Dynamic relationship between stock prices and exchange rates for G-7 countries

There are two major findings from our time-series estimations. First, we find that there is no long-run significant relationship between stock prices and exchange rates in the G-7 countries. This result interfaces with Bahmani-Oskooee and Sohrabian’s (1992) finding, but contrasts with the studies that suggest there be a significant relationship between these two financial variables. Our second finding is that the short-run significant relationship has only been found for one day in certain G-7 countries. For instance, currency depreciation often drags down stock returns in the German financial market, but it stimulates the Canadian and UK markets on the following day. However, an increase in stock price often causes currency depreciation the next day in Italy and Japan. In addition, we also find that the record of stock price and the value of the dollar cannot be depended on when predicting the future in the US, either in the short-run or long-run.     

Investigating properties of commodity price responses to real and nominal shocks

This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in the nominal exchange rate and the world real GDP. After we estimate the dynamic elasticity of the prices with respect to these shocks, we obtain the kernel density of our estimates to establish stylized facts on the adjustment process of the commodity price toward a new equilibrium path. Our empirical findings imply, on average, that the law of one price holds in the long-run, whereas the substantial degree of short-run price rigidity was observed in response to the nominal exchange rate shock. The real GDP shock tends to generate substantial price fluctuations in the short-run because adjustments of the supply can be limited, but have much weaker effects in the long-run as the supply eventually counterbalances the increase in the demand. Overall, we report persistent long-lasting effects of the nominal exchange rate shock on commodity prices relative to those of the real GDP shock.     

What determines the long-term correlation between oil prices and exchange rates?

In this study, we obtain the long-term correlation between oil prices and exchange rates by employing the dynamic conditional correlation-mixed data sampling (DCC-MIDAS) model. We then identify the factors that influence the long-term correlation using panel data analysis. We find that the long-run correlations between oil prices and exchange rates are negative for all oil-exchange rate markets except Japan. We also find that both inflation and term spread have negative effects, while the risk-free interest rate has a positive effect on the long-term correlation between oil prices and exchange rates. Importantly, the empirical results show that an increase in inflation will significantly damage the real value of the currency itself.     

Savings and investment rates in Latin America: An error correction analysis

Using savings and investment rates from fifteen Latin and Central American countries, this study explores the possibility of a long-run relationship between saving and investment. The analysis consists of regressions unit root tests, and an error correction model developed by Jansen and Schulze (1996) and Jansen (1996). Of the 15 countries, there is evidence to substantiate capital mobility in 13 countries. For Chile and Uruguay, countries that have experienced considerable capital controls, evidence indicates the lack of capital mobility for these two countries.     

The stability of money demand in China: Evidence from the ARDL model

This study examines the demand for broad money (M2) in China using the autoregressive distributed lag (ARDL) cointegration framework. The results based on the bounds testing procedure confirm that a stable, long-run relationship exists between M2 and its determinants: real income, inflation, foreign interest rates and stock prices. Importantly, our results reveal that stock prices have a significant wealth effect on long- and short-run broad money demand; its omission can lead to serious misspecifications in the money demand function (MDF). This finding is consistent with the notion that asset inflation (deflation) has systematic influence on the pattern of monetary aggregates.     

“Global factors,international spillovers,and the term structure of interest rates: New evidence for Asian Countries”

This paper provides new evidence about the role of common global factors exploring the existence of structural breaks in the long-run trend of the term structure and analyzes the spillover effects from the unconventional monetary policies recently implemented by major industrialized countries. For a panel of four Asian economies (Malaysia, Philippines, Singapore, South Korea), we show that, accounting for the role of global liquidity factors, parameters restrictions associated with the EHTS are not rejected, even after a regime-shift occurring at the end of 2005, thus supporting an extended weak version of the “Liquidity Premium Theory”. We also document relevant discrepancies in the short-run dynamics of long-term interest rates, which are strictly related to some structural differences between these Asian countries in terms of the “impossible trinity” between monetary independence, financial openness and exchange rate stability.     

The business cycle in the G-7 economies

In this paper the Hodrick–Prescott filter is used to decompose real GDP for the G7 countries into cyclical and trend components. The resulting series of cyclical components are then examined for static relationships, using correlations and graphs; long-run relationships using autoregressive-distributed lag models; and short-run relationships, using error–correction models. The main result is that the patterns of cyclical behaviour changed following the oil price shocks in the 1970s. Since 1980, cyclical fluctuations have been smaller as a result of a decline in synchronisation of the cycles in the G7. Two separate cycles seem to be developing since 1990. One is for Germany, Italy and France, whilst the other is for the US, UK and Canada. Within each of these groups there are both long-run and short-run relationships between the cyclical components of GDP.     

