Detecting currency manipulation: An application of a state-space model with Markov switching

Following an idea of Milton Friedman's “plucking model,” we propose to use a state-space model with Markov switching as an auxiliary tool for detecting currency manipulation. Without imposing any a priori restrictions, our model tests if fluctuations of a country's exchange rate are symmetric or if there exists a time-varying support level or resistance level of exchange rate. Using weekly and monthly data of countries on the “monitoring list” of the US Treasury as of April 2017, we find that exchange rates of China, South Korea, Switzerland, and Taiwan rarely fall below their time-varying trends, but are plucked upward from time to time by transitory shocks, suggesting that the FX (foreign exchange) authorities of these countries may have been intervening more actively against appreciation shocks. Our sub-sample analysis reveals that our model accurately captures the period of Switzerland's minimum exchange rate policy with probability of one and Japan's exchange rate rarely falls below its trend after implementing Abenomics. We discuss the difficulties of detecting FX intervention along with the relative advantage of our approach.     

Central bank intervention and exchange rate dynamics: A rationale for the regime-switching process of exchange rates

By proposing a stochastic intervention model of exchange rate determination, this paper provides an alternative rationale for the success of the Markov-switching model in explaining exchange rate dynamics. One extreme case is a pure floating rate model while the other extreme one is a driftless random walk model. The relation between the exchange rate and the future fundamentals under a non-intervention state is looser than the one under a pure floating exchange regime. This article also provides a method for detecting a central bank's interventions when intervention data are not available. Applying the stochastic intervention model to the monthly NT$/US$ exchange rates in 1989M1–2004M6, we find that it outperforms both the pure floating rate model and the random walk model in terms of the likelihood value and the diagnostic test of heteroscedasticity. In addition, with the constructed intervention state index in this article, the estimation of the stochastic intervention model is found to be consistent with the hypothesis that the regime switches of exchange rates are due to a central bank's (non-)interventions. J. Japanese Int. Economies 21 (1) (2007) 64–77.     

An empirical analysis of China's equilibrium exchange rate: A co-integration approach

This paper estimates time specific values for China's long-run equilibrium exchange rate and develops measures of the direction and extent of misalignment based on a reduced-form real effective exchange rate (REER) model. An appropriately specified long-run equilibrium model is estimated and tested following Johansen and Juselius (1990) procedures, which is then used to construct an estimated time path for long-run equilibrium exchange rate values.Unit root tests indicated that each series can be considered as I(1) and that there was one cointegrating relationship linking the RMB series with its “fundamentals” – openness, money supply, productivity and government spending – with long-run elasticities of (0.41), (0.97), (0.51) and (0.75), respectively. The estimated error-correction model of REER determination showed that during China's latest exchange rate regime (from 2005:Q3) the RMB was undervalued by an average of 6.7 percent, which is modest compared to related studies.Estimation of the associated short-run error correction model shows that the error correction term has a statistically significant value of 0.85, implying that the actual real effective exchange rates would converge relatively quickly (just over one quarter, on average) towards their long-run equilibrium level in the absence of central bank intervention.     

Effects of the Bank of Japan's intervention on yen/dollar exchange rate volatility

This paper examines the effects of the Bank of Japan's (BOJ) intervention on the volatility as well as the level of the yen/dollar exchange rate. Specifically, the conventional GARCH model proposed by Bollerslev [Bollerslev, T., 1986. Generalized autoregressive conditional heteroskedasticity. J. Econometrics 31, 307–327] and the component GARCH model proposed by Engle and Lee [Engle, R.F., Lee, G.G.J., 1999. A long-run and short-run component model of stock return volatility. In: Engle, R., White, H. (Eds.), Cointegration, Causality and Forecasting. Oxford Univ. Press, Oxford, UK, pp. 475–497], where the volatility consists of short-run and long-run components, are estimated using the BOJ's and the Federal Reserve system's (Fed's) official intervention data. Results based on the component GARCH model provide new evidence on the effects of the BOJ's intervention on the volatility of the yen/dollar exchange rate. The BOJ's intervention only reduces the short-run volatility component from the late 1990s to 2003, while it does not have an impact on volatility (both the short- and long-run volatilities) at all in the early 1990s. The stabilizing effect of the BOJ's intervention in the late 1990s and the first few years of the 2000s is not enhanced by the Fed's coordinated intervention. J. Japanese Int. Economies 20 (1) (2006) 99–111.     

