Nonlinearities in exchange rate determination in a small open economy: Some evidence for Canada

We analyze bilateral Canadian-US dollar exchange rate movements within a Markov switching framework with two states, one in which the exchange rate is determined by the monetary model, and the other in which its behavior follows the predictions of a Taylor rule exchange rate model. There are a number of regime switches throughout the estimation period 1991:2–2008:12 which we can each relate to particular changes in Canadian monetary policy. These results imply that an active monetary policy stance may account for nonlinearities in the exchange rate-fundamentals nexus. The strong evidence of nonlinearities also confirms the notion that exchange rate movements cannot be explained exclusively in terms of any one particular exchange rate model.     

Cointegration and models of exchange rate determination

The application of new techniques in testing for cointegration indicate the inappropriate- ness of the pure monetary model to explain movements in the nominal exchange rate. In general the fundamental variables are found to be integrated of different orders and there is a lack of cointegration between the exchange rate variables in the monetary model and relative prices. Estimation of other dynamic models are found to give rise to parameter estimates which do not support the monetary model. The results are broadly consistent across five countries. These results imply that it is not worthwhile to forecast from the monetary model and its main variants.     

Multilateral adjustment,regime switching and real exchange rate dynamics

The purpose of this paper is to examine the role of multilateral adjustment to U.S. external imbalances in driving bilateral real exchange rate movements by developing a new regime-switching model that consists of a Markov-switching model with a time-varying transition matrix that depends on a threshold variable. Consequently, the dynamics of the real exchange rate can be modeled in the context of two regimes: one in which multilateral adjustment to large U.S. external imbalances is an important factor driving movements in the real exchange rate and the second in which the real exchange rate is driven mainly by country-specific macroeconomic fundamentals. We apply this model to the bilateral real Canada–U.S. dollar exchange rate and compare its performance to several other alternative models. All of the models are estimated using a Bayesian approach. Our findings suggest that during periods of large U.S. imbalances, an exchange rate model for the real Canada–U.S. dollar exchange rate should allow for multilateral adjustment effects.     

Real exchange rate behaviour: evidence from black markets

The behaviour of real exchange rates (relative to the US dollar) is examined using monthly data obtained from the black markets for foreign exchange of eight Asian developing countries. The data span is 31 years. The black market real exchange rates do not show excess volatility during the recent float which is in sharp contrast to the results reported elsewhere. Unit root tests in heterogeneous panels and variance ratio tests confirm their stationarity. Thus, we find support for PPP but not for the ‘survivorship’ bias (Froot and Rogoff, 1995 ). There is little evidence of segmented trends. Issues raised by Rogoff ( 1996 )—of whether PPP would hold across countries with differing growth experience—and Lothian and Taylor ( 1996 )—of whether the degree of relative price volatility may bias results in favour of mean reverting real exchange rates—are addressed. Copyright © 2000 John Wiley & Sons, Ltd.     

Tariff-tax reform and exchange rate dynamics in a monetary economy

Using a dynamic monetary model, this paper analyzes the short- and long-run impacts of a tariff-tax reform on the economy, with attention being paid to short-run fluctuations in exchange rates. When a policy reform is announced and if the public believe that it will decrease excess demand, the domestic currency depreciates now to reflect its future depreciation. On the contrary, the domestic currency immediately appreciates if the public believe that it will increase excess demand. However, if there is a relatively small increase in excess demand, the public may mis-react in the exchange rate market by observing currency depreciation first and then appreciation toward the steady-state rate.     

The political economy of capital punishment

Although the policy case against capital punishment appears largely settled and now closed within Britain and Europe there is a need to recognise that the well-entrenched pro-abolitionist conventional wisdom has essentially ignored the costs and exaggerated the benefits of removal of the death-penalty option.     

