The future of the dollar–euro exchange rate

Monetary unification in Europe is expected to produce a major new international currency, which may compete with the U.S. dollar as the currency of choice in foreign exchange transactions, financial asset markets and central bank reserves. This study considers two important issues regarding the euro: its global role as medium of exchange, unit of account, and store of value and its position relative to the U.S. dollar. Among the main considerations are differences in cyclical behavior, inflation differentials, trade patterns and capital flows, and risk-return assessments. External diversification of private portfolios and of central banks’ reserve holdings will play a key role in determining the euro’s exchange rate. Overall, despite its rough start, we argue that the euro may emerge as a challenger to the U.S. dollar.     

论人民币汇率形成机制与资本账户开放

汇率形成机制与资本管理程度是开放经济最重要的两个政策安排。世界各国推进资本账户开放的动因各不相同,其中最主要的是通过资本的跨国界自由流动提高资源的配置效率。但是,近年来新兴市场国家(部分起因于资本流动过快)频繁发生的金融危机告诫我们对资本账户开放应持更谨慎的态度,而且汇率机制与资本账户管理程度必须密切配合,彼此协调,才能避免国际收支的严重失衡。文章通过阐述汇率安排与资本账户开放的关系,指出中国应循序渐进地放松资本管制和开放资本账户,逐步增大汇率制度弹性空间,最终实现资本账户开放和有管理的浮动汇率制度。     

Pricing‐to‐Market and Market Structure*

Stimulated by imperfect competition/sticky prices framework of the new open economy macroeconomics, empirical research has reconsidered the role of exchange rates in international adjustment. This paper reassesses the link between exchange rates and traded good prices by estimating pricing‐to‐market equations for the five main euro area countries over the period 1990–99. We minimize selection biases by keeping all manufacturing products and all destination markets and show that exchange rate pass‐through (ERPT) is much larger, almost complete, than previously estimated. Thanks to a huge variability in terms of exchange rate variations, products and destination markets, we can map differences in ERPT into market structures and, at the same time, reconcile our results with the empirical literature. We find that ERPT is highly incomplete for sales by oligopolistic industries into advanced economies, indeed in the order of 50–60% as previously estimated. ERPT is instead almost complete in emerging and developing economies where therefore exchange rate movements can help adjust external imbalances. We also find that ERPT is largely asymmetric: it is almost complete after an appreciation of the exporter's currency, rather incomplete after a depreciation. This result is very robust across specifications.     

The effects of U.S. monetary policy on Colombia and Panama (2002–2007)

I study the economies of Colombia (floating exchange rate) and Panama (dollarized) to illustrate how the monetary policy of a large economy can export capital structure distortions to small open economies that follow different exchange rate regimes. The paper contributes to the literature on international business cycles in two ways. First, it adds to recent research that extends the Mises–Hayek business cycle theory to an international context. Second, most current research abstracts from effects on the production structures of emerging market economies when analyzing the transmission of monetary policy shocks. This paper seeks to fill this gap by studying structural effects of U.S. monetary policy on the economies of Colombia (floating exchange rate) and Panama (dollarized).     

Do European capital flows comove?

We study the cross-section correlations of net, total, and disaggregated capital flows for the major source and recipient European Union countries. We seek evidence of changes in these correlations since the introduction of the euro to understand whether the European Union can be considered a unique entity with regard to its international capital flows. We make use of Ng’s (2006) “uniform spacing” methodology to rank cross-section correlations and to shed light on potential common factors driving international capital flows. We find that a common factor structure is suitable for equity flows disaggregated by sign but not for net and total flows. We only find mixed evidence that correlations between types of flows have changed since the introduction of the euro.     

TIME‐VARYING DYNAMICS OF THE REAL EXCHANGE RATE: AN EMPIRICAL ANALYSIS

We use a time‐varying structural vector autoregression to investigate evolving dynamics of the real exchange rate for the UK, euro area and Canada. We show that demand and nominal shocks have a substantially larger impact on the real exchange rate after the mid 1980s. Real exchange rate volatility, relative to fundamentals, also shows a marked increase after this point in time. However, there is some evidence suggesting a closer business cycle co‐movement of the real exchange rate and fundamentals. Simulations from an open‐economy DSGE model show that these results are consistent with a decline in exchange rate pass‐through. Copyright © 2012 John Wiley & Sons, Ltd.     

