Estimating an equilibrium exchange rate for the dollar and other key currencies

In this paper, we adapt the concept of fundamental equilibrium exchange rates ‘FEER’ in a complete model approach. We use it to determine the likely paths of the Dollar and other key currencies. The FEER is the (real) exchange rate that is consistent with internal balance and sustainable external balances. Here we examine the composition of a Dollar adjustment and hence the extent to which a FEER (for the US) depends on factors or rigidities elsewhere in the world, as well as at home. We find, the US still needs to accept an adjustment in her real exchange rate if the increase in her foreign liabilities is to come to an end. However, counterpart adjustments also have to be made in Canada, Mexico, and some Asian economies if this policy is to be successful. We also show that productivity growth differentials may act as a substitute for depreciation, and this provides an explanation for the failure of the dollar to depreciate in the 1990s.     

Excess comovements between the euro/US dollar and pound sterling/US dollar exchange rates

ABSTRACT

The aim of this article is to discuss excess comovements of the euro/US dollar and pound sterling/US dollar exchange rates, i.e. we look for comovements of exchange rates which are stronger than implied by the fundamentals. The results of the empirical analysis provide evidence that excess comovements exist for the two exchange rates. A long-run analysis of correlations can verify that a link exists between the correlation dynamics of exchange rates, relative inflation rates, long-term interest rates, economic sentiments and money supply. We find that common movements of money supply, prices and economic sentiments each play a major role in comovements of the exchange rates. From the investigation of the two exchange rates, we conclude that macroeconomic fundamentals can account for the comovement but that common non-fundamental factors also have major significance for the exchange rates.     

Testing exchange rate efficiency: the case of euro–dollar

This paper tests the semi‐strong efficiency of the euro–dollar currency market by introducing a simple heuristic test, based on the ‘general‐to‐specific’ methodology and meant to include as two specific sub‐cases the ‘efficient market hypothesis’ (EMH) in the currency market as well as alternative theories implying a time dependent process of propagation of information. According to the results of our nested test, the ‘efficient market hypothesis’ in the euro–dollar currency market is rejected.     

Interaction between oil and US dollar exchange rate: nonlinear causality,time-varying influence and structural breaks in volatility

This article examines the nonlinear Granger causality and time-varying influence between crude oil prices and the US dollar (USD) exchange rate using the Hiemstra and Jones (HP) test, the Diks and Panchenko (DP) test and the time-varying parameter structural vector autoregression model. By applying the iterated cumulative sums of squares (ICSS) algorithm and the DCC-GARCH model, the effects of structural breaks in volatility of the two markets are also investigated. The empirical analysis indicates that, first, crude oil prices are the nonlinear Granger-cause of the USD exchange rate, but not vice versa. Second, the USD exchange rate exerts a stronger and more stable negative influence on crude oil prices in the short term, and the influence gradually weakens after 2012. Finally, ignoring structural breaks can increase the negative volatility correlation between the oil and USD exchange rate markets, which is particularly remarkable during the financial crisis.     

Spatial panel data analysis with feasible GLS techniques: An application to the Chinese real exchange rate

Recent panel data approaches stress the importance of the location interdependence. Little has been done in the Balassa-Samuelson literature accounting for spatial dependence in the panel data context that allows for spatial autocorrelation. By utilising the recently developed Kapoor et al. (2007) spatial panel feasible GLS methods, we find that the Balassa-Samuelson effect in the Chinese economy during 1985 until 2000 generally does not appear to hold. However, the black market exchange rate tends to be more compatible with the theory.     

The Canadian border and the US dollar: The impact of exchange rate changes on US retailers

This paper provides a micro‐level investigation into the impact of changes in the US–Canada nominal exchange rate on retailers in US regions lying close to the US–Canada border. Using a large data set on product‐level retail prices and sales in the United States over a nine year period, we explore the links between changes in exchange rates, cross‐border travel and the price and quantity responses of US retailers. This allows us to assess the importance of geography and distance in affecting the pass‐through of exchange rate changes into prices and quantities at the level of the consumer. We develop a two‐stage theoretical model of cross‐border travel and industry equilibrium for retail sales at the border. Our empirical results accord well with the implications of the model.     