The influence of international oil price fluctuation on the exchange rate of countries along the “Belt and Road”

In recent years, the international crude oil price has become increasingly volatile. It influences the exchange rate changes of relevant countries through economic growth, price level, international balance of payments, and other channels. Such exchange rate fluctuations have caused certain risks for the development of China’s “Belt and Road” Initiative. This article analyzes the impact of oil price changes on the exchange rates of countries. Because the fluctuation of oil prices and exchange rates has shown the characteristics of multiple time scales, this study used the empirical mode decomposition (EMD) method to obtain the long-cycle and short-cycle sequences of oil prices and the exchange rates of various countries, then analyzed the impact of oil price changes on exchange rates under different time scales. The results showed that oil price fluctuations have an impact on the exchange rate changes of countries along the “Belt and Road” under different time scales. However, this effect is asymmetric between oil-producing countries and non-oil-producing countries, and the transmission path of oil prices to exchange rates varies from cycle to cycle.     

Growth, development and natural resources: New evidence using a heterogeneous panel analysis

This paper explores whether natural resource abundance is a curse or a blessing. To do so, we firstly develop a theory consistent econometric model, in which we show that there is a long run relationship between real income, the investment rate, and the real value of oil production. Secondly, we investigate the long-run (level) impacts of natural resource abundance on domestic output as well as the short-run (growth) effects. Thirdly, we explicitly recognize that there is a substantial cross-sectional dependence and cross-country heterogeneity in our sample, which covers 53 oil exporting and importing countries with very different historical and institutional backgrounds, and adopt the non-stationary panel methodologies developed by Pesaran (2006) and Pedroni (2000) for estimation. Our results, using the real value of oil production, rent or reserves as a proxy for resource endowment, reveal that oil abundance has a positive effect on both income levels and economic growth. While we accept that oil rich countries could benefit more from their natural wealth by adopting growth and welfare enhancing policies and institutions, we challenge the common view that oil abundance affects economic growth negatively.     

Cointegration and joint efficiency of international commodity markets

This paper investigates the semi-strong efficiency hypothesis in the international commodity markets of four industrialized countries, using vector autoregression (VAR) and cointegration techniques. Efficiency in these markets requires the corresponding real exchange rates to be martingales with respect to any information set available in the public domain. In the context of a VAR consisting only of real exchange rates, we show that necessary and sufficient conditions for joint efficiency of all the markets under consideration amount to the VAR being of order one (Markovness) and non-cointegrated. On the contrary, in a VAR extended by other potentially “relevant” variables, such as the corresponding real interest rates, non-cointegration and Markovness are only sufficient conditions for the same commodity markets to be characterized as jointly efficient. We also suggest methods for efficiency testing in each individual market within a cointegrated VAR and, finally, we discuss possible long-run linkages among the real exchange rates and real interest rates in association with efficiency in the commodity markets. JEL Classification Number: F31     

The impact of productivity adjusted deviations from PPP on the U.S. inbound FDI: Evidence from Japan, U.K. and Germany

In this paper, we investigate the degree to which productivity adjusted deviations from PPP influence the U.S. inbound FDI. Our results show a significant negative relationship between productivity adjusted misalignments and the U.S. inbound FDI from Germany and the United Kingdom in the short-run, and a positive relationship in the long-run. Hence, indicating that a positive misalignment—undervalued U.S. dollar—leads to a decrease in the U.S. inbound FDI in the short-run and to an increase in the long-run. No significant evidence is found for Japan. Interestingly, unadjusted real exchange rate changes show no statistically significant relationship with respect to the U.S. inbound FDI. The authors thank the reviewers for their insightful comments.     

