Forecasting the Euro exchange rate using vector error correction models

Forecasting the Euro Exchange Rate Using Vector Error Correction Models. — This paper presents an exchange rate model for the Euro exchange rates of four major currencies, namely the US dollar, the British pound, the Japanese yen and the Swiss franc. The model is based on the monetary approach of exchange rate theory which uses fundamental macroeconomic variables to explain the exchange rate. A crucial point when using such a model is its proper estimation through cointegration analysis. The euro exchange rate model is therefore estimated in the form of a Vector Autoregressive (VAR) model with cointegrating vectors (VECM). We find that when cointegration analysis is undertaken properly, the naive random walk prediction can be out-performed for the US dollar, the British pound and the Japanese yen, but not for the Swiss franc.     

An evolutionary algorithm for the estimation of threshold vector error correction models

We develop an evolutionary algorithm to estimate Threshold Vector Error Correction models (TVECM) with more than two cointegrated variables. Since disregarding a threshold in cointegration models renders standard approaches to the estimation of the cointegration vectors inefficient, TVECM necessitate a simultaneous estimation of the cointegration vector(s) and the threshold. As far as two cointegrated variables are considered this is commonly achieved by a grid search. However, grid search quickly becomes computationally unfeasible if more than two variables are cointegrated. Therefore, the likelihood function has to be maximized using heuristic approaches. Depending on the precise problem structure the evolutionary approach developed in the present paper for this purpose saves 90 to 99 per cent of the computation time of a grid search.     

Financial innovations and the interest elasticity of money demand: Evidence from an error correction model

The difficulty of estimating a stable money demand function has been blamed on financial innovations of the past two decades. Gurley and Shaw's [1960] thesis implies that a proliferation of money-like assets resulting from financial innovations increased the interest elasticity of money demand. However, Hafer and Hein [1984] provided empirical evidence to the contrary. This paper presents the empirical results of the M2 demand for money using an error correction model for the period 1959:1–87:4 and two subperiods 1959:1–73:4 and 1974:1–87:4. The findings suggest lower interest and price elasticities for money demand in the second sample in which money substitutes proliferated.     

Mergers, welfare, and concentration: Results from a model of stackelberg-cournot oligopoly

This paper explores the relationship between mergers, welfare, and concentration, using a two-stage oligopoly model that generalizes the Cournot and Stackelberg models. This model has been used to show that some profitable mergers raise welfare and that some welfare-lowering mergers are unprofitable. Based on this, one might conclude that policy designed to restrict mergers is unnecessary or even counterproductive. This present paper examines in greater detail the implications of this model and finds that a merger's effects depend not only on the reduction in the number of firms, but also on premerger and postmerger firm behavior. In fact, most mergers lower welfare, and many of these are profitable. Usually, but not always, changes in concentration and welfare are negatively related.     

Testing the collective model of household labor supply: Evidence from China

This paper tests the collective model against the unitary model by estimating the labor supply of both the husband and wife. Using data from a developing country, China, we reject the hypothesis that distribution factors have no effect on household time allocation decisions. On the other hand, we cannot reject restrictions implied by the collective model. Thus the unitary model is not supported while the collective model gains credence in this study. Our findings suggest that the traditional patriarchalism in Chinese families is giving ways to power sharing between spouses.     

Exchange Rate Forecasting: Results from a Threshold Autoregressive Model

Structural models of exchange rate determination rarely forecast the exchange rate more accurately than a naive random walk model. Recent innovations in exchange rate modeling indicate that changes in the exchange rate may follow a self-exciting threshold autoregressive model (SETAR). We estimate a SETAR model for various monthly US dollar exchange rates and generate forecasts for the estimated models. We find: (1) nonlinearities in the data not uncovered by the standard nonlinearity tests and (2) that the SETAR model produces better forecasts than the naive random walk model.     

A model of exchange rate determination in a dual exchange rate mechanism

Summary In this paper a theoretical model of exchange rate determination in the dual exchange rate mechanism is established. The role of interest arbitrageurs, speculators and hedgers in the official and the financial markets (both spot and forward) is analysed. For each of the categories of participants excess demand functions for foreign exchange are derived, which lead to the equilibrium condition for the various market segments. Also the main links between the different markets are discussed.This paper is based on chapter II of my Ph. D. dissertation submitted to the John Hopkins University. I am grateful to Professors Bela Balassa and Kirg Niehans for helpful comments. Also Zoran Hodjera (IMF) and Paul De Grauwe (KUL) provided stimulating criticism.     

