A MODEL OF INFLATION TRANSMISSION IN AN EXCHANGE RATE TARGET ZONE

I incorporate an exchange rate target zone with intramarginal interventions in a small open economy model. Using the method of undetermined coefficients, I solve for the price level and the nominal exchange rate to determine how price shocks from the large economy affect the small open economy. The results show that the behaviour of inflation transmission within the band differs from the behavior of inflation transmission at the edge of the band of the target zone. Foreign shocks can affect local prices in both cases but the central bank can respond through market interventions within the band while it cannot do so at the edge. Near the edge of the band, a central bank has to intervene to stop the exchange rate from breaching the band. My model predicts that if the interventions are robust, then the exchange rate is mean reverting and an exchange rate target zone can insulate an economy from foreign price shocks. Based on the model, central bank interventions contribute to long‐run price stability in a target zone regime. Finally, I empirically test the model using unit root and cointegration tests, and present some policy implications.     

Testing the bounds: Empirical behavior of target zone fundamentals

Standard target zone exchange rate models are based on nonlinear functions of unobserved economic fundamentals, which are assumed to be bounded, similarly to the target zone exchange rates themselves. Using a novel estimation and testing strategy, I show how this key but often overlooked assumption may be tested. Empirical results cast doubt on its validity in practice, providing a reason for well-documented empirical difficulties of these models in the literature.     

Mean reversion in target zones: a re-examination of some ERM exchange rates

The theoretical literature on exchange rate behaviour in target zones predicts that the exchange rate would be mean reverting. This article empirically investigates this theoretical prediction in the case of the German mark bilateral exchange rates. Using a recently developed unit root test, this article provides evidence that is generally negative to the idea of mean reversion. It shows that all bilateral exchange rates under investigation appear to be unit root processes with the exception of the Dutch guilder/German mark rate.     

On the cross-sectional relation between exchange rates and future fundamentals

Using a cross-sectional perspective, we investigate the implications of the present-value model of exchange rates for a sample of 64 countries during 1971–2015, excluding periods of pegged exchange rates. Our paper uses all bilateral exchange rate pairs instead of choosing a reference currency and extends the list of fundamentals that have been examined in the previous literature by using the variables present in the behavioral equilibrium exchange rate (BEER) model. We document that exchange rates are strongly connected to future fundamentals using forecast horizons from one month to 10 years. Our findings highlight that unlike for time-series and panel data, the evidence against the “exchange rate disconnect puzzle” is more robust using a cross-sectional perspective. Given the relevance of fundamental factors in determining exchange rates dynamics we examine whether they are useful in constructing profitable investment strategies. Except for inflation, we find that a significant relation between exchange rates and a fundamental does not lead necessarily to a profitable investment strategy. Finally, we document that using the cross-rates of exchange rates leads to a significant improvement in the profitability of the carry trade strategy.     

Soft versus hard targets for exchange rate intervention

Exchange rate intervention by monetary authorities should defend a band not for the spot exchange rate, but for a moving average of its recent values. This target zone is soft, in that it allows greater short-run flexibility, but also rigorous: it still precludes any sustained easing of monetary policy. In comparison with conventional hard target zones for the spot exchange rate, we find considerable advantages for the rule we propose. In particular, without compromising long-run discipline, it increases resilience against speculative attacks, especially when shocks to exchange rate fundamentals are transitory.     

The Target Zone Model, Non-Linearity and Mean Reversion: is the Honeymoon Really Over?

We estimate a target zone model for three ERM exchange rates for 1983–6 and 1987–91 by the method of simulated moments, taking account of the continuous time specification by using daily data with the interruptions of holidays and weekends. Specification tests are unable to reject the model. The estimates imply, however, an essentially linear relationship between the exchange rate and the fundamentals, with a very limited 'honeymoon effect'. Using Monte Carlo simulations, calibrated on the estimates, we find that standard tests for mean reversion of the exchange rate would largely reject the target zone model when, in fact, it held.     

Nonfundamental FX trading and excess volatility in credible target zones Theory and empirical evidence

This paper presents a target zone model with imperfect asset substitutability in which exchange rates are driven both by expectations regarding the credible defense of the currency band and foreign exchange traders' stop-loss trading strategies. The model generates excess volatility and nonuniqueness in the density function of the exchange rate. These results obtain independently of whether the stop-loss strategies are known to the market. In an empirical section, the authors find support for the existence of excess volatility for selected countries of the European monetary system (EMS) during the stable EMS period.     

