Devaluation, Fiscal Deficits, and the Real Exchange Rate

This article examines the use of fiscal policies to sustainthe effects of a nominal devaluation on the real exchange rate.It is shown that the magnitude of the change in the real exchangerate depends not only on the size of the devaluation and thedegree of fiscal adjustment but also on the means by which thefiscal deficit is reduced. The change in the nominal exchangerate necessary to maintain the depreciation of the real exchangerate will depend on whether the fiscal deficit is eliminatedby increasing taxes or by reducing government expenditures ontraded and nontraded goods. The required depreciation of thedomestic currency will be larger if the fiscal deficit is reducedby increasing taxes than it will be if the deficit is cut bylowering government expenditures. Further, the depreciationwould be smaller if the cuts in expenditure fell on traded ratherthan nontraded goods. This result implies that the authoritiesmust ensure consistency between exchange rate action and policiesto reduce fiscal imbalances in order to achieve a desired levelof the real exchange rate necessary to attain balance of paymentsequilibrium.     

The Composition of Government Spending and the Real Exchange Rate

We show that the composition of government spending influences the long-run behavior of the real exchange rate. We develop a two-sector small open-economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.     

Stocks,flows, and some exchange rate dynamics for the currency substitution model

The paper argues that the treatment of stocks and flows in portfolio balance models of exchange rate determination is inadequate, and that this hampers the analysis of exchange rate dynamics. A proposed resolution is reworked into the currency substitution model. In addition to providing explicit solutions for the spot rate of exchange depreciation under different expectational hypotheses, an attempt is made to clarify the dynamic properties of the model. Inter alia, it is shown how exchange rate overshooting is possible without having to assume market frictions; how a deteriorating current account deficit can coexist with an appreciating exchange rate; and, more generally, how portfolio induced jumps in the exchange rate are linked to balance of payments flow influences on the evolution of the exchange rate.     

汇改、人民币国际化与汇率定价权 —基于双边随机前沿模型的实证研究

本文通过构建人民币外汇市场中关于人民币汇率定价权力的双边随机前沿模型, 分析了中外定价权差异对于人民币汇率的影响。实证研究表明,中国在人民币外汇市场上较外 部经济体具有更强的定价权力,近期的汇率贬值并非政府操作行为而是市场均衡结果;人民币 国际化和汇率市场化进程可以矫正偏离。本文的政策建议为：（1）继续推进人民币国际化和 汇改市场化进程。（2）进一步提高外部经济体参与人民币外汇市场交易的深度和广度。     

投资者关注会影响个体投资者的汇率预期吗?--基于银行代客结售汇数据的实证分析

为考察个体投资者汇率预期的非理性及形成机制,本文基于外汇市场异质主体理论和行为金融学观点,构建了包含投资者关注的个体投资者汇率预期形成模型,并采用远期和即期银行代客结汇售汇比作为个体投资者汇率预期的替代指标,进行了实证分析。结果表明,远期结售比受到前一期汇率变动和境内外利差的影响,而即期结售比受前一期汇率变动影响。进一步引入投资者关注,采用MS-FTP和MS-TVTP模型的实证研究表明,投资者关注对远期和即期结售比的影响是时变的。在人民币贬值阶段,投资者关注对结售比存在显著的负向冲击,会导致更大的结售汇逆差;而在人民币升值阶段,投资者关注对结售比则无显著影响。本文的结论表明,个体投资者汇率预期具有显著的非理性特征,符合动量原则和套息规则,同时还受到投资者关注的影响。央行在人民币处于持续贬值区间时,应通过汇率沟通作用于投资者关注,稳定汇率预期。     

The relationship between investment and large exchange rate depreciations in dollarized economies

We use a simple financial friction in an economy with high degree of liability dollarization - and currency mismatch - to show that the negative balance-sheet effect of an exchange rate depreciation may be observable only if the magnitude of the depreciation is large enough. This result justifies the difficulty to find strong empirical evidence for balance-sheet effects and suggests the convenience of including a “large depreciation” term in empirical analyses. We review some of the related empirical literature and provide some new evidence of this large depreciation effect.     