A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility

We study the impact of Japanese foreign exchange intervention on the volatility of the yen/dollar exchange rate since the early 1990’s in a GARCH framework with interventions as exogenous variables. Using daily intervention data provided by the Japanese Ministry of Finance, we show that the effect of interventions varies over time. From 1991 up to the late 1990’s, Japanese foreign exchange intervention is associated with an increase in volatility of the yen/dollar exchange rate. After the year 1997, Japanese foreign exchange intervention correlates with reductions in exchange rate volatility. This can be explained by the fact that Japanese foreign exchange intervention remained quasi unsterilized in the liquidity trap.

The impact of central bank intervention on exchange-rate forecast heterogeneity

We investigate the impact of official foreign exchange intervention on forecast heterogeneity, on the basis of a sample of forecasts made by a large number of commercial banks over two distinct periods, for the DEM (or EUR) and the JPY against the USD. We show that heterogeneity increases as a result of foreign exchange intervention. In the case of the DEM–EUR/USD market this increase is due to unexpected intervention, while for the JPY/USD it is due to expected intervention. Our results also emphasise the role of rumours, especially for the JPY/USD. In sum, official interventions are shown to move market opinions, albeit differently across the two markets. J. Japanese Int. Economies 21 (1) (2007) 38–63.     

Governing the coffee chain: The role of voluntary regulatory Systems

The coffee crisis has coincided with the emergence of a number of voluntary regulatory systems in the global coffee chain. The present article explores the advantages and limitations of such schemes, their impact on the chain’s governance, and their implications for farmers’ upgrading. We conclude that participation in these systems does not ensure a better economic performance, but it may facilitate coordination between roasters/traders and some growers, which may lead to upgrading opportunities. The paper also explores some possible options for deriving rents from improved coordination along the coffee chain.     

Optimal Exchange Intervention in an Inflation Targeting Regime: Some Cautionary Tales

Devaluations and fiscal retrenchments coming from developed countries are buffeting less developed countries. Many emerging market countries have adopted inflation targeting as “best practice,” but now they are being advised to enhance their inflation targeting regimes with foreign exchange intervention. Here we use a DSGE model to tell some cautionary tales about this advice. A Taylor rule guides interest rate setting, while foreign exchange interventions are used as a second tool of monetary policy. These interventions are effective in our model since domestic and key currency bonds are imperfect substitutes. We derive optimal (Ramsey) intervention policies in response to foreign devaluations and fiscal retrenchments, and find that they are rather complex. So, we compare the optimal responses to policies that simply smooth real or nominal exchange rate movements. Our results suggest that discretion may be the better part of valor: pure inflation targeting may come closer to the optimal policy than exchange rate smoothing. A secondary result may also be of some interest: foreign exchange interventions have a stronger impact on inflation and output in an inflation targeting regime than do sterilized interventions; the Taylor rule augments the effects of a given intervention.     

黄金期货中的隐含远期人民币汇率及其运用研究

中国黄金市场已高度市场化与国际化,在按人民币即期汇率调整后,境内外黄金市场现货价格之间已没有明显的升贴水。基于黄金期货之间的隐含远期汇率与离岸人民币NDF市场远期汇率到期前的不一致性与临近到期日的一致性,运用黄金期货构建替代性的远期外汇头寸,为投资者提供了现行管制环境下实现外汇投资、跨市场套利以及对真实外汇敞口风险进行套期保值的新渠道。     

Exchange rate models: Do they work?

