Foreign interest rate shocks and exchange rate regimes in East Asia

Using a theoretical dynamic stochastic general equilibrium model and an empirical panel vector autoregression, we assess the transmission of foreign real interest rate shocks on the volatility of various key macroeconomic variables in nine small open economies in East Asia taking into account the role of exchange rate regimes. Both the theoretical and empirical findings confirm the hypothesis that flexible exchange rate may work as a shock absorber when the economy is hit by foreign real interest rate shocks. The findings suggest a clear trade-off between the volatility of real exchange rate and real output to foreign interest rate shocks, both the US and G7 real interest rates, where the responses of real output are mitigated in countries that have more flexible exchange rate regime.     

我国汇率与存款利率的关系研究：2000.1-2007.8

本文通过对2000年1月到2007年8月期间的人民币汇率与利率的关系进行了格兰杰因果检验,并采用单位根检验,建立VAR模型,通过脉冲响应函数和方差分解分析了二者的关系。结果表明,汇率变动影响着居民储蓄存款利率的变化较为显著,而居民储蓄存款利率影响汇率变动的力度较弱。我国存在着阻碍汇率利率联动的制度、经济等因素。     

Monetary policy, macroeconomic adjustment and currency speculation under floating exchange rates: the case of Bulgaria

This paper deals with the Bulgarian experience with exchange rate policy and the related macroeconomic adjustment in the transition period. It is argued that in the context of the Bulgarian macroeconomic environment, the exchange rate regime and the exchange rate policy (or the lack of such) did play a crucial role in determining the patterns of macroeconomic adjustment in this period. A simple general equilibrium model is suggested that provides some insights into the stylized performance of an economy under certain assumptions, similar to those characterizing the transitional state of the Bulgarian economy. Finally, some aspects of Bulgarian macroeconomic performance in recent years are analysed on the basis of the available empirical information and using the framework of the theoretical model. The paper concludes with the policy lessons of this experience.     

Monetary and banking policy transmission through interest rates: an empirical application to the USA,Canada, the UK and the Eurozone

The main purpose of this paper is an examination of the pass‐through interest rate transmission from the wholesale rates (central bank and/or money market rates) to the retail rates (deposit and lending rates) of the banking system. Knowledge of the transmission substantially helps us to calculate the pass‐through interest rate margin or mark‐up in the banking systems under examination (USA, Canada, the UK and the Eurozone). The selection of the wholesale interest rate is also an important part of this pass‐through transmission framework because it is related to the money supply process and therefore the central bank's policy capabilities. In the empirical part, a Johansen (1988) cointegration based error‐correction procedure (ECM‐GE) is implemented for the wholesale interest rate selection. Then an LSE–Hendry general‐to‐specific model (GETS) is applied, for the revelation of the banking sector pass‐through interest rate behaviour. In the empirical part, on the issue of the wholesale interest rate selection, the USA and the Eurozone seem to favour the Money Market rate while the UK and Canada favour the central bank policy rate. The results indicate two types of interest rate pass‐through behaviour, with market structure implication – namely, the US and UK banking systems contrasted with Canada–Eurozone.     

Real exchange rate and exchange rate policy in Hungary

Five real exchange rate indicators are computed to assess the international competitiveness of Hungarian industry. These indicators are explained in econometric equations by employment, unemployment, productivity, interest spread and real producer wage. Causality tests reveal that external performance has an impact on real exchange rates, and contributes to explaining real exchange rates. There is very limited scope for policy intervention to constrain the negative effects of capital inflows without incurring other costs.     

Monetary policy and long-term US interest rates

This paper assesses the effect of federal funds rate innovations on longer-term US nominal interest rates across different periods. The evidence suggests that these responses change with changes in the monetary policy regime. Time periods considered are pre- and post-1979 and different Federal Reserve Chairman’s tenure. The response of longer-term interest rates to federal funds rate innovations are shown to be smaller and less persistent in the post-1979 period when the Federal Reserve placed more emphasis on inflation.     