Monetary policy in a small open economy with fixed exchange rate: The case of Macedonia

This paper empirically applies the New Keynesian model for monetary policy analysis in a small open economy with a fixed exchange rate. Official reserves are included in the interest rate rule to account for the constraint that these impose on monetary policy when the exchange rate is fixed. Also, the foreign interest rate is included in order to reflect the necessity of following the foreign monetary policy. The model is applied to Macedonian data from the period 1997 to 2011. In general, results indicate that monetary policy has been focused on domestic objectives during this period, despite the fixed currency. In addition, there seem to have been significant differences in the conduct of the monetary policy in the first and second half of this period. The response to inflation has been more aggressive in the earlier period, at a time when reserves appear less important, while the output gap is found to be important only in the latter period, possibly due to the stronger monetary policy transmission. Finally, results indicate that the monetary policy has likely moved from adaptive in the first period to rational in the second period.     

The political economy of growth in Morocco

This paper is an attempt to explain the relatively low performance of the Moroccan economy during the last four decades using a political economy approach. In that period, the Moroccan society benefited from sophisticated institutions that facilitated policy coordination and commitment. But, the existing institutions hampered the participation of large segments of the population and political parties representing them in the policymaking process. Also, the centralization of administration hindered local initiatives. However, numerous and significant structural reforms have been undertaken in the 1980s and 1990s and in recent years a strategy has been adopted that combines continued economic liberalization, increased democratization, and efforts to reduce poverty and promote human development. These changes have started to bear fruit in the past few years.     

Comptes rendus: The political economy of housing in Britain

Book reviewed in this article: Murie, A., Niner, P. and Watson, C. 1976: Housing policy and the housing system (HPHS). Transactions of the Institute of British Geographers, New Series , Volume I, No. I, Houses and people in the city (HPC), 1976. Antipode , Urban political economy issue (UPE) (ed M. Boody) Political Economy of Housing Workshop (PEHW) of the Conference of Socialist Economists 1975: Political economy and the housing question (PEHQ). Political Economy of the Housing Workshop of the Conference of Socialist Economists 1976: Housing and Class in Britain (HCB). National Community Development Project 1976: Whatever happened to council housing? (WHCH). National Community Development Project 1976: Profits against houses: an alternative guide to housing finance (PAH). Marx, K. edn. 1970: Capital, Volume 1. Nell, E. 1972: Economics: the revival of political economy. Broadbent, T. A. 1977: Planning and profit in the urban economy. Centro di Ricerche sui Modi di Produzione (a cura di Enzo Mingione) 1977: L'uso del territorio in Cina. Darke, R. and Walker, R. editors, 1977: Local government and the public. Sewell, W. and Coppock, J. , editors, 1977: Public participation in planning. Hart, D. A. 1976: Strategic planning in London: the rise and fall of the primary road network. Hayden, D. 1976: Seven American utopias: the architecture of communitarian socialism, 1790–1975. C. G. Pickvance , IJURR/RIRUR, Beverley Farm, University of Kent, Canterbury, England.     

The political economy of international trade and factor mobility

Abstract. Free trade in goods and factors is efficient. When we move away from economic theory and consider the policies actually followed by governments, we observe distortions being implemented both on goods and factors trades. It is natural then to question the relative merits of the two types of intervention, and the normative literature has provided only partial answers. We ask then why is the international flow of goods and factors not free, and the political economy literature has looked at the two issues only separately. In studying the determination of trade policy, a theoretical paradigm has emerged, focusing on the role of influence driven contributions. This approach has also found strong empirical support. The literature on the political economy of factor mobility, on the other hand, is fragmented. Distortions in labor and capital flows are typically the subject of different studies, and only recently a unified framework has been proposed. More work has to be done in this area as well as in integrating the political economy of trade and factor movements.     

Exchange rate determination: Empirical evidence for the Greek drachma

We examine the monetary approach to the exchange rate from several perspectives, using monthly data on five Greek bilateral exchange rates. Using the Johansen multivariate cointegration technique we demonstrate that the monetary model is validate as a long-run relationship. Moreover, upon imposing the long-run monetary model restrictions we find that the proportionality of the exchange rate to relative monetary aggregates is accepted for the bilateral exchange rate of the Greek drachma with respect to the US dollar, the deutschemark, the pound sterling, the French franc and the Italian lira. Finally, using the Hansen-Johansen (1993) testing procedure, we reject the hypothesis of sample independency of the dimension of the cointegration space in all cases, apart from the German one, but we accept the hypothesis that the estimated coefficients do not display instabilities in recursive estimations.     