Economic news,exchange rates and interest rates

The paper examines the post-October 1979 response of exchange rates and interest rates to the new information contained in the first announcement of fifteen US macroeconomic series. Markets respond primarily to monetary news, but also to news about the trade deficit, domestic inflation, and variables that reflect the state of the business cycle. For all fifteen macroeconomic variables, an increase (decrease) in interest rates is accompanied by an appreciation (depreciation) of the dollar, which is consistent with models that stress price rigidity and absence of purchasing power parity.     

Twin deficits and the sustainability of public debt and exchange rate policies in Lebanon

This paper examines empirically using time series econometric models the sustainability of public debt and exchange rate policies, as well as, the relationship between current account and budget deficits in the emerging small open economy of Lebanon. The empirical results point to unsustainable debt and exchange rate policies. Other empirical results support the existence of a uni-directional causal relationship, in the short run, between the budget and current account deficits, indicating that rising fiscal deficits have started to put even more strain on the current account deficits and on the national public debt. To avoid a future depreciation of the exchange rate and perhaps a fiscal and currency crises, the government will have to timely introduce austerity measures to curb the negative implications of its rising budget and current account deficits and debt on Lebanon's economy.     

Exchange Rate Fluctuations and Output in Oil-Producing Countries: The Case of Iran

Conventional wisdom states that currency depreciation in oil-producing countries is contractionary because demand effects, limited by the prevalence of oil exports priced in dollars, are more than offset by adverse supply effects. Iran, however, has experienced a rapid increase in nonoil exports in the past decade. Against this background, the paper tests whether the conventional wisdom still applies to Iran and concludes that the emergence of the nonoil export sector has made currency depreciation expansionary. The expansionary effect is particularly evident regarding anticipated persistent depreciation in the long run. Notwithstanding the varying effects of exchange rate fluctuations on the demand and supply sides of the economy, managing a flexible exchange rate gradually over time toward achieving stability in the real effective exchange rate may strike the necessary balance.     

The euro–dollar exchange rate and equity flows

I examine equity flows between the US and the euro area and their impact on the euro–dollar exchange rate. I explain equity flows by examining the behavior of an international investor who maintains a minimum variance portfolio. An excess of euro area equity returns over US equity returns generates a flow of equity from the euro area to the US. The equity flow, the purchase of US equities by the euro-area residents, causes appreciation (depreciation) of the dollar (euro), while the purchase of euro area equities by US residents causes appreciation (depreciation) of the euro (dollar).     

Capital controls,competitive depreciation,and the technological frontier

This paper considers the internal and external welfare effects of international capital controls and real exchange rate undervaluation in a multi-country setting. I present a dynamic open-economy macro model with an endogenously determined rate of interest on internationally traded assets. All countries produce tradable and nontradable goods using technology that converges over time to a global frontier. The model quantifies the welfare effects of the unilateral implementation of capital controls that depreciate the real exchange rate in economies both already at and converging to the technological frontier. For developing economies, I demonstrate that such government interventions may constitute “beggar-thy-neighbor” policies.     

Order flow information and spot rate dynamics

This paper examines why order flows are empirically important drivers of spot exchange rate dynamics. We consider a decomposition for the depreciation rate that must hold in any model and show that order flows will appear as important proximate drivers when they convey significant incremental information about future interest rate differentials, risk premiums and/or long-run exchange rate levels (i.e., information that cannot be inferred from publicly observed variables). We estimate the importance of these incremental information flows for the EURNOK spot exchange rate using eight years of high-quality, disaggregated, end-user order flow data collected by the Norges Bank.     

Real exchange rates in small open OECD and transition economies: Comparing apples with oranges?

We find that productivity gains in tradables cause an appreciation of the real exchange rate via both tradable and nontradable prices in the CEE-5 and have no affect in the Baltic countries, while they lead to a depreciation of the real exchange rate of tradables in OECD economies that overcompensates the appreciation due to nontradable prices. Rising net foreign liabilities lead to a real appreciation in the Baltic countries instead of the expected depreciation found in OECD and CEE-5 countries. These differences are due to the different impact of the fundamentals on the real exchange rate depending on the time horizon studied.     