汇率影响、货币供给与通货膨胀

本文从人民银行近期政策与通货膨胀的现实意义出发,回顾了理论界有关通货膨胀主要成因的观点,并指出输入型通胀、需求拉动型通胀和成本推动型通胀是国内学者普遍认为当下通货膨胀压力的主要成因。根据经典理论分析,我国当下的通货膨胀压力是人民币汇率制度导致我国基础货币被动增发以及扩张性货币政策指导下超量货币供给所带来的流动性过剩问题。     

Real exchange rates and target interest rates in a simple VAR model

This paper proposes a simple vector autoregressions (VAR) model with (real) output and exchange rate shocks on interest rates. Rather than assuming non-recursive identification schemes, we test the identifying assumption of the error term decompositions. Applying the model to quarterly data on major currencies against the U.S. dollar (USD) from 1974 to 1997, interest rate shocks explain - after 3 years - 16% of Canadian dollar/USD (CAD) real exchange rate variations and less than 2% for the mark/USD and yen/USD. Positive innovations of interest rates bring about (transitory) CAD real appreciations in differences and (permanent) appreciations in levels. Canadian real output is more explained by domestic interest rate shocks (19%) than Germanys (5%) or Japans (0.2%). Canada is smaller than the other economies and CAD has been shown to suffer from fear of floating. Our findings support the proposition that domestic shocks dominate output variance under fixed exchange rates. They are also consistent with structural interpretations of the VAR.     

Inflation,growth and exchange rate regimes in small open economies

Summary. This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Endogenously arising volatility may be observed independently of the exchange rate regime. Private information - with high rates of domestic inflation - increases the scope for indeterminacy and economic fluctuations.Received: 26 March 2002, Revised: 29 October 2002JEL Classification Numbers: E32, E44, F33.P.L. Hernandez-Verme: I would like to thank Leonardo Auernheimer, Valerie Bencivenga, Dean Corbae, Scott Freeman, Todd Keister, Beatrix Paal, and Maxwell Stinchcombe for very helpful comments and suggestions. Very special thanks are due to Bruce D. Smith. The paper also benefited from the discussions in the seminars in CIDE, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, Indiana University, ITAM, Purdue University, the Second Annual Missouri Economics Conference, Texas A&M, the University of Missouri and the University of Texas at Austin.     

Nonlinearities in the real exchange rates: new evidence from developed and developing countries

This paper investigates nonlinearities in the dynamics of real exchange rates. We use Monte Carlo simulations to establish the size properties of the Teräsvirta-Anderson test, when the dynamics of the real exchange rate is influenced by an exogenous process. In addition, we show that a modified nonlinearity test, which includes additional right-hand-side variables, performs much better than the original in both Monte Carlo exercises and in the actual data on 1431 bilateral real exchange rate series. Finally, we investigate the dynamics of the real exchange rate for both developed and developing countries using the modified test for the recent floating period. In general, the results find a greater incidence of nonlinear dynamics for developing country real exchange rates.     

Fundamentals, the exchange rate and prospects for the current and future EU enlargements: evidence from Bulgaria, Croatia, Romania and Turkey

We analyze the link between macroeconomic fundamentals and exchange rate dynamics in two new and two potential EU member states: Bulgaria, Romania, Croatia, and Turkey. Given the different institutional settings of the exchange rate market in the countries of interest, we follow two different modelling strategies. For Romania and Turkey, we evaluate possible exchange rate misalignments based on a monetary model of exchange rate determination. In the case of Bulgaria and Croatia, with currency board and narrow-band peg arrangements against the euro, we discuss possible exit strategies and quantitatively assess the effects of the peg arrangements by means of simulation.

Inflation Targeting: Some Extensions

Previous analyses of the implementation of inflation targeting are extended to monetary policy responses to different shocks, consequences of model uncertainty, and effects of interest rate smoothing and stabilization. Model uncertainty, output stabilization, and interest rate stabilization or smoothing all call for a more gradual adjustment of the conditional inflation forecast toward the inflation target. The conditional inflation forecast is the natural intermediate target during inflation targeting. The optimal way of reacting to shocks is hence to check how they affect the inflation forecast and then take the appropriate action.
JEL classification : E 42; E 52; E 58     

Professional forecasts of interest rates and exchange rates: Evidence from the Wall Street Journal’s panel of economists

We analyze economists’ forecasts of interest rates and exchange rates from the Wall Street Journal. We find that a majority of economists produced unbiased forecasts but that none predicted directions of changes more accurately than chance. Most economists’ forecast accuracy is statistically indistinguishable from a random walk model in forecasting the Treasury bill rate, but many are significantly worse in forecasting the Treasury bond rate and the exchange rate. We also find systematic forecast heterogeneity, support for strategic models predicting the industry employing the economist matters, and evidence that economists deviate less from the consensus as they age.     

