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.

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.     

Central bank intervention and exchange rate volatility: Evidence from Japan using realized volatility

This paper presents new empirical evidence on the effectiveness of Bank of Japan's foreign exchange interventions on the daily realized volatility of USD/JPY exchange rates using high frequency data. Following Huang and Tauchen (2005) and Barndorff-Nielsen and Shephard, 2004, Barndorff-Nielsen and Shephard, 2006, we use bi-power variation to decompose daily realized volatility into two components: the smooth persistent and the discontinuous jump components. We model exchange rate returns, the different components of realized volatility and the central bank intervention using a system of simultaneous equations. We find strong support that interventions by Bank of Japan had increased both the continuous and the jump components of daily realized volatility. This suggests that the interventions by Bank of Japan had increased market volatility which not only caused short-lived positive jumps, but were also persistent over time. We did not find any evidence that interventions were effective in influencing the exchange rate returns for the entire sample period.     

The optimal exchange rate regime for a small country

This paper examines the welfare comparisons between a freely floating, a managed floating, and a pegged exchange rate regime. We compare the expected loss under these regimes by modifying and generalizing Hamada’s (2002) model to accommodate intervention policy. We consider the de jure and de facto classifications, where the former is defined by the officially stated intentions of the monetary authorities, while the latter is based on the actually observed behavior of the nominal exchange rate. We first examine the exchange rate regimes from the central bank’s policy stance and the actual exchange rate policy. Next we assume that the regime which the private sector perceives according to an official announcement may be different from the one adopted actually by the central bank. We examine nine combinations of the de jure and de facto regimes. We interpret that, whenever they are different, there is informational friction between the central bank and the private sector. We show that the welfare level of a small country under freely floating is no less than that under other regimes, and that with some restrictive conditions, the de facto pegged or de facto managed floating is close to freely floating. This partly explains “Fear of floating” and “Fear of pegging”.     

Post-crisis monetary and exchange rate policies in Indonesia,Malaysia and Thailands

This paper surveys the post-crisis monetary and exchange rate policies of Indonesia, Thailand and Malaysia. Malaysia has pegged the ringgit while Indonesia and Thailand have adopted heavily managed exchange rates. Under their IMF programs, Thailand and Indonesia set base money targets, but Thailand has moved, and Indonesia is now moving, to inflation targeting, using interest rates as the short-term instrument. Malaysia also sets interest rates. The ability of the three central banks to set interest rates and also pursue an exchange rate target with an interest rate target has been bolstered by restrictions on the internationalisation of the domestic currency. The three central banks have also had to sterilise the monetary effects of their foreign exchange interventions. It is argued that inflation targeting is now a good policy choice, but that a more freely floating exchange rate would be better than sterilisation of balance of payments surpluses or deficits.     

Is reversion to PPP in euro exchange rates non-linear?

The paper tests for nonlinearities in the adjustment of the euro exchange rate towards purchasing power parity (PPP). It presents new survey based evidence consistent with non-linear patterns in euro exchange rate dynamics. Moreover, based on an exponential smooth transition autoregressive (ESTAR-) model, it finds strong evidence that the speed of mean reversion in euro exchange rates increases non-linearly with the magnitude of the PPP deviation. Accordingly, while the euro real exchange rate can be well approximated by a random walk if PPP deviations are small, in periods of significant deviations, gravitational forces are set to take root and bring the exchange rate back towards its long-term trend. Deviations from the PPP equilibrium for the euro-dollar rate need to be stronger in order to reach the same adjustment intensity as for other rates.

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.     

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.     

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.     

Exchange Rate Economics

The paper summarizes the current theory of how a floating exchange rate is determined, dividing the subject into what determines the steady state and what determines the transition to steady state. The inadequacies of this model are examined, and an alternative “behavioral” model, which recognizes that the foreign exchange market is populated by both fundamentalists and chartists is presented. It is argued that the main importance of understanding the foreign exchange market for development strategy is to permit a correct appraisal of the dangers of Dutch disease. Empirically it seems that from the standpoint of promoting development it is preferable to have a mildly undervalued rate. The paper concludes by examining implications for exchange rate regimes.

Application of the Tobit model with autoregressive conditional heteroscedasticity for foreign exchange market interventions

In this empirical study, we apply the Tobit-GARCH model to investigate the intervention function of the Bank of Japan (BoJ) in the JPY/USD exchange market. The proposed model has the advantage of handling intervention data with both a majority of zero observations and conditional heteroscedasticity. Thus, the model provides better estimates of the intervention function than such conventional models as the standard Tobit, OLS, Probit, and traditional GARCH models. Results show that the intervention behavior of the BoJ is affected more by its half-year long-term target than its previous-day short-term target, and the BoJ generally follows the policy of “leaning against the wind”. The US-JP interest rate spread was never a trigger of BoJ's interventions during the sample period. The BoJ did not respond to the domestic stock index by the sales-intervention of the JPY, even when the economy was sluggish during the lost decade (1992–2004). However, its intervention behavior was significantly affected by U.S. interventions and was significantly persistent across some of the periods.     

人民币汇率制度改革以及汇率波动性研究

自我国1978年改革开放以来,我国汇率制度的改革大体上经过了3个阶段:复汇率制度、单一有管理浮动汇率制度、参考"一篮子货币"有管理浮动汇率制度。本文着重讲述了这三个阶段汇率制度的改革情况,分析了人民币兑美元的汇率走势,并对汇率波动性进行实证研究,然后指出我国汇率制度当前存在的问题,以及针对这些问题提出改革的下一步路径。     

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.     