Implications of ERM2 for Poland's monetary policy

We propose an extension to the inflation targeting regime currently pursued by Poland. It incorporates the exchange rate stability constraints as imposed by the obligatory participation in the ERM2 that Poland needs to satisfy prior to adopting the euro. The modified policy is based on the forward-looking inflation targeting supplemented with the exchange rate stability objective. Its effective implementation depends on the determined long-term equilibrium exchange rate and the observed degree of exchange rate volatility. Both are empirically estimated by employing the Johansen cointegration tests and the threshold generalized autoregressive heteroscedasticity model with the in-mean extension and generalized error distribution (TGARCH-M-GED).     

Global monetary instability: The role of the IMF,the EU and NAFTA

This paper argues that the global monetary system has exhibited significant instability since the collapse of the Bretton Woods regime in 1971. The current challenge for economists and policy makers is the creation of a global monetary system that offers greater exchange rate stability without sacrificing international capital mobility. This paper proposes a solution that consists of three components. First, strengthening the international financial architecture to bring stability, primarily to emerging nations. Second, eventually creating a monetary union in NAFTA and extending it to other countries of the Western Hemisphere to bring stability to this region à la the European Monetary Union (EMU). Third, coordinating economic policies among the U.S., EU and Japan to stabilize these three key global currencies.     

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.     

Inclusion of the RMB in SDRs and the impossible trinity in China

This paper explores the dynamics and features of the impossible trinity configuration in China, in the process of reforming the renminbi (RMB) exchange rate and inclusion in the currency basket of special drawing rights (SDR). By applying the synthetic model of Ito and Kawai (2014) and Aizenman et al. (2008) to Chinese data for the period between 2002 and 2019, we find structural breaks in China’s exchange rate stability in 2005, when China started its market-oriented exchange rate reform, and 2016, when the RMB was included in the SDR. More importantly, we find that, in the process of RMB exchange rate reform and RMB’s inclusion in the SDR, China has adopted a more flexible exchange rate regime, becoming more financially open, monetarily independent, and less reliant on international reserves hoarding.     

Economic policies on Slovenia's road to the euro area

On 1 January 2007, Slovenia was the first new EU member state to enter the euro area. Since June 2004, the Slovenian tolar participated in the exchange rate mechanism ERM-II with a central parity of 239.64 against the euro. This parity was also the conversion rate upon euro area accession. Applying a macroeconometric model of Slovenia, this paper analyses the macroeconomic effects of different conversion rates. These simulations are compared to a scenario with flexible exchange rates. The best results are obtained with the actual conversion rate. In addition, it is shown that the labour market performance can be significantly improved by cutting non-wage labour costs.     

Determinants of European stock market integration

We analyse the determinants of stock market integration among EU member states for the period 1999–2007. First, we apply bivariate DCC-MGARCH models to extract dynamic conditional correlations between European stock markets, which are then explained by interest rate spreads, exchange rate risk, market capitalisation, and business cycle synchronisation in a pooled OLS model. By grouping the countries into euro area countries, “old” EU member states outside the euro area, and new EU member states, we also evaluate the impact of euro introduction and the European unification process on stock market integration. We find a significant trend toward more stock market integration, which is enhanced by the size of relative and absolute market capitalisation and hindered by foreign exchange risk between old member states and the euro area. Interest rate spreads and business cycle synchronisation are also significant factors in explaining equity market integration.     

资本管制有效性与中国汇率制度改革

本文在利率平价框架下考察了近十年中国资本管制的效力。我们采用比较类似金融工具在国内外市场的收益率、检验未抛补利率平价理论偏差的平稳性两种方法进行分析。研究表明,尽管资本管制的效力随时间推移有所下降,但境内外美元利差的持续存在以及未抛补利率平价理论偏差的非平稳性仍然足以证明中国的资本管制基本有效。资本管制的有效性在盯住制框架下确保了汇率稳定和一定的货币政策自主性,并且使未来汇率制度弹性化改革可以渐进地推进。     

European Integration and the Feldstein–Horioka Puzzle

We apply the differences‐in‐differences method to study the effect of the European single market in 1993 and the euro in 1999 on the Feldstein–Horioka equation where countries outside the single market serve as a control group and those within as a treatment group. We find structural breaks that coincide with both events, in addition to the financial crisis in 2008. The results suggest that the correlation between investment and savings depends on institutions, exchange rate risk and credit risk. Furthermore, the pattern of capital flows within the single market leaves a significant part of the flows unexplained by fundamentals.     