Managing real exchange rate for economic growth: Empirical evidences from developing countries

Abstract

This article analyses macroeconomic policies capable of influencing the long-run real exchange rate (RER). In this vein, it identifies economic policy tools that can devalue RER, covering a theoretical issue neglected by the economic literature, which argues that competitive exchange rate enhances growth. After discussing the “Trilemma,” we identify those variables that could affect RER without constraining monetary policy or exchange rate regime choice. In what follows, we model the probability of achieving an undervalued (small or large) RER for a sample of 14 developing countries from 1980 to 2010 (30?years) by applying econometric techniques for discrete choice and censored data. Afterwards, we compare the results for Latin American nations with Asian ones. They suggest that competitive exchange rate requires different approaches depending on the region. Moreover, Latin American countries need to take on additional policies so that interventions in the foreign exchange market become effective.     

The impact of exchange rate volatility on commodity trade between the US and Thailand

The impact of exchange rate volatility on trade flows continues to occupy the international finance literature. More recent studies have deviated from the traditional approach of using aggregate trade flows and have employed trade data at commodity level. This study investigates the impact of exchange rate uncertainty on the trade flows of 118 US exporting industries to Thailand and 41 US importing industries from Thailand. We find that exchange rate uncertainty has short-run effects on the trade flows of most industries. In the long-run, the main determinants of the trade flows are the level of economic activity in both countries.     

Impact of exchange rate volatility on commodity trade between US and Hong Kong

The impact of exchange rate uncertainty on trade flows is still the center of attention in international economics. A few studies that have looked at this effect in Hong Kong have used either aggregate data between Hong Kong and the rest of the world or between Hong Kong and several of her major trading partners. They have been unable to locate any significant effect. Suspecting that existing studies could suffer from aggregation bias, we concentrate on the trade between Hong Kong and the US and disaggregate their trade flows further by commodity. Out of 140 Hong Kong importing industries and 104 exporting industries considered, we find short-run effects in the majority of the industries. The short-run effects translated into the long run in 81 of Hong Kong import industries and 51 of her export industries, a finding that contradicts previous research.     

On the predictive power of monetary exchange rate model: the case of the Malaysian ringgit/US dollar rate

Despite anecdotal and survey evidence suggesting the presence of discrimination against customers in stores, restaurants and other small-transaction consumer markets, few studies exist that identify or quantify the nature of any unequal treatment. We provide evidence from a field study of wait times in Boston-area coffee shops that suggests that female customers wait an average of 20 seconds longer for their orders than do male customers even when controlling for gender differences in orders. We find that this differential in wait times is inverse to the proportion of employees who are female and directly related to how busy the coffee shop is at the time of the order. This supports the conclusion that the observed differential is driven at least in part by employee animus and/or statistical discrimination rather than unobserved heterogeneity in the purchasing behaviour of female customers.     

On the predictability of daytime and night-time yen/dollar exchange rates

This article first shows that the yen/dollar rate tended to appreciate in Japan daytime but to depreciate in Japan night-time in the 2000s. The result is very paradoxical because the asymmetry implies that the intra-daily yen/dollar rate had predictable stochastic trends in the 2000s. The article then investigates whether lagged dependent variables and various external shocks were responsible to the asymmetric feature. We find that once we control the effects of lagged dependent variables and external shocks, the daytime yen/dollar rate tended to appreciate when it had appreciated on the day before, while the night-time yen/dollar rate tended to depreciate when it had depreciated on the day before.     

Capital-enhanced equilibrium exchange rate: evidence from India

This article examines the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach using quarterly data ranging from 1993Q1 to 2016Q2. Using unit root break test and structural break cointegration technique, our overall results indicated that the CHEER is invalidated once a structural break is accounted for in the cointegration relationship. The rejection of the validity could be attributed to the asymmetry in the capital flows and exchange rates being not fully flexible.     

克鲁格曼汇率目标区理论评述

布雷顿森林体系瓦解之后，世界进入了以浮动汇率为主的混合体制时期，但浮动汇率制也带来诸多问题，经济学家和政府官员开始寻求更为合理的汇率制度。汇率目标区正是这种寻求的结果之一。本文采取一种综述的形式，对汇率目标区理论，主要是对克鲁格曼的汇率目标区模型进行了介绍。     

Productivity,real exchange rate,and aggregate demand: An empirical exercise applied to Brazil from 1960 to 2011

This research analyzes, from a post Kaleckian perspective, the interactions among the aggregate demand, the real exchange rate, productivity, and real wages in the Brazilian economy from 1960 to 2011. It adopts the longstanding perspective that demand is the driver of capital accumulation and economic growth. The research comprises the following steps: (a) a critical assessment of the growth regime literature, with a particular emphasis on issues related to productivity and the real exchange rate; (b) understanding the relationship between the real exchange rate and the productivity and growth regimes; (c) proposing a theoretical model that relates the real exchange rate, productivity, and the growth regime; and (d) an empirical test of the interaction between the real exchange rate, productivity, and the growth regime. Theoretically the study develops a model showing the interactions between the aggregate demand, the real exchange rate, productivity, and real wages. Furthermore, this research attempts to address the lack of theoretical and empirical studies about the relationship between the aggregate demand, the real exchange rate, productivity and real wages.     

