjust fully to inflation and labor has a high MPC relative to that of the producers. In this paper, we argue that in addition to the exchange rate itself, exchange rate uncertainty could also affect domestic consumption. We demonstrate our conjecture by using quarterly data from Japan and a bounds testing approach that distinguishes the short run from the long run.     

Measuring and modeling the effects of G-3 exchange rate fluctuations on small open economies: A natural experiment

I present evidence that exchange rate fluctuations among the world's major currencies significantly affect the business cycles of small open economies. The impact of those fluctuations on any given country depends crucially on its exchange rate regime. The three Baltic countries in Central Europe constitute an interesting natural experiment in that regard. I estimate a structural vector autoregression (VAR) model to show the differential impact of euro–dollar exchange rate fluctuations on the business cycles of these three countries. Next, I build a dynamic sticky-price model and I calibrate it to the Baltic States in order to match and explain the empirical evidence.     

Exchange rate dynamics and their effect on macroeconomic volatility in selected CEE countries

To understand the potential for forming an optimum currency area it is important to investigate the origins of macroeconomic volatility. We focus on the contribution of real exchange rate shocks to macroeconomic volatility in selected Central and Eastern European countries. The contribution of real exchange rate shocks relative to other shocks allows us to evaluate whether the real exchange rate is a source of volatility or a buffer against shocks, as the theory suggests. The identification of the contributions is based on variance decomposition in two-country structural VAR models, which are identified by the sign restriction method. For most of the countries in the sample, shocks are predominantly symmetric relative to their effective counterpart, although the role of non-symmetric shocks is non-negligible. In general, for all the countries considered except Bulgaria and Slovenia, the real exchange rate does not generate large volatility over the business cycle and, with the exception of Bulgaria and Romania, is mostly driven by the non-symmetric shocks. These results are consistent with the real exchange rate having a shock-absorbing nature.     

Money growth and interest rate volatility and the demand for money

In this paper the author empirically examines the effects of both money growth and interest rate volatility measures upon the demand for real balances. The findings of this study suggest that both money growth and interest rate volatility measures are statistically insignificant. However, evidence suggests a structural shift in the demand for money in the post-1979 period. Moreover, there is a noticeable change in the speed of adjustment moving from actual to desired real balances with the adjustment coefficient in the post-1979 period increasing roughly in magnitude nine and half, times the adjustment coefficient in the pre-1979 period.     

Exchange rate, inflation and unemployment in East European economies: the case of Poland and Hungary*

The aim of the paper is to model the impact of exchange rate on both inflation and unemployment variables in economies which are characterized by important structural changes, i.e. a transition phase moving from centralized economies towards market economies. This phenomenon, which is common to the East European countries, stressed different effects both for what concerns the behaviour of economic agents and for what concerns fiscal and monetary measures adopted by governments and aiming to keep under control the inflation–unemployment trade off. Time series relationships between these variables are investigated within an econometric model. Economic theory and the available data on the hypothetically relevant variables, along with the consideration of the main facts occurred in the period under study, characterize our information set. It is found that single equation analysis yields inefficient inference relative to the whole system analysis, and important structural changes are detected which reflect possible breaks in the structure of the economic system along with a change in economic policy.     

Systems of cities in closed and open economies

This paper investigates the equilibrium properties of the system of cities in an economy. First, for a closed economy, the numbers of each type of city, their capital-to-labor ratios and their wages and costs of living, are solved for. Then the characteristics of international trade between open economies composed of systems of cities are examined, through an evaluation of standard trade theorems. This leads into topics in regional economics, such as migration and regional specialization.     

Monetary policy and stock prices in small open economies: Empirical evidence for the new EU member states

This study presents evidence on the effect of domestic and Euro Area monetary policy on stock prices in four new EU member states of Central Europe and the main determinants of stock price volatility, estimating structural vector autoregressive models identified with short-run restrictions. We find that stock prices in the considered new EU member states are more sensitive to changes in the Euro Area interest rate than to the domestic one. Moreover, the bulk of stock price volatility in these countries is due to shocks related to exchange rate and Euro Area monetary policy. Overall, we find that local stock markets are more sensitive to external shocks than to domestic ones.     

The risk-free rate in heterogeneous-agent incomplete-insurance economies

Why has the average real risk-free interest rate been less than one percent? The question is motivated by the failure of a class of calibrated representative-agent economies to explain the average return to equity and risk-free debt. I construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk-free asset. I calibrate the economy and characterize equilibria computationally. With a borrowing constraint of one year's income, the resulting risk-free rate is more than one percent below the rate in the comparable representative-agent economy.     

Policy reforms and growth in computable OLG economies

We build a computable general equilibrium model with overlapping generations of agents and an endogenous growth specification à la Lucas. Two main issues are addressed: (i) to what extent does endogenous growth play a significant role in the face of policy reforms and (ii) are the simulation results robust to various calibrations of the production function of human capital. In this purpose, we simulate four large policy changes and compare the predictions with endogenous growth (under various parameter sets) to those with exogenous growth. If endogenous growth is important when examining the effects of education reform, it does not really matter with pension reforms and plays a minor role in the debt repayment scenario. These results are very robust to calibration.     

