International transmission of inflation under alternative exchange rate regimes: Empirical evidence and its implications

This is a study of the transmission pattern of inflation under alternative exchange rate regimes, fixed and flexible, among the Group of Seven (G-7) countries and their subsets, including four members of the European Union (EU) and two countries from North America. Our key empirical findings are as follows. The price levels of several countries that we found move together as a cointegrated system, forming an equilibrium relationship under both fixed and flexible exchange regimes. Second, the speed of adjustment estimates show that the transmission of inflationary disturbances across countries is less pronounced under the flexible exchange rate regime than under the fixed exchange rate regime. Third, the US was found to be the main producer of inflationary innovations among G-7 countries, whereas the UK was found to be the main producer of inflationary innovations among the EU countries, regardless of exchange rate regime.     

Fiscal Discipline and Exchange Rate Arrangements: Evidence from the Caribbean

This paper assesses the nature of fiscal discipline under alternative exchange rate regimes. First, it shows that fiscal agencies under a currency union with a fixed exchange rate can have a larger incentive to overspend or "free ride" than those under other exchange rate regimes, owing to the agencies' ability to spread the costs of overspending in inflation tax across both time, given the fixed exchange rate, and space, given the currency union. In contrast, such free-riding behavior does not arise under flexible regimes owing to the immediate inflationary impact of spending. Next, empirically, fiscal stances in countries with fixed pegs and currency union regimes demonstrate greater free-riding behavior than do countries with more flexible regimes in fifteen Caribbean countries from 1983 to 2004.     

Stock market integration between the UK and the US: Evidence over eight decades

This study investigates how the impact made on stock market integration by macroeconomic determinants such as various measures of convergence and financial volatility, as well as crisis episodes, varies over the period 1935–2015. We gauge how the level of integration between the UK and US stock markets changes across three monetary regimes during this period: pre–Bretton Woods (BW), the BW fixed exchange rate, and the post-BW flexible rates. Our empirical results suggest that integration was strongest under the post-BW regime and weakest under the BW regime. We further demonstrate that stock market integration between the two markets has been driven largely by macroeconomic convergence and financial volatility as well as by crises, especially since the demise of the BW system.     

Exchange rate regimes and FDI in developing countries: A propensity score matching approach

Theory suggests that regimes of relatively fixed exchange rates encourage inward foreign direct investment (FDI) relative to regimes of more flexible exchange rates. We use propensity score matching (PSM) to investigate the relationship between the exchange rate regimes of 70 developing countries and FDI into such countries using de facto regime classifications. We include a large number of variables in the logit equation that estimates the propensity score, the probability of regime choice. We also use general-to-specific modeling to get alternative, parsimonious versions. Based on four matching procedures, the average treatment effects suggest, with overall modest statistical significance, that relatively fixed de facto regimes do encourage FDI compared with relatively floating regimes. In addition, the estimated effects are sometimes economically large.     

Exchange Rate Policy and Sovereign Bond Spreads in Developing Countries

This paper analyzes how exchange rate policy affects the issuance and pricing of sovereign bonds for developing countries. We find that countries with less flexible exchange rate regimes pay higher spreads and are less likely to issue bonds. Changing a free‐floating regime to a fixed regime decreases the likelihood of bond issuance by 5.5% and increases the spread by 88 basis points on average. Countries with real overvaluation have higher spreads and higher bond issuance probabilities. The effects of real overvaluation on sovereign bonds tend to be magnified for countries with fixed exchange rate regimes.     

Comparative statics of a two-country capital/money model

This paper presents a two country version of James Tobin's capital/money model, with international trade and capital transactions. The model is used to derive comparative static properties of financial market equilibrium under four alternative regimes: fixed or flexible exchange rates combined with a pegged foreign government interest rate or a fixed supply of foreign government debt. The comparative static results derived by Tobin for a closed economy, and by William Branson for a small country with an open economy, are preserved in the model developed here only in the case where both the exchange rate and the foreign interest rate are pegged. The reasons for this are explored.     

Exchange rate regime durability and performance in developing versus advanced economies

Drawing on new data and advances in exchange rate regimes’ classification, we find that countries appear to benefit by having increasingly flexible exchange rate systems as they become richer and more financially developed. For developing countries with little exposure to international capital markets, pegs are notable for their durability and relatively low inflation. In contrast, for advanced economies, floats are distinctly more durable and also appear to be associated with higher growth. For emerging markets, our results parallel the Baxter and Stockman classic exchange regime neutrality result, though pegs are the least durable and expose countries to higher risk of crisis.     