Testing Korteweg's rational expectations model for a small open economy

Summary Korteweg extended the Barro, Lucas, Sargent, Wallace type of rational expectations model to a small open economy. This paper tests Korteweg's model with Dutch data. A major error in the specification and estimation is pointed out and corrected: the differenced expected variables are not defined consistently. This error implies that Korteweg's and Bomhoff's previous empirical results on the model are invalid. The test results for the corrected model indicate that this model has to be rejected for The Netherlands. The restrictions implied by an extremely simple empirical alternative are, however, not rejected.I would like to thank Dr. Th.E. Nijman, Professors F. van der Ploeg, W.H. Buiter and J.J.M. Theeuwes and Dr. A. J. de Zeeuw for their stimulus and helpful comments on previous versions of this paper, and Professor P. Korteweg for his open-minded attitude towards this research. Responsibility for the contents remains, of course, with the author. Financial help, from the Stichting Bekker-La Bastide-Fonds and the Stichting A.A. van Beek-Fonds is gratefully acknowledged.     

Forecasting the Yen/U.S. Dollar exchange rate: Empirical evidence from a capital enhanced relative PPP-based model

This study uses a relative purchasing power parity (PPP) model based on price indexes (consumer, CPI or traded-goods price indexes, TPI), interest rate differentials, and a linear forecasting technique to determine the horizon over which such a model outperforms a random walk in forecasting the Yen/U.S. Dollar exchange rates out-of-sample. The results improve if one adjusts a simple CPI-based PPP-model by interest rate differentials, while the best results are obtained using a TPI-based PPP-model. For example, the TPI-based model, adjusted by interest rate differentials, is able to statistically significantly outperform the pure random walk starting at forecast horizons of 1 month.     

Increasing returns and economic growth: some evidence for manufacturing from the European Union regions: a correction

There was an error in the specification of the regression equation(23) (p.100) in the original paper of Fingleton and McCombie(1998), although it does not greatly alter any of the estimatedcoefficients of interest.     

Testing for output convergence: a re-examination

This paper investigates output convergence for the G7 countriesusing panel time-series techniques. We consider both the nullhypotheses of no convergence and convergence. It is shown thatinferences on output convergence depend on which one of thetwo null hypotheses is considered. Further, the no convergenceresults reported in previous studies using the time-series definitionmay be attributed to the low power of the test procedures beingused. Our results also highlight some potential problems oninterpreting results from some typical panel unit root and stationaritytests.     

The poverty implications of alternative tax reforms: Results from a numerical application to Pakistan

This paper presents results from four simulations of the impact of potential tax reforms in Pakistan on poverty, shared prosperity, and inequality. The simulations are carried out in the context of a dynamic computational general equilibrium (CGE) model that incorporates endogenous tax evasion. The simulations link the CGE model to household survey data that is incorporated in a micro simulation model. The combined models suggest that equal yield increases in sales and corporate tax rates differ mildly in their impacts on consumption and poverty. Endogenously modeled tax evasion plays an important role in the results.     

Hong Kong's exchange rate regime:: Lessons from Singapore

Singapore's managed floating exchange rate regime contrasts with Hong Kong's currency board system featured by the Hong Kong–United States dollars peg. This paper appraises the two different exchange rate regimes by comparing their track records in maintaining macroeconomic stability and trade competitiveness in the 1990s. A review of the two regimes' institutional characteristics and macroeconomic performance reveals the systemic inadequacy of Hong Kong's exchange rate regime under a changing global financial environment. As East Asia emerges from the recent financial crisis, Singapore's experience of successfully moving away from a currency board system to a credible managed floating regime offers a lesson worthy of attention from Hong Kong.     

Renminbi exchange rate exposure: evidence from Chinese industries

This paper investigates sensitivity of stock returns of industry-sorted Chinese firms with respect to renminbi exchange rate movements. Strong evidence of significant exposure is documented for 7 out of 16 Chinese industries. Evidence is also found of the size asymmetry effects. In addition, we explore the characteristics of the exposure, and detect evidence of significant exposure among non-exporters in some of the industries. Special attention is given to examining the time-varying exposure under the impact of the new Chinese exchange rate regime in place since 2005, in which even stronger exchange rate exposure is reported. The conditional exposure estimated in this paper also reveals the close relation between stock returns and changes of the renminbi exchange rate.