Heterogeneous expectations and debt in a growth model for a small open economy

We extend an aggregative growth model for a small open economy by developing a framework in which boundedly rational agents raise credit in proportion to their expected income. Moreover, these agents are heterogeneous in the sense that they switch between an extrapolative and a regressive forecasting rule with respect to perceived market circumstances. Using a mixture of analytical and numerical tools, we attempt to describe the characteristics of our model’s dynamical system. Our results then suggest that self-fulfilling short-run expectations do not only have important consequences for fluctuations in economic activity but are also a source of simple endogenous dynamics.     

人民币汇率波动对NFDI波动的影响及其检验

本文通过对我国NFDI资本流动性及其波动性的计算,检验了人民币/美元汇率波动对NFDI波动性的关系。通过实证分析表明,人民币汇率的波动将导致NFDI资本流动的明显不稳定。在理论研究的基础上,引申出其政策含义：在国际资本流动不断加大的今天,我们必须维护人民币/美元汇率的稳定,这样对于有效引导NFDI的资本流动和维护金融稳定都具有重要的意义。     

De facto and official exchange rate regimes in transition economies

This paper provides an empirical investigation on the discrepancies between official and de facto exchange rate regimes in transition economies. We use a probit model to describe the determination of regime discrepancies. We find that “errors” in the selection of official regimes as well as the macroeconomic developments calling for conflicting adjustments in exchange rate regimes are important determinants of regime discrepancies.     

Exchange rates and oil prices: A multivariate stochastic volatility analysis

This paper uses the multivariate stochastic volatility (MSV) and the multivariate GARCH (MGARCH) models to investigate the volatility interactions between the oil market and the foreign exchange (FX) market, in an attempt to extract information intertwined in the two for better volatility forecast. Our analysis takes into account structural breaks in the data. We find that when the markets are relatively calm (before the 2008 crisis), both oil and FX markets respond to shocks simultaneously and therefore no interaction is detected in daily data. However, during turbulent time, there is bi-directional volatility interaction between the two. In other words, innovations that hit one market also have some impact on the other at a later date and thus using such a dependence significantly improves the forecasting power of volatility models. The MSV models outperform others in fitting the data and forecasting exchange rate volatility. However, the MGARCH models do better job in forecasting oil volatility.     

Economic crisis in the European periphery: An assessment of EMU membership and home policy effects based on the Greek experience

In this paper we examine the evidence on the impacts on the Greece economy of enhanced transfer assistance from the EMU as well as that of the domestic policies of the Greek government. A simple macroeconomic model is constructed to incorporate the issues related to the formation of the economic and financial crisis in Greece, and to analyze the impacts of Greek government's domestic policies. The model's solution is employed to highlight the outcomes that we believe could be related to EMU membership and Greek government policies after assuming membership. Our finding is that intervention by the Greek government either worsened the harmful impacts of the transfers, or altered the outcomes in a deleterious fashion; the policies which were put in place were of a nature leading unavoidably to a severe economic crisis and eventual bankruptcy.     

Growth at the EU periphery: the next enlargement

In 2004, 75 million people are scheduled to become EU citizens, making this the largest round of expansion of the Western European club to date. Of the 10 new entrants, 8 are former socialist economies, for which membership in the EU represents the coronation of an effort began with the fall of the Berlin wall in 1989. Based on their recent economic performance, the Central and Eastern European countries appear to be well on their way to successfully integrate in the Western European club, while the Baltic Republics still lag behind. The gap between the two groups emerges when we consider the adjustment of the production structure, the composition of trade and FDI flows, and income distribution. The evidence we review appears to support the role of institutional quality to facilitate integration in the world market and overall economic performance.     

Demographic volatility and economic growth: convention and beyond

Following the success of endogenous growth theory, recent empirical examinations of the demography–economic growth construct established that components of demographic change can provide meaningful and clear insights into the direction and impact of demographic variation in economic growth. While theoretical justification and empirical support to the claim cannot be denied, confusions seem to have arisen whether an empirical growth construct will only be limited to demographic dynamics or the model can entertain other non-demographic variables. In a leading research, Kelley and Schmidt (1995, 2001) provided seemingly ambiguous evidence that addition of non-demographic variables can add explanatory power to the growth regression. While subsequent empirical growth models have largely followed the convention as in KS, some important considerations like the stochastic effects of demographic system on economic growth seem to be missing. This paper attempts to address the concerns by suggesting a long-memory demographic system and embedding stochastic demographic characteristics in a standard Solow–Swan model, which also forms the basis of convergence pattern. We empirically show that significant stochastic shocks exist in the demographic components which could have contributed to the growth volatility across nations. We suggest that empirical growth models should account for stochastic demographic characteristics to enable economic policy makers with correct information about the current and future state of evolution of the demography–economic system.     

From inflation to exchange rate targeting: Estimating the stabilization effects for a small open economy

This paper attempts to estimate possible losses in macroeconomic stabilization due to a move from inflation to exchange rate targeting on the example of the Czech Republic. The authors use an estimated New Keynesian policy model, typical inflation and exchange rate targeting rules, and representative central bank loss functions to carry out these estimations. The authors find that for the Czech Republic, moving from the historically applied inflation targeting to optimized exchange rate targeting should not involve any significant losses in macroeconomic stabilization. However, the Czech National Bank could improve its stabilization outcomes while remaining an inflation targeter. This requires the Czech National Bank to respond more strongly to increasing expected future inflation and to be less concerned about an opening output gap when adjusting its policy rate. Moving then from such optimized inflation targeting to optimized exchange rate targeting can result in significant losses in economic stabilization in the magnitude of 0.4–2% points of GDP growth.