International mixed duopoly and strategic commitments

This paper examines an international mixed model in which a social-welfare-maximizing domestic public firm competes against a profit-maximizing foreign private firm. First, the public firm can adopt either a lifetime employment contract or a wage-rise contract as strategic commitments. Second, the foreign private firm decides whether or not to enter the market. Third, if the foreign private firm enters, each firm independently chooses its actual output, while if the foreign private firm does not enter, the public firm acts as a monopolist. The paper shows the equilibrium of the international mixed model.

Foreign Transfers and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy

This paper investigates the role of the real exchange rate in determining the effects of foreign transfers. If capital is perfectly mobile between sectors, a pure transfer has no long-run impact on the real exchange rate. A decline in the traded sector occurs because the transfer, being denominated in traded output, substitutes for exports in financing imports. While a pure transfer causes short-run real exchange appreciation, this response is temporary and negligibly small. Transfers allocated to productivity enhancement do generate permanent real exchange rate adjustments in response to the sectoral reallocation of productive factors. The analysis, which employs extensive numerical simulations, emphasizes the tradeoffs between real exchange adjustments, long-run capital accumulation, and economic welfare, associated with alternative forms of transfers.

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.

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.

Devaluation,Debt, and Default in Emerging Economies

We explore the interactions between exchange rate and fiscal policy, and default on external debt. Exchange rate policy affects the supply of short-term debt facing the government. Under a conventional soft peg, it can be optimal for the government to set the exchange rate at a level in which partial default occurs. In this case multiple equilibria exist, with one featuring high interest rate, overvalued exchange rate, low level of output, and default. Default is also an equilibrium under a hard peg, precisely because devaluation is not an option. Under a hard peg, however, there is a unique equilibrium.

Exchange Rate Risk and Commodity Trade Between the U.S. and India

Floating exchange rates are said to introduce volatility into the foreign exchange market that could deter trade flows. Previous research employed aggregate import and export trade data and provided mixed results. In this paper we disaggregate the trade data between the U.S. and the emerging economy of India and use the bounds testing approach to cointegration and error-correction modeling to show that in 40 industries that trade between the two countries, exchange rate volatility has negative and positive effects in 40% of industries, in the short run. These short-run effects, however, do not last into the long run in many cases.

Exchange Rate Pegs, Fiscal Policy and Credibility

In a fixed exchange rate regime, an exchange rate change can be a swift way to change the real exchange rate in the short run. Fiscal policy also affects relative prices, and fiscal policy response to various types of shocks can therefore be crucial for the credibility of an exchange rate peg. We develop a model within which fiscal policy plays a crucial role for ensuring the viability and thus credibility of an exchange rate peg. We use the insights of this model to take a closer look at Denmark, which has successfully pursued a fixed exchange rate policy since 1982.

Openness and Real Exchange Rate Volatility: In Search of an Explanation

The puzzle that real exchange rates are less volatile in open economies is an important challenge to exchange rate theory. Adjustment of domestic prices to nominal exchange rate movements can account for only a small proportion of this effect. Real and nominal shocks display no obvious correlation with openness. It is shown here that real effective exchange rates are more strongly mean-reverting in more open economies, even after controlling for exchange rate regime effects. This is predicted by the theory of current account sustainability, because of its emphasis on ratios to GDP rather than to trade flows.

Modeling the Impact of Real and Financial Shocks on Mercosur: The Role of the Exchange Rate Regime

This paper studies to what extent the diversity of exchange rate regimes within Mercosur exerts an influence on the feasibility of a monetary union in this area. A semi-structural vector autoregression model is built for each country, including a set of international and domestic variables. Based on impulse response functions and forecast error decomposition, we conclude that differences in exchange rate regimes explain significantly the divergences of economic dynamics triggered by foreign or domestic shocks. Second, we decompose the structural innovations generated by each country model into unobservable common and idiosyncratic components, using a state-space model. This last exercise, intended to assess the degree of policy coordination between the Mercado Común del Sur members, did not disclose any common component for the structural innovations generated by the three national models.

Estimating the Equilibrium Effective Exchange Rate for Potential EMU Members

In this study, we attempt to examine the possibility of emergence of significant fluctuations of the exchange rates in the future for the candidate EMU countries. In doing so, we estimate the equilibrium rate of the nominal effective exchange rate for Poland, Hungary, Slovak Republic and Malta through the BEER and PEER approaches. While the PEER-based estimation implies a large misalignment rate for the Hungarian forint, the BEER-based analysis shows that the present exchange rates of the countries considered do not deviate significantly from their equilibrium rates. As a consequence, based on BEER analysis, we do not expect large fluctuations in the effective exchange rates among the currencies considered. Hence, the relevant effective exchange rates are expected to be relatively stable. As a matter of fact, the entry of those countries into EMU is not expected to weaken the stability of Euro.