Optimal monetary policy in a regime-switching economy: The response to abrupt shifts in exchange rate dynamics

This paper examines the trade-offs that a central bank faces when the exchange rate can experience sustained deviations from fundamentals and occasionally collapse. The economy is modelled as switching randomly between different regimes according to time-invariant transition probabilities. We compute both the optimal regime-switching control rule for this economy and optimised linear Taylor rules, in the two cases where the transition probabilities are known with certainty and where they are uncertain. The simple algorithms used in the computation are also of independent interest as tools for the study of monetary policy under general forms of (asymmetric) additive and multiplicative uncertainty. An interesting finding is that policies based on robust (minmax) values of the transition probabilities are usually more conservative.     

Discrete choice modeling with nonstationary panels applied to exchange rate regime choice

This paper develops a regression limit theory for discrete choice nonstationary panels with large cross section (N) and time series (T) dimensions. Some results emerging from this theory are directly applicable in the wider context of M-estimation. This includes an extension of work by Wooldridge [Wooldridge, J.M., 1994. Estimation and Inference for Dependent Processes. In: Engle, R.F., McFadden, D.L. (Eds.). Handbook of Econometrics, vol. 4, North-Holland, Amsterdam] on the limit theory of local extremum estimators to multi-indexed processes in nonlinear nonstationary panel data models.It is shown that the maximum likelihood (ML) estimator is consistent without an incidental parameters problem and has a limit theory with a fast rate of convergence N^1/2T^3/4 (in the stationary case, the rate is N^1/2T^1/2) for the regression coefficients and thresholds, and a normal limit distribution. In contrast, the limit distribution is known to be mixed normal in time series modeling, as shown in [Park, J.Y., Phillips, P.C.B., 2000, Nonstationary binary choice. Econometrica, 68, 1249–1280] (hereafter PP), and [Phillips, P.C.B., Jin, S., Hu, L., 2007. Nonstationary discrete choice: A corrigendum and addendum. Journal of Econometrics 141(2), 1115–1130] (hereafter, PJH).The approach is applied to exchange rate regime choice by monetary authorities, and we provide an analysis of the empirical phenomenon known as “fear of floating”.     

Owner-occupied housing in a model of exchange rate determination

This study explores the effect of owner-occupied housing asset holdings on the short and long run determination of exchange rates. In the presence of consumption goods that can simultaneously serve as investment allocation subject to capital gains—such as owner-occupied housing—the general equilibrium model, based on the Obstfeld and Rogoff Redux model, produces exchange rate overshooting both in the presence and in the absence of price rigidities in the markets for final goods. This effect depends on the size of owner-occupied housing expenditures relative to total consumption expenditures, the initial level of housing market inflation, capital gains in housing and other parameters of the model. Depending on parameter values and initial conditions, the model supports the possibility for exchange rate dynamics that include either overshooting or undershooting.     

The political economy of a racist housing market

While much empirical research indicates that blacks pay higher prices than whites for housing, models that generate this result have not been given a convincing theoretical structure. To remedy this deficiency, the paper develops two different models in which racial market segmentation is possible. The first considers a cartel controlling a white neighborhood threatened by black entry; the second considers the effort of a suburban government to exclude blacks. After developing these models, we contrast the conditions under which private collusion and public coercion generate exclusionary policies that restrict the supply of housing to minority groups.     

The political economy of financial reform: are Abiad and Mody right?

Motivated by the questions ‘Financial Reform: What Shakes It? What Shapes It?’ raised by Abiad and Mody ( 2005 ), this paper studies the forces that induce governments to undertake financial sector reform. Rather than their ordered logit technique, it uses a within groups approach allowing for error dependence across countries and over time. This analysis shows that some of the AM findings are not robust to error dependence and the estimation method. It has shed new light on the political economy of financial reform. Copyright © 2009 John Wiley & Sons, Ltd.