Conclusions In this paper we have examined empirically five asset-market exchange rate models: the flexible-price monetary model, the sticky-price model, the Hooper-Morton model, the stock-flow model and the portfolio balance model. Each of these models was estimated for the Deutsche mark/dollar exchange rate over the floating period. The empirical results suggest that none of the models is fully supported by the data. Our findings are similar to those of other studies [see, e.g., Backus, 1984; Boughton, 1985; Frankel, 1983; Meese, Rogoff, 1983]. The failure of various exchange rate models to explain the behaviour of the Deutsche mark/dollar exchange rate may be attributed to a number of factors, such as the instability of money demand functions observed in the U.S. and Germany in the mid-1970s¹¹, the intervention of the Bundesbank in an effort to mitigate the large fluctuations of the Deutsche mark/dollar exchange rate, and speculation, which may be increasingly important. This suggests that further theoretical and empirical work is required to resolve the issue of how best to model the exchange rate determination.     

The Efficacy of Official Intervention in the Foreign Exchange Market in Malawi

Abstract: This paper analyses the effectiveness of foreign exchange market interventions by the Reserve Bank of Malawi (RBM). We use a GARCH (1, 1) model to simultaneously estimate the effect of intervention on the mean and volatility of the Malawi kwacha. Results from the GARCH model indicate that net sales of US dollars by the RBM depreciate, rather than appreciate, the kwacha. Empirically, this implies the RBM ‘leans against the wind’, that is, the RBM intervenes to reduce, but not reverse, exchange rate depreciation. On the other hand, results for the GARCH model for the post‐2003 period indicate the RBM intervention in the market stabilizes the kwacha. In general, results for the entire study period show that the RBM interventions have been associated with increased exchange rate volatility, with the only exception being the post‐2003 period. The implication of this finding is that intervention can only have a temporary influence on the exchange rate.     

Regional currency arrangements in North America

Choosing an exchange-rate regime is largely a matter of choosing the variables that will bear the brunt of adjustment to shocks and disturbances. Floating rates, supported by inflation-targeting regimes of varying degrees of transparency, have dominated currency arrangements in North America, especially after the peso crisis of 1994. Although the member countries have pursued their policy goals without formal coordination, their objectives have been very similar. Meanwhile, de facto integration of the three economies has continued, especially in the realm of cross-border production sharing. The result has been reduction of asymmetries and convergence of business cycles, as well as changes in balance of payments behavior and in the sensitivity of trade to the exchange rate. This paper explores the implications for monetary union.     

Volatility behavior of exchange rate future contracts

The increasing globalization of economies and the concurrent increase in the risk of currency exposure has stimulated the development of new instruments to allow both investors and traders to hedge their currency risk. The expansion of these derivatives, however, has raised some concerns. This paper studies the determinants of the dynamics of exchange rate future contracts as a means to identify the sources of such concerns. By using a mean-exponential generalized autoregressive conditional heteroskedasticity (M-EGARCH) model for five different future contract lengths and six developed economies, it is found that an M-EGARCH(1,1) effectively describes the exchange rate futures' daily dynamic. Sign, size, and persistence effects on the volatility of future contracts are all significant, thus providing important information to both policy makers and market participants.     

International monetary transmission in East Asia: Floaters,non-floaters,and capital controls

This paper analyzes the impacts of the United States (US) monetary shocks on East Asian countries using structural vector-autoregression (VAR) model. We find that the impacts of the US monetary shocks on East Asian domestic interest rates and exchange rates contradict conventional wisdom. The conventional exchange rate channel is unlikely to play much role in the transmission of the US monetary policy shocks to floaters in East Asian countries, excluding Japan. In these countries, the domestic interest rates respond strongly to the US interest rate changes, by giving up monetary autonomy, probably because of fear of floating. However, the domestic interest rate does not respond much in countries with fixed exchange rate regimes and capital account restrictions, such as China and Malaysia. This may suggest that the countries with fixed exchange rate regimes enjoy a higher degree of monetary autonomy, most likely with the help of capital account restrictions.     