Exchange rate regimes, banking and the non-tradable sector

This paper presents a small-open-economy, two-good version of the Diamond and Dybvig model with cash constraints to analyze the implications on banking of different exchange rate regimes and monetary policies. I show that fixed exchange rates with a Central Bank providing liquidity in local currency imply Pareto efficiency, with conditions for a run equilibrium stronger than in the literature. In a flexible exchange rate regime, multiple equilibria may not be eliminated. In particular, for very a expansive monetary policy there exists an equilibrium where a fraction of patient consumers purchases dollars in the interim period, which constitutes a partial currency run. A dollarized banking system without international short-run credit may also implement the efficient allocation under certain conditions.     

Sharing rules and equilibrium in an international capital market under uncertainty

International capital market equilibrium is characterized for a world economy in which consumption preferences are defined multiplicatively over many commodities. It is shown that the set of relative asset prices under pure exchange in international capital markets depends on the real purchasing power of nominal payoffs under uncertainty and does not depend on the currency in which the nominal payoffs are denominated. A Sharpe-Lintner type international capital asset pricing model is derived as a special case. Proportional ad valorem commodity taxes and transportation costs are incorporated in the valuation model, interest rate parity and purchasing power parity are reinterpreted under uncertainty, and international differences in borrowing and lending are shown to reflect, in part, differences in risk aversion across countries.     

全球金融周期、美国货币政策与“三元悖论”

全球金融周期存在的背景下"三元悖论"是否依然成立充满争议。本文通过构建包含银行与金融摩擦的两国DSGE模型,为考察全球金融周期的形成提供了理论依据。美国货币政策通过资本流动传导到外围国金融市场,使外围国信贷利率、银行风险承担以及杠杆率与美国银行趋同,形成全球金融周期。金融渠道的传导速度快于实体经济渠道导致外围国国内经济周期与金融周期相背离,外围国想要稳定经济就不得不与美国保持同向的政策利率变化,货币政策独立性将不再存在。随着全球经济一体化进程加速,估值效应的作用越来越明显,浮动汇率制度并不能隔离全球金融周期的影响也无法保证货币政策的独立性。在资本账户开放的情况下,外围国金融市场越不发达,受全球金融周期的影响越大,货币政策越不独立。     

The information content of the exchange rate and the stability of real output under alternative exchange-rate regimes

When the exchange rate is flexible, and thus responds to market forces, it provides agents with useful information, while when it is fixed (by a feedback rule) it does not. The implications of this asymmetry for the stability of real output under the two regimes is discussed. It is shown that whenever shocks are predominantly of one variety, or when domestic monetary shocks accompanied by one real shock, a flexible exchange rate does a better job of stabilizing real output than does a fixed exchange rate. These results undermine arguments favoring fixed exchange rates because they ‘discipline’ monetary policy. In addition, it is demonstrated that managed floating rules and exchange rate feedback rules are irrelevant for the distribution of real output.     

事实汇率制度选择、企业生产率与对外直接投资

企业“走出去”和汇率制度安排灵活化是中国参与全球经济的两大典型特征,本文从企业异质性视角讨论了双边事实汇率制度选择对企业对外直接投资的影响效应。理论层面上,本文将Gali and Monacelli(2005)的一般均衡框架拓展为两国模型,发现双边固定汇率制度降低了企业进入东道国开展OFDI活动的生产率阈值,提高了企业对外直接投资倾向。同时,尽管企业生产率的提升能够促进企业对外直接投资活动,但其促进力度明显不及双边事实固定汇率制度安排。实证层面上,本文采用了中国商务部公布的2000-2013年《境外投资企业(机构)名录》等微观企业数据,发现双边事实固定汇率制度能使企业进行OFDI概率平均提高0.8%~55.4%。考虑其他异质性因素及内生性问题后,本文主要结论依然稳健。     