FEER for the CFA franc

We investigate the behaviour of the real effective exchange rates (REER) of the two CFA franc zone monetary unions?–?CEMAC and WAEMU?–?vis-à-vis their long-run equilibrium paths. A reduced form of the Edwards’ (1989) fundamentals equilibrium exchange rate (FEER) model is estimated using the Johansen's (1995) cointegration methodology, and equilibrium paths and associated misalignments are derived for the period 1970 to 2005. Our results suggest that, for both CEMAC and WAEMU, the fundamentals account for most of the exchange rates’ fluctuation: increases in the terms-of-trade, government consumption and productivity tend to appreciate the exchange rate, while increases in investment and openness tend to depreciate it. At end of 2005, we find no evidence that either the CEMAC or WAEMU REERs were significantly over-valued, which suggests that no exchange rate action is currently needed. Our analysis also reveals significant differences in the fundamentals’ marginal impact, and speed of reversion to equilibrium following a shock, which may raise questions about the desirability of maintaining the same parity for both monetary unions.     

通货膨胀目标制度在我国实施的可行性分析

20世纪90年代以来,由于通货膨胀目标制(Inflation Targeting,以下又简称通胀目标制)被越来越多的国家采用,使得通胀目标制成为近年西方货币经济学领域最热门的研究课题之一。从传统的以控制货币供应量为主的货币目标法(Monetary'Targeting)和以稳定汇率为主的汇率目标法(Exchange rate Targeting)到明确公布通货膨胀目标的通胀目标制是一个货币政策方面的重大转变。本文主要分析了我国实施通胀目标制的可行性,并提供相关的政策建议。     

Trade balance dynamics and exchange rates: In search of the J‐curve using a structural gravity approach

This paper uses a structural gravity approach, specifying currency movements as trade cost component to derive an empirical trade balance model, which incorporates multilateral resistance terms and accounts for the cross‐country variation in the exchange rate pass‐through into import and export prices. The model is estimated using quarterly bilateral trade flows between 47 countries over the period 2010Q1 to 2017Q2, disaggregated into 97 commodity groups. Our results support the existence of an “aggregate” J‐curve, pooled over commodity groups; at the same time they point to considerable heterogeneity in the trade balance dynamics across industries below the surface of aggregate data.     

Exchange rate volatility and exports from East Asian countries to Japan and the USA

The purpose of this article is to investigate the impact of exchange rate volatility on exports in four East Asian countries (Hong Kong, South Korea, Singapore, and Thailand). Specifically, this article aims at determining whether the bilateral real exchange rate volatility between an East Asian country and its trading partner negatively affects the exports of the East Asian country. Considering the dominant roles of the USA and Japan as trading partners of those East Asian countries, this article focuses on the quarterly export volumes of East Asian countries to the US and Japan for the period from 1981 to 2004. Except for the case of Hong Kong's exports to Japan, cointegration tests and estimations of error correction models indicate exchange rate volatility has negative impacts on exports either in the short-run or in the long-run, or both. On the other hand, the real GDP of importing countries and depreciation of real bilateral exchange rates turn out, in general, to have positive effects. Of special interest is the finding that the impact of the exchange rate volatility does not show any stylized differences depending on whether the importing country is Japan or the USA, even though dollar invoicing dominates in East Asia.     

Bilateral real exchange rates and migration

Migrants who move across borders are, to a large extent, motivated by the prospect of earning higher incomes at destination, which can be partly transferred back to their countries of origin via remittances. This suggests that the real exchange rate can influence the incentives to migrate, as it determines the purchasing power of expected income in terms of the currency of the origin country. This article investigates empirically how bilateral real exchange rate fluctuations influence international migration flows. To do so, we build a dataset of 30 OECD destination countries and 165 origin countries over the period 1980–2011 and estimate an equation derived from a micro-founded random utility maximization model that allows for unobserved heterogeneity between migrants and non-migrants. Our results show that migration flows are highly responsive to bilateral real exchange rates: A 10% real appreciation of the currency of the destination country is associated with an 18.2–19.4% increase in migration flows.     

Revisiting the exchange rate disconnect puzzle

One of the major anomalies in International Macroeconomics is the persistent finding that the exchange rate has no empirical relationship with a variety of macroeconomic fundamentals. Dubbed the ‘exchange rate disconnect puzzle’, this article examines this issue for five Australian dollar bilateral exchange rates, using quarterly data for the period 1984:1–2015:4. A novel feature of this article is that it departs from the extant literature by using a different approach to testing for cointegration. The results show that the exchange rates and fundamentals move together in the long run. Furthermore, the results show that fundamentals Granger cause exchange rates, both in the short run and the long run.     