The relationship between carbon dioxide emissions and economic growth: quantile panel-type analysis

This paper samples the data of 138 countries during the 1971–2007 period, and performs an empirical test to validate the relationship between carbon dioxide emissions and economic growth. It first performs panel data analysis and quantile regression analysis to estimate the long-run elasticity relationships, and then analyzes the short-run error correction model to verify the causal relationship between the two. The empirical results indicate the following. (1) The long-run relationship between global carbon dioxide emissions and GDP is stable, with 32.6% of the sampled countries showing cross-coupling of the two (with an elasticity value of greater than 1), 47.1% reporting relative-decoupling (with an elasticity value between 0 and 1), and 20.3% seeing absolute-decoupling (with an elasticity value of smaller than 0). (2) The quantile regression shows that long-run elasticity declines along with the rise of carbon dioxide emission quantiles. In other words, cross-coupling turns into relative-decoupling. (3) The analysis of short-run panel data and quantile regressions mostly support the feedback relationship between carbon dioxide emissions growth and economic growth. This is consistent with the hypothesis developed by Kuznets. (4) According to the results of the quantile regression, the higher the quantiles, the faster and more stable of the short-run error-correction mechanism of the adjustments from short-run disequilibrium to long-run equilibrium. (5) Under the low-quantile carbon dioxide emissions growth and economic growth, the relationship between these two is not stable of the short-run disequilibrium adjustments in the error-correction adjustment process. However, the relationship between these two is steady and feedback in the case of high quantiles. Therefore, the first priority to combat global warming is to focus on the countries with high economic growth and high carbon dioxide emissions growth.     

THE STOCK MARKET, HOUSING AND CONSUMER SPENDING: A SURVEY OF THE EVIDENCE ON WEALTH EFFECTS

Abstract.  This paper examines the time-series and micro-econometric evidence on the relationship between stock and house prices and consumer spending. The time-series studies distinguish between short-run and long-run links between consumption, income and wealth. They allow us to identify which variables adjust to restore the long-run equilibrium in the case of a shock, and to determine the time taken by the adjustment process. The micro-econometric literature improves our understanding of the link between wealth and expenditure and distinguishes among the alternative hypotheses – of direct wealth effect, common causality and collateral channel – that have been proposed to explain this relationship. The relationship between wealth and consumer spending appears to be strong, but there is some disagreement as to its size and nature. Furthermore, there appear to be some important differences across countries, which should be allowed for by policy makers when appraising the policy implications of a change in asset prices.     

The effect of housing and stock market wealth on consumption in emerging and developed countries

This study examines the long- and short-run relationship between private consumption, housing wealth, stock market wealth and income. In order to asses this relationship empirically, we use pooled mean group estimators of dynamic heterogeneous panel data on a sample of 30 developed and emerging economies. The sample countries are segmented into three separate panels: a developed bank-based panel, a developed market-based panel, and an emerging bank-based panel. Empirical estimates support the existence of long- and short-run stock market wealth effects in both groups of developed countries, with the effect being particularly strong in the developed market-based countries. A moderate long-run housing wealth effect is confirmed only for the developed bank-based countries, while a very strong short-run housing wealth effect is present in the developed market-based countries. As far as the emerging countries are concerned, the evidence is somewhat inconclusive, but it does seem to suggest that both wealth effects are effective in the long run, with housing wealth being more dominant.     

Causality and volatility patterns between gold prices and exchange rates

This paper provides a new perspective on the link between gold prices and exchange rates. Based on gold prices denominated in five different currencies and the related bilateral exchange rates, we put causalities and short-run volatility transmission under closer scrutiny. We provide evidence that the identification of a strong hedge function of gold requires an explicit modeling of the volatility component. For all currencies, exchange rate depreciations initially have a negative impact on the gold price after one day which turns out to be positive after two days in most of the cases. Contrary to previous studies, our results point to a specific role of the dollar in the context of gold-exchange rate relationships: volatility of dollar exchange rates more frequently results in strong hedging functions of gold prices. Furthermore, the gold price denominated in the US dollar tends to increase after a depreciation of the dollar.     

The J-Curve at industry level: Evidence from Sweden–US trade

Previous research that investigated the impact of real depreciation of kronor on Swedish trade balance used trade data either between Sweden and the rest of the world or between Sweden and each of her trading partners. Not much support was provided for a significant effect, especially in the case of Swedish–US trade. In this paper we consider the trade flows between Sweden and the US one more time and try to disaggregate the data by industry. We consider the trade balance of each of the 87 industries that trade between the two countries and investigate the short-run and the long-run effects of real depreciation of kronor on each industry's trade balance. While we find short-run significant effects in the majority of the industries, the short-run effects last into the long-run favorable effects only in 23 of 87 industries.     