Exchange Rate Regime and Demand for Reserves: Evidence from Kenya,Mexico and Philippines

This paper empirically investigates the demand for international reserves (and foreign exchange reserves) during fixed and floating exchange rates periods in three developing countries: Kenya, Mexico and Philippines. Based on theoretical models, three factors are identified as important for the demand of international reserves and foreign reserves: average propensity to import, volume of imports and variability of reserves. The paper employs the cointegration methodology and error correction method to investigate the relationships. Cointegration tests results indicate a reliable long-run stationary relationship between the international reserves (and foreign exchange reserves) and the stated explanatory variables across countries and sub-periods of fixed and clean float. The error correction results indicate causality from the explanatory variables to the reserves during both the short and long run. This is true during both the fixed and the floating periods.

On the Equality of Real Interest Rates Across Borders in Integrated Capital Markets

The purpose in this note is first to review briefly the empirical results on the relationship between real interest rates and real exchange rates; this empirical literature provides little support for the hypothesis of Roll that expected real interest rates are equal in general. Our second aim is to discuss the theoretical conditions that have to be met for his hypothesis to hold.

Running the Numbers on Lotteries and the Poor: An Empirical Analysis of Transfer Payment Distribution and Subsequent Lottery Sales

State lottery revenues are shown to increase during the week transfer payments are distributed. The timing of the increase in lottery purchases suggests a portion of the transfer payments is used to purchase lottery tickets. In addition to providing information on the timing of lottery purchases, this study finds sales of Pick 3 and Pick 4 tickets increase during the period, while sales of Pick 5 and Pick 6 games do not, suggesting a general preference for the relatively higher probability, smaller jackpot games for the group.

Labour Market Adjustments to Exchange Rate Fluctuations: Evidence from Canadian Manufacturing Industries

This paper provides some of the first empirical evidence on labour market adjustments to exchange rate movements in Canadian manufacturing industries. Controlling for endogeneity using generalized method of moments estimation, it is found that during the 1981–1997 period, exchange movements have a substantial impact on labour input and that this impact has grown over time as the manufacturing industries have become more exposed to trade. In contrast, the exchange rate effect on real wages is estimated to be virtually zero for all manufacturing industries.

Fear of Floating and Pegging: A Simultaneous Choice Model of De Jure and De Facto Exchange Rate Regimes in Developing Countries

We present an analysis of the determinants of de jure and de facto exchange rate regimes based on a panel probit model with simultaneous equations. The model is estimated using simulation-based maximum likelihood methods. The empirical results suggest a triangular structure of the model such that the choice of de facto regimes depends on the choice of de jure regimes but not vice versa. This gives rise to a novel interpretation of regime discrepancies.

The Swedish external position and the krona

Introduction  This paper addresses the dynamics of the Swedish external position, with a particular focus on its inter-relation with the external value of the krona. Materials and methods  We argue that financial globalisation means that a broader conceptual framework is required, whereby exchange rate fluctuations operate through the ‘valuation channel’ of external adjustment, in addition to the traditional trade balance channel. In the other direction, we highlight that the projected trend for the trade balance is an important influence on the long-term prospects for the krona. Conclusion  Finally, we seek to assess the future direction for the Swedish net foreign asset position by investigating the likely impact of demographic change and shifts in the Swedish position in the world income distribution.

Beggar thy Neighbor? The Transmission of Fiscal Shocks from the US to Canada

This paper investigates how innovations in income taxes and government expenditures originating in the US affect the US economy, and how these effects are transmitted to the Canadian economy. Using a semi-structural VAR model and data for both countries for the 1961:1–2004:3 period, we find that fiscal policy innovations originating in the US are transmitted to the Canadian economy by international trade and capital flows through interest rate and exchange rate channels. Unanticipated shocks to US government expenditures have beggar thy neighbor effects on Canada. US output increases and Canadian output decreases in response to a positive shock to US government expenditures. In response to an unanticipated increase in US income taxes, US output declines while US and Canadian real interest rates rise. The response of Canadian output, however, is not significantly different from zero.

Policy coordination in East Asia and across the Pacific

In this paper, we construct a macro-econometric model that describes the economic activity in the Asia-Pacific area and provide quantitative insights into the recent policy debates on monetary and currency coordination among the East Asian economies. The model includes a wide variety of monetary and currency policy rules that the East Asian economies adopt and allows for one country's policymaking to have substantial effects on foreign countries. We apply the model to three current policy issues: (1) the desirability of currency basket pegs in East Asia, (2) the anticipated effects of China's currency policy reform, and (3) the non-negativity constraint on Japanese nominal interest rates. The simulation analyses show the external economy effects of policy rules quantitatively and suggest the difficulty of monetary and currency policy coordination among the East Asian economies.

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A Puzzle or a Choice: Uniform Pricing for Motion Pictures at the Box

Consumer differentiated preferences over movies make the uniform pricing regime at the box office a puzzle in the motion picture business. This paper explores the nature of price rigidity at the current uniform price. It concludes that the high profit mark-up from concession sales helps to retain uniform pricing as the optimal choice for exhibitors, without distributors’ condemned intervention. Unless many successful event movies are expected, tiered pricing over regular and event movies will not benefit either exhibitors or distributors. The criteria for exhibitors to favor tiered pricing and the distributors’ choices to eliminate the agency problem are also developed.

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.