Oil dependency and exchange rate regimes in Arab oil economies: time to rethink the paradigm

This study examines implications of the current exchange rate regimes on the macroeconomic and growth performance of five Arab oil-producing countries: Saudi Arabia, the UAE, Sudan, Algeria and Yemen. The study evaluates alternative exchange rate regime policy options towards exploring an optimal exit strategy to ensure successful transition to more sustainable exchange rate regime, especially in the fixed regime economies of Saudi Arabia and the UAE. This study proposes the adoption of a transparent broad basket, band and crawl (BBC) regime by the Arab oil economies in order to provide a better alternative to the existing fixed pegs or dirty floats. However, it is imperative to note that, the timing of the exit from the current regime and the extent of institutional development and market sophistications are very critical to successful transition to more sustainable regime that would provide a larger scope for counter-cyclical policies and diversification in these economies.     

The effects of exchange rate volatility on exports: evidence from Armenia

The article examines how the volatility of exchange rate affected Armenia’s export to its main trading partner, Russia, in the period from January 2007 to February 2016. Along with real foreign income and competitiveness, the exchange rate volatility is considered as a determinant of real export. The estimation results indicate that the exchange rate volatility has negative significant effects on real export both in the long run and in the short run.     

Median-unbiased estimation of structural change models: an application to real exchange rate persistence

Measuring deviations from purchasing power parity has been the subject of extensive investigation. The most common practice in empirical research for measuring real exchange rate persistence is to estimate univariate autoregressive (AR) time series models and calculate the half-life, defined as the number of periods for a unit shock to a time series to decay by 50%. In the presence of structural change, there are two potential biases in the parameter estimates of AR models: (1) a downward small sample median-bias and (2) an upward bias, which occurs when structural change is present and ignored. We conduct a variety of Monte Carlo simulations and demonstrate that the existence of structural change causes a substantial increase in the small sample bias documented in Andrews (1993). We then propose an extension of median-unbiased estimation, which explicitly accounts for structural change, and apply these methods to estimate half-lives of several long-horizon real exchange rates analysed by Lothian and Taylor (1996) and Taylor (2002). The upward bias from neglecting structural change dominates the downward median-bias for these real exchange rates. When structural change is present and accounted for, the median-unbiased half-lives towards a changing mean decrease and the confidence intervals tighten.     

Monetary policy synchronization in the ASEAN-5 region: an exchange rate perspective

In light of the long-standing vision of economic and monetary integration in the ASEAN (Association of Southeast Asian Nations) region and the importance of coordinating monetary policies to achieve it, the objective of this article is to assess the monetary policy synchronization among the founding members of the ASEAN, that is, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Due to the importance of exchange rate movements to monetary policies, we approach this issue from a currency exchange rate perspective. Specifically, multivariate trend–cycle decomposition is employed to investigate common trends and common cycles among the exchange rates of these countries during the period 1976–2012. Our analysis reveals that the real exchange rates of Malaysia, the Philippines, Singapore and Thailand share common cycles in the short term and have common trends in the long term, but the Indonesian currency does not share these relationships. Thus, our results augur well for the synchronization of monetary policies among Malaysia, the Philippines, Singapore and Thailand. In contrast, the relatively turbulent dynamics of the Indonesian rupiah evident in frequent bouts of stark depreciation separated by periods of steady depreciation over the past three decades raise questions regarding the readiness of Indonesia for participating in a monetary alliance with the ASEAN-4 nations.     

An investigation of the effects of exchange rate volatility on exports in East Asia

This study investigates the effects of the exchange rate volatility on the export flows of Indonesia, Malaysia, Republic of Korea, Singapore, Thailand, and the Philippines during 1974–2011. Towards this goal a trade weighted real effective (rather than the bilateral) exchange rate and three different measures of volatility, i.e. obtained from an ARCH model, a GARCH model and a moving-average standard deviation measure are used in this study. Specifically, the export flows between six Asian countries and the rest of the world are investigated rather than focusing on trade with only one country. Our findings reveal that the exchange rate volatility has a significant impact on export flows in the short run as well as in the long run for all the countries in the sample. The impact in the long run is predominantly negative with the exception of Singapore, but in the short run the impact varies across countries. Moreover, our results are robust to the alternative measures of volatility used and most of the findings in the long run and short run are also robust to the crisis period.