Forecasting the Real Exchange Rate

This brief examines the historical relationship between exchange rates and relative inflation rates for a group of major industrial countries. It establishes the concept of the ‘real exchange rate’ and the ‘productivity-adjusted real exchange rate’ (PARE) as essential in understanding these relationships and projecting them into the future. It puts the discussion into the context of company decision making, as one important factor in the rate of return likely to accrue from different methods of supplying an overseas market. Differences in productivity between countries explain the divergences in prices of ‘non-traded goods’. To give a simple example, a haircut costs much more in New York than in Madrid since high US wages reflect high productivity which does not apply in many parts of the service sector. These differences rule out the acceptance of the over simple ‘purchasing power parity’ approach which assumes that exchange rates will settle at a point where all prices (in terms of a common currency) are the same everywhere, or move together. Even after account has been taken of differences in productivity growth, productivity-adjusted real exchange rates (PARE) - though reasonably stable - can still show some deviations, or ‘blips’. The ‘blip’ may occur because of rapid changes in the actual exchange rate or in domestic prices, in which case it is likely to prove temporary and the PARE rate will tend to adjust back to its normal level. But it may come from major structural changes, in which case PARE will be altered permanently within definable limits. A way of recognising the different categories of ‘blip’ is suggested in the brief. The PARE framework is then used to provide a guide to UK businesses who are concerned to calculate the future sterling value of foreign currency sales or, more generally, to estimate their competitiveness in supplying specific export markets. (The method used would apply equally well to other countries.) This is done by showing step-by-step the forecasting procedure to compute sterling's effective exchange rate to 1981 on assumptions concerning respective rates of inflation, monetary policy and the impact of North Sea oil. The computation shows that a sustained period of exchange rate stability is possible for the UK, even if UK inflation rates remain significantly above the world level for the next two years.     

Time-frequency effect of crude oil and exchange rates on stock markets in BRICS countries: Evidence from wavelet quantile regression analysis

This study examines the effects of oil prices and exchange rates on stock market returns in BRICS countries (Brazil, Russia, China, India and South Africa) from a time–frequency perspective over the period 2009–2020. We use wavelet decomposition series to develop a threshold rolling window quantile regression to detect time–frequency effects at various scales. The empirical results are as follows. First, our findings confirm that the effects of both crude oil prices and exchange rates on BRICS stock returns are asymmetric. Positive shocks of crude oil have a greater impact on a bull market, whereas negative shocks have a greater impact on a bear market. Second, there is a short-term enhancement effect of crude oil and exchange rate on BRICS stock markets. In addition, volatility in the macro financial environment also exacerbates the impacts of oil prices and exchange rates on the stock market, and these fluctuations are heterogeneous. Overall, these findings provide useful insights for international investors and policy makers.     

The effect of exchange rate volatility on U.S. bilateral trade with Africa: A symmetric and asymmetric analysis

The impact of exchange rate volatility on U.S. trade with the world or on U.S. trade with major partners has been assessed by many researchers, but none have considered the case of U.S. trade with African nations. We fill this gap by assessing the symmetric and asymmetric impact of the real bilateral exchange rate volatility between the U.S. dollar and each African partner’s currency on the U.S. trade flows with each of the 20 partners from Africa. We found asymmetric short-run effects of exchange rate volatility on almost all U.S. exports to and imports from each of the 20 countries. In addition, significant long-run asymmetric effects were discovered in the case of U.S. exports to 15 countries and U.S. imports from 12 countries. Our findings are partner-specific.     

Are the stock and real estate markets integrated in China?

This paper examines the dynamic short-run and long-run co-movement between the real estate and stock markets in China by employing a continuous wavelet method. We use gross domestic product and M2 (broad money supply) as control variables to eliminate the common factors of the two markets and to identify the real nexus between them. The empirical results show that the co-movement between real estate and stock prices is weak in the short run, except during the financial crisis period. Since the stock market is highly volatile, while real estate prices are relatively stable, the two markets are less correlated in the short run. The results also show that real estate prices affect stock prices in the long run, which supports the existence of a credit-price effect in China. Real estate prices remained very high in most time periods. Enterprises and individuals can obtain funds from bank loans to invest in the stock market, thus raising stock prices. These findings indicate that the two markets are generally segmented in the short run but are integrated in the long run. The stabilization of the real estate market is critical for stability in the stock market, but not vice versa. Additionally, investments in the two markets may not provide a high level of risk dispersion in the long run in China.