Hungary's entry into the euro area: Lessons for prospective members from a monetary policy perspective

This paper evaluates the conduct of monetary policy in Hungary using standard Taylor rules as well as extended rules that incorporate real exchange rate effects. Moreover, we explicitly consider the impact of future euro area entry by estimating instrument rules that permit an influence from Maastricht Treaty inflation requirements via the estimation of Markov switching models as well as by estimating a differential rule vis-à-vis the existing euro area. Lastly, the paper also considers the impact on policy rules from the large data revision that affects real exchange rate and output estimates. I find that interest rate setting behavior in Hungary does not resemble that of the euro area. Also, counterfactual experiments reveal that the potential macroeconomic costs of entry into the euro area sooner rather than later may be lower than if membership in the single currency area is delayed beyond 2008.     

On the Real Effect of Financial Pressure: Evidence From Firm‐Level Employment During the Euro‐Area Crisis

Using a large panel of mainly unquoted euro‐area firms over the period 2003–2011, this paper examines the impact of financial pressure on firms’ employment. The analysis finds evidence that financial pressure negatively affects firms’ employment decisions. This effect is stronger during the euro area‐crisis (2010–2011), especially for firms in the periphery compared to their counterparts in non‐periphery European economies. When we introduce firm‐level heterogeneity, we show that financial pressure appears to be both statistically and quantitatively more important for bank‐dependent, small and privately held firms operating in periphery economies during the crisis.     

The impact of foreign trade issues on economic growth in some developing countries including Iran and Turkey

The issue of foreign trade and economic growth have been on the economic agenda for centuries. Foreign trade is a facilitator of goods and services exchange in the global marketplace and is an engine of economic growth in a country. Moreover, economic growth is a means to improve the output, employment opportunities, and welfare, which in turn could make a favorable impact on the positive foreign trade balance. Economic growth is also an essential component of country competitiveness in international markets. Yet, the objective of this study is to analyze the correlation between foreign trade and economic growth in some developing countries, including Iran and Turkey, by using econometrics applications (panel co-integration method and E-views software), also resting on credible national and international publications. Thus, it is estimated in the study that foreign trade has a positive impact on economic growth, resource allocation, energy and green energy consumption, human capital development, and physical capital consumption.     

Low interest rate policy and the use of reserve requirements in emerging markets

This paper sheds light on the link between the interest rate policy in large advanced economies with international funding and reserve currencies (the United States and the euro area) and the use of reserve requirements in emerging markets. Using reserve requirement data for 28 emerging markets from 1998 to 2012, we provide evidence that emerging market central banks tend to raise reserve requirements when interest rates in international funding markets decline or financial inflows accelerate, most likely to preserve financial stability. In contrast, when global liquidity risk rises and funding from the large advanced economies dries up, emerging markets lower reserve requirements.     

Investment and capital structure decisions of foreign subsidiary with international debt shifting and exchange rate uncertainty

This paper examines the impact of international debt shifting and exchange rate uncertainty on investment and capital structure decisions of foreign subsidiary. We find that debt shifting induces earlier investment, earlier default, higher leverage, and larger ex ante firm value of foreign subsidiary. When debt shifting is not so costly, the optimal leverage of foreign subsidiary increases as the tax rate differential increases. Moreover, when the correlation between exchange rate and foreign cash flow uncertainties is positive (negative, respectively), foreign investment advances as exchange rate uncertainty increases (decreases) as well as the correlation increases. These results reveal that the impact of debt shifting and exchange rate uncertainty on investment and capital structure policies cannot be ignored, supporting existing empirical findings.     

POPULATION AGE STRUCTURE,SAVING, CAPITAL FLOWS AND THE REAL EXCHANGE RATE: A SURVEY OF THE LITERATURE

Abstract This paper surveys the existing literature on the effects of population age structure on saving, capital flows and the real exchange rate. We build on previous surveys of age structure and saving behaviour by including extensive discussion of international linkages, specifically the impact on capital flows and real exchange rates. We also point to unresolved issues that need to be addressed given that population aging has serious policy implications in the developed economies these days.