Volatility spillover between the RBI’s intervention and exchange rate

This study examines the effectiveness of the Reserve Bank of India’s (RBI) intervention policy in the foreign exchange market. An attempt is made to capture volatility spillovers between the RBI’s intervention and exchange rate. The results indicate that the past volatility of intervention has a positive impact on the present volatility of the exchange rate. Similarly the past volatility of the exchange rate, increases the present volatility of intervention. The volatility of the exchange rate is more sensitive to its past shock than the past shock of an intervention. Similarly, the volatility of intervention is more sensitive to the past volatility of exchange rate compared to the past volatility of intervention.     

Institutional determinants of Indonesia's sugar trade policy

An analysis of contemporary sugar trade policy in Indonesia highlights problems in the institutional framework for trade policy making. The institutions through which sugar trade policy is formulated entrench the interests of rent-seeking bureaucrats, import licence holders and traders to the detriment of consumers and downstream producers of processed products. Moreover, the resulting trade policy regime has problematic effects on sugarcane farmers. The structure of regulatory intervention is due less to democratic pressures than to the inclusion of vested interests in the institutions that formulate policy. Further, the lack of effective mechanisms for inter-ministerial coordination and for resolving conflicting policy preferences among ministries hinders the development of coherent trade policy and obstructs reform efforts. An institutional framework that facilitates representation of all interests affected by sugar trade policies and public scrutiny of the effects of policy intervention is likely to deliver better outcomes for consumers and producers alike.     

东亚经济体汇率制度选择:基于博弈论视角的分析

东亚金融危机凸现了该地区汇率制度不匹配以及区域协调机制的缺失。本文运用博弈论分析法探讨东亚经济体汇率制度的最优选择,合作博弈与非合作博弈分析显示在短期,和共同钉住货币篮相比,各自独立钉住货币篮更能提高各国的福利。从长期来看,在各自钉住的基础上实现共同钉住货币篮,建立区域性汇率安排和协调机制是东亚各国汇率制度改革的方向。     

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

Bank loans and the effects of monetary policy in China: VAR/VECM approach

In this paper, we test the differential effects of monetary policy shock on aspects of banks' balance sheets (deposits, loans, and securities) across bank categories (aggregate banks, state banks, and non-state banks) as well as on macroeconomic variables (output, consumer price index, exports, imports, and foreign exchange reserves). We do so by estimating VAR/VEC Models to uncover the transmission mechanisms of China's monetary policy. Also we identify the cointegrating vectors to establish the long-run relationship between these variables. By using monthly aggregate bank data and disaggregated data on bank and loan types from 1996 to 2006, our study suggests the existence of a bank lending channel, an interest rate channel and an asset price channel. Furthermore, we discuss and explore the distribution and growth effects of China's monetary policy on China's real economy. In addition, we investigate the effects of China's monetary policy on China's international trade. Finally, we identify the cointegrating vectors among these variables and set up VEC Models to uncover the long-run relationships that connect the indicators of monetary policy, bank balance sheet variables and the macroeconomic variables in China.     

The Exchange Rate and the Monetary Transmission Mechanism in Germany

For the conduct of monetary policy under floating exchange rates it is important to understand the role of the exchange rate in the monetary transmission mechanism (MTM). The timing and the magnitude of the effects of a change in the exchange rate on output and inflation may be quite different from traditional interest rate channels, thereby affecting optimal policy. In this paper we examine the exchange rate channel in the MTM in Germany by estimating an identified VAR model. Two features of the results are highlighted. The effect of a policy shock on the exchange rate accelerates the pass-through of policy into prices and leads to a different response of the various components of GDP. We then show that these qualitative effects can be duplicated in a general equilibrium model for a semi-small open economy with sticky prices and wages that is calibrated to capture the main features of the German economy.