Inflation targeting and inflation expectations in Mexico

In this article we analyse inflation expectations in Mexico. After a review of the theoretical and empirical literature, we apply unit root, normality and cointegration tests to the data provided by Banco de México (Banxico) in the Survey on the Expectations of the Private Sector Economics Specialists. Our results reject the null hypothesis of normality for inflation expectations over the period 2004:01–2011:12. The exchange rate has become one of the most relevant variables in the transmission mechanism of monetary policy in a small open economy. In this regard, we show the existence of a long-run relationship between nominal exchange rate and interest rate where inflation expectations matter for long-term dynamics.     

Linear and nonlinear Granger-causality between short-term and long-term interest rates during business cycles

This paper is about the causal relationship between short-term and long-term interest rates in the US and Canada. To that end, we apply a linear Granger causality test introduced by Toda and Yamamoto (1995 Toda, H. Y., and T. Yamamoto. 1995. “Statistical Inference in Vector Autoregressions with Possibly Integrated Processes.” Journal of Econometrics 66 (1–2): 225–250. doi:10.1016/0304-4076(94)01616-8.[Crossref], [Web of Science ®] , [Google Scholar]) and the nonlinear Granger causality test of Diks and Panchenko (2006 Diks, C., and V. Panchenko. 2006. “A New Statistic and Practical Guidelines for Nonparametric Granger Causality Testing.” Journal of Economic Dynamics and Control 30 (9–10): 1647–1669. doi:10.1016/j.jedc.2005.08.008.[Crossref], [Web of Science ®] , [Google Scholar]). By combining linear causality effects with the nonlinear ones, it is seen that the most common Granger causality direction between short-term and long-term interest rates is a bidirectional one. We also find that nonlinear Granger causality can be found where no linear causality had been uncovered. Moreover, our findings show that during recent business cycles, the federal funds rate (in the US) and the overnight rate (in Canada) still Granger-cause long-term interest rates significantly.     

Inflation targeting and real exchange rates: A bias correction approach

This paper examines whether inflation targeting (IT) influences purchasing power parity (PPP) by a bias correction approach under cross-sectional dependence. The recursive mean adjustment (RMA) method proposed by So and Shin (1999) and Shin and So (2001) is employed to correct a downward bias in half-life estimates of real exchange rates. More importantly, the empirical results show that IT lowers variability of real exchange rates and plays an important role in providing favorable evidence for long-run PPP.     

Inflation,money, interest rate,exchange rate,and casuality: the case of Egypt,Morocco, and Tunisia

This study provides further evidence of the inflationary efects of the rates of growth of money supply, gross domestic product, efective exchange rate, and imported inflation for Egypt, Morocco, and Tunisia using quarterly data from 1964 to 1990. In addition, it examines the Granger causality between inflation and money supply as well as between inflation and the real exchange rate in the countries under consideration. Most of the results are consistent with extant theory and empirical evidence.     

Withholding taxes or information exchange: the taxation of international interest flows

This paper considers withholding taxes and information exchange as alternative means to tax international interest income. For each regime, we consider the maximum level of taxation of foreign-source income that can be sustained as the equilibrium of a repeated game. The best regime is the one that brings the level of taxation in the repeated game closest to the cooperative level of interest taxation. Sustainable levels of taxation in either regime depend on the importance of bank profits and on the marginal cost of public funds, among other things. Simulations with the model illustrate the choice between withholding taxes and information exchange. An explicit possibility is the emergence of a mixed regime, with one country imposing a withholding tax and the other country providing information. The basic model is extended to allow for size differences between the two countries and to incorporate a third, outside country.     

人民币汇率弹性的增大对利率稳定性的影响

汇率改革前后,汇率与利率之间的动态关系发生了系统性的改变。在均值意义上讲,人民币汇率弹性的增大降低了利率波动的幅度,利率对汇率的反馈机制有了一定的加强。实证检验证明,汇率改革后人民币汇率弹性的增大能稳定利率波动的假设只在长期内存在,而短期内人民币弹性的增大实际上加剧了利率的波动。