Identifying the effects of an exchange rate depreciation on country risk: Evidence from a natural experiment

A natural experiment is used to study exchange rate depreciation and perceived sovereign risk. France suspended coinage of silver in 1876 provoking a significant exogenous depreciation of all silver standard countries versus gold standard currencies like the British pound – the currency in which their debt was payable. The evidence suggests an exchange rate depreciation can significantly increase sovereign risk if a country is exposed to foreign currency debt. We implement a difference-in-differences estimator and find that the average silver country's spread on hard currency debt increased over ten percent relative to non-silver countries.     

人民币汇率的中长期走势

近期人民币汇率贬值幅度较大,引起市场广泛关注。作为基本的宏观价格变量,汇率牵一发而动全身,不仅影响宏观经济走势,还通过国内外商品比价的变化影响经济结构。本文分析了人民币汇率变动原因及人民币贬值对经济的影响,估计了汇率的中长期走势。     

Optimal capital controls and real exchange rate policies: A pecuniary externality perspective

A new literature studies the use of capital controls to prevent financial crises. Within this new framework, we show that when exchange rate policy is costless, there is no need for capital controls. However, if exchange rate policy entails efficiency costs, capital controls become part of the optimal policy mix. When exchange rate policy is costly, the optimal mix combines prudential capital controls in tranquil times with policies that limit exchange rate depreciation in crisis times. The optimal mix yields more borrowing, fewer and less severe financial crises, and much higher welfare than with capital controls alone.     

人民币汇率预期对经常项下跨境资金流动的影响

本文利用2006-2012年月度时间序列数据．对人民币汇率预期与经常项下跨境资金流动的关系进行了实证研究。结果表明,山东省经常项下跨境资金流动与人民币汇率预期之间存在着协整关系,人民币升值（贬值）预期能够导致跨境资金的大幅流人（流出）。通过对样本企业调查发现．汇率预期在微观角度上影响着跨境资金流动机制的形成。最后,本文对完善人民币汇率预期管理提出了政策建议。     

Current account adjustment in industrial countries

This paper examines the dynamics of current account adjustment among industrial countries. The purpose is to evaluate whether there is a threshold level of a current account deficit at which it becomes unsustainable and whether it is possible to characterize episodes of adjustment. We identify 25 episodes in which there was a sustained improvement in the current account following a large deficit between 1980 and 1997. We find that a typical current account reversal begins when the current account deficit is about 5% of GDP. However, we also find considerable cross-country variation in the reversal threshold, consistent with a stock-adjustment model of current account sustainability. Reversals are associated with slowing income growth and a 10–20% real exchange rate depreciation. Real export growth, declining investment, and an eventual leveling off in the budget deficit–GDP ratio are also likely to be part of the adjustment. These results imply that current account reversals in industrialized countries are related to the business cycle.     

Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?

In emerging markets, external debt is denominated almost entirely in large, developed country currencies such as the U.S. dollar. This liability dollarization offers a channel through which exchange rate variation can lead to business cycle instability. When firms' assets are denominated in domestic currency and liabilities are denominated in foreign currency, an exchange rate depreciation worsens firms' balance sheets, which leads to higher capital costs and contractions in capital spending. To illustrate this, I construct a quantitative, sticky price, small open economy model in which a monetary policy induced devaluation leads to a persistent contraction in output. In this model, fixed exchange rates offer greater stability than an interest rule that targets inflation.     

Financial instability in Latin America

In this paper I deal with a number of issues related to financial instability in Latin America. I first discuss, from a macroeconomic research perspective, what I believe are some of the most important policy issues faced by the Latin American nations. These include the effectiveness of controls on capital inflows, the effect of exchange rate depreciation on output, and the international transmission of the business cycle. Second, I argue that the economic research agenda on Latin America should not ignore history. In Latin America, more so than in any other region in the world, there has been a self-destructing tendency for repeating history.