Fear of Floating: Korea's Exchange Rate Policy after the Crisis

The purpose of this paper is to explore the question of whether a free floating exchange rate regime is a viable option for Korea. This paper divides the sample period into three subperiods: pre-crisis, crisis, and post-crisis. We then analyze the causal relationships among both levels and volatility of three financial variables: exchange rates, interest rates, and stock prices. By using Granger causality tests and variance decomposition, our empirical results show that causal relations among the three variables are weak during the post-crisis period, and furthermore, shocks in other financial markets do not have a significant contribution to explain the variations of each variable's forecast errors. Based on these empirical findings, we infer that the Korean government, having adopted the de jure freely floating exchange rate regime, is still fearful of floating for various reasons. J. Japan. Int. Econ., June 2001, 15(2), pp. 225–251. Department of Economics, Korea University, Seoul, Korea; Korea Institute for International Economic Policy, Seoul, Korea. Copyright 2001 Academic Press.Journal of Economic Literature Classification Numbers: F3, F4.     

Exchange rates in the modern floating era: what do we really know?

Forecasting nominal exchange rates remains a remarkably difficult task, despite the proliferation of new floating currencies, the maturation of the floating rate period, the deepening of financial markets, and the development of more sophisticated econometric tests that make use of today’s more powerful computing possibilities. Despite these advances, the basic results of Meese and Rogoff in the 1980s stand up remarkably well—it is still extremely difficult to forecast exchange rates. To the extent that there is any forecasting power, the most promising models are those based on purchasing power parity or the current account, although it must be noted that these mainly predict the real exchange rate, rather than the nominal exchange rate. Thus, some of the adjustment takes place in prices. Finally, it should be noted that panel methods help in exchange rate forecasting, albeit mainly by allowing better estimation of nonstructural factors such as shift parameters.

Modeling coordinated foreign exchange market interventions: The case of the Japanese and U.S. interventions in the 1990s

During the past thirty years, central banks often intervened in foreign exchange markets. Sometimes they carried out foreign exchange market interventions on a unilateral basis. However, central banks often coordinated their foreign exchange market interventions. We develop a quantitative reaction function model that renders it possible to study the factors that made central banks switch from unilateral to coordinated interventions. We apply our model to the intervention policies of the Japanese monetary authorities and the U.S. Federal Reserve in the yen/U.S. dollar market during the period 1991–2001. To this end, we use recently released official data on the foreign exchange market interventions of the Japanese monetary authorities. JEL no. F31, F33, G14, G15     

Excess Liquidity,Housing Price Booms and Policy Challenges in China

Incorporating asymmetric cost and benefit of supplying excess liquidity into an otherwise standard time inconsistency model, this paper offers an explanation of the excess liquidity and housing price booms recently experienced in China. We find that the central bank's incentive to stimulate economic growth with excess liquidity fuels real estate prices and accelerates inflation bias. Therefore, the central bank should free itself from the pressure to achieve an economic growth rate higher than the potential level, and assign an appropriate weight to the real estate price fluctuations in the central bank's objective function, so that the central bank's policy of stimulating economic growth with excess liquidity can be constrained.     

Testing the Unstable Middle and Two Corners Hypotheses About Exchange Rate Regimes

The recent rash of international currency crises has generated considerable interest in the role that exchange rate regimes have played in contributing to these crises. Many economists have argued that efforts to operate adjustably pegged exchange rate regimes have been a major contributor to “the unstable middle” hypothesis and some have argued that this unstable middle is so broad that only the two corners of hard fixes or floating rates will be stable in a world of high capital mobility—the two corners or bipolar hypothesis. Two recent empirical studies by researchers at the International Monetary Fund reach opposing conclusions on these issues. We examine the issue further and show that conclusions can be quite sensitive to how exchange rate regimes are grouped into categories and the measures of currency crises that are used. In general we find that the dead center of the adjustable peg is by far the most crisis prone broad type of exchange rate regimes, but that countries need not go all the way to freely floating rates or hard fixes to substantially reduce the risks of currency crises.

Implicit exchange regimes in Central and Eastern Europe: a first exploration

This paper attempts to identify implicit exchange rate regimes for currencies of the Central and Eastern European Countries vis-à-vis the euro. To that end, we apply a sequential procedure that considers the dynamics of exchange rates to data covering the period from 1977:01 to 2006:02. Our results would suggest that implicit bands have existed in many subperiods for almost all currencies under study. Once we detect de facto discrepancies between de facto and de iure exchange rate regimes, we propose a model in order to explain these decisions. Our results suggest a positive association between the previous inflation rate and the probability of a peg with the euro, and a negative association with past unemployment rate.

Exchange Rates and Concurrent Leasing and Selling in Durable-Goods Monopoly

Theoretical durable-goods models suggest that a monopolist will prefer to lease rather than sell units of output due to the seller’s commitment problem with potential buyers. However, many monopolistic durable-goods manufactures are commonly observed simultaneously leasing and selling output. We provide a theoretical rationale for this observed behavior in firms engaged in trade with a foreign country. In a simple two-period setting we show that a foreign durable-goods monopolist will concurrently lease and sell output if the expected future exchange rate is lower than the current rate. With this concurrent strategy the firm earns higher profit than a pure rental or sales regime. Additionally, our model provides additional theoretical underpinnings for the empirical finding that increases in expected future exchange rates increase the current sales price of durable products. Finally, our analysis examines the role of product durability in determining exchange rate pass-though to domestic prices.