Bilateral and Third‐Country Exchange Rate Effects on Multinational Activity

In an earlier paper, we showed that bilateral exchange rates are important determinants of multinational activity of both the US and Japan and that increases in the bilateral and third‐country exchange rates exert opposing effects on bilateral multinational activity. Furthermore, the signs of the exchange rate coefficients differ between Japan and the US. In this paper, we formulate a three‐country model with coexisting exporters and multinational firms that engage in Cournot competition to rationalize these effects. In this model, we identify two counteracting effects which govern the bilateral and third‐country effects of an exchange rate increase on bilateral multinational activity. Our theoretical framework is flexible enough to explain the Japanese as well as the US patterns of exchange rate effects and it allows us to identify those factors that are responsible for the respective differences.     

Competing specifications of the gravity equation: a three-way model,bilateral interaction effects,or a dynamic gravity model with time-varying country effects?

We investigate bilateral trade flows across the EU-15 countries from 1962 to 2003 by different specifications of the gravity model. We augment the basic gravity model with population and exchange rate variables, and then include time-varying country fixed effects, to account for Anderson and van Wincoop (Am Econ Rev 93(1):170–192, 2003) multilateral resistance terms. Then, following the previous theoretical derivations of the gravity model in the presence of panel data in a dynamic setting we change the specification of our gravity model. We compare the results of different specifications showing the improvement in each case. We claim the comparative superiority of the dynamic gravity model with time-varying exporter and importer fixed effects due to its higher explanatory power. Finally, we compare out-of-sample forecasting performance of different specifications of the gravity model.     

Modelling the FF/MM rate by threshold cointegration analysis

This paper investigates a sticky-price model of exchange rate determination: extension of Krugman's target zone model with price inertia applied to the French Franc. A novel theoretical argument is considered, Threshold Cointegration, such that the long-run relationship between the parity and its fundamentals is dormant within a certain range of disequilibria but is restored when the system crosses the boundaries. Over the period 1987–1993, nonlinearities in the FF/DM rate, consistent with the credibility of this target zone, were detected by pointing out a band-reversion mechanism. A shock persistence analysis which highlights a nonlinear reversion of the exchange-rate deviation is also implemented.     

Does it Matter Who You Sign With? Comparing the Impacts of North–South and South–South Trade Agreements on Bilateral Trade

Free trade agreements (FTAs) lead to a rise in bilateral trade regardless of whether the signatories are developed or developing countries. Furthermore, the percentage increase in bilateral trade is higher for South–South agreements than for North–South agreements. The results are robust across a number of gravity model specifications in which we control for the endogeneity of FTAs (with bilateral fixed effects) and also take account of multilateral resistance in both estimation (with country‐time fixed effects) and comparative statics (analytically). Our analytical model shows that multilateral resistance dampens the impact of FTAs on trade by less in South–South agreements than in North–South agreements, which accentuates the difference implied by our gravity model coefficients, and that this difference becomes larger as the number of signatories rises. For example, allowing for lags and multilateral resistance, a four‐country North–South agreement raises bilateral trade by 53% while the analogous South–South impact is 107%.     

Causal relations between nominal exchange rates and monetary fundamentals in Central and Eastern European countries

The purpose of this paper is to investigate the causal relations between nominal exchange rates and monetary fundamentals. The analysis is conducted using panel quarterly data from the period 2001–12 for Central and Eastern European countries (including Turkey) with relatively flexible exchange rate regimes. The paper reconnects the empirical literature on exchange rates in Central and Eastern European countries with the most recent findings on exchange rate determination in advanced economies. Kóyna's approach, which accounts for linkages between countries, is used in the study. The main findings indicate the existence of causal relations running from both nominal exchange rates to monetary fundamentals and in the opposite direction as well as the existence of a relatively strong link between exchange rates and differentials in the relative price of non‐tradables.     

基于贸易收支数据的美国贸易逆差与美元汇率相互关系研究

通过选择美国与中国、日本、加拿大、英国和欧元区11国等美国主要贸易伙伴的双边贸易数据作为样本,研究美国的双边贸易逆差与美元汇率之间的关系.实证分析表明,美国对主要贸易伙伴国的双边贸易收支与美元汇率没有实质性联系.美国逼迫其它货币升值没有也不能缓解美国的贸易逆差问题,同样,美国逼迫人民币升值也不能缓解美中双边贸易失衡问题.     

Common trends in prices and exchange rates. Tests of long-run purchasing power parity

The empirical validity of long-run purchasing power parity is investigated using multi-variate cointegration techniques. Both bilateral and multilateral PPP is examined. The data set is monthly and covers almost 22 years (January 1970–August 1991) for four countries — Germany, Japan, the U.S., and Great Britain. While three cointegrating relations are detected among the set of nominal exchange rates and domestic price levels (or equivalently, there exists a reduced number of common stochastic trends) none of these satisfy the linear constraints implied by PPP. We conclude that neither bilateral nor multilateral PPP can be supported by the behavior of the data.