Understanding the Backus–Smith puzzle: It's the (nominal) exchange rate,stupid

Backus, Kehoe and Kydland (BKK 1992) demonstrated that if international capital markets are complete, consumption growth correlations across countries should be higher than their corresponding output growth correlations. In stark contrast to the theory, however, in actual data the consumption growth correlation is lower than the output growth correlation. By assuming trade imperfections due to non-traded goods, Backus, D.K., Smith, G.W. [1993 Consumption and real exchange rates in dynamic economies with non-traded goods. Journal of International Economics 35(3–4), 297–316] showed that there is an additional impediment at work that can lower the consumption growth correlation. While their argument was successful in partially explaining the puzzlingly low cross country correlation of consumption growth rates, it contributed to generating another puzzle because the data forcefully show that consumption growth is negatively correlated with the real exchange rate, which is also a violation of the theory. Using data for OECD countries, we decompose real exchange rate growth into its nominal exchange rate growth and inflation differential components, and find that nominal exchange rate movements are the main source for the Backus-Smith puzzle. We demonstrate the robustness of this finding by examining sub-samples of the data, by allowing for imperfect risk sharing due to ‘rule of thumb’ consumers, and by examining intranational data across the U.S. states where the nominal exchange rate is fixed.     

International risk sharing is better than you think, or exchange rates are too smooth

Exchange rates depreciate by the difference between domestic and foreign marginal utility growth or discount factors. Exchange rates vary a lot, as much as 15% per year. However, equity premia imply that marginal utility growth varies much more, by at least 50% per year. Therefore, marginal utility growth must be highly correlated across countries: international risk sharing is better than you think. Conversely, if risks really are not shared internationally, exchange rates should vary more than they do: exchange rates are too smooth. We calculate an index of international risk sharing that formalizes this intuition. We treat carefully the realistic case of incomplete capital markets. We contrast our estimates with the poor risk sharing suggested by consumption data and home-bias portfolio calculations.     

R/S analysis of foreign exchange rates under two international monetary regimes

The purpose of this study is to examine empirically the behavior of foreign exchange markets during the most recent experiences with fixed and flexible rates. Specifically, this study explores the possibility that long-term dependence is present in the exchange rate series for the British pound, French franc, and German mark in terms of the U.S. dollar. Using R/S analysis, positive long-term dependence is uncovered for each exchange rate during the flexible regime but negative dependence is found in the fixed period.     

Monetary and commercial policy in a two-country flexible exchange rate model with perfect capital mobility

A two-country portfolio-balance model is developed in this paper in order to analyse the international transmission of monetary and commercial policy disturbances under a flexible exchange rate regime. Particular emphasis is placed on the role of capital mobility, differences in the asset demand functions across countries, and national net-asset positions in determining the effects of these policies on the macroeconomic variables of the two countries. Both the short and the long-run effects are considered with expectations assumed to be formed rationally.     

Exchange rate flexibility and credit during capital inflow reversals: Purgatory … not paradise

We identify periods of capital inflows reversals—looking at both gross and net capital flows—and document the behavior of macro and credit variables in economies with different degrees of exchange rate flexibility. We find that more exchange rate flexibility moderates credit swings during capital flow cycles, mainly because it is associated with milder credit growth during the boom. Flexibility, however, cannot completely shield the economy from a credit reversal. We observe what we dub as a recovery puzzle: credit growth in economies with more flexible exchange rate regimes remains tepid well after the capital flow reversal takes place. This results stress potential complementarity of macro-prudential policies with the exchange rate regime. More flexible regimes could help smoothing the credit cycle through capital surcharges and dynamic provisioning that build buffers to counteract the credit recovery puzzle. In contrast, more rigid exchange rate regimes would benefit the most from measures to contain excessive credit growth during booms, such as reserve requirements, loan-to-income ratios, and debt-to-income and debt-service-to-income limits.     

A new financial order in Asia: Will a RMB bloc emerge?

The objective of this paper is three-fold. First, the monetary and exchange rate regimes of the Asian countries are described and analyzed. The degrees of flexibility in exchange rates and capital controls vary across countries. Some countries have adopted a flexible inflation targeting framework, while others have pursued exchange rate targeting. The paper presents a new result of a tradeoff between price stability and exchange rate stability in the hyperbolic relationship of Asian countries. Second, a framework that analyzes and quantifies the degree of currency internationalization is proposed and applied to the RMB. In every indicator, the RMB’s weight in private-sector international finance has grown in the last several years, both in the private and public sectors. In the settlement role of currency, the RMB is ranked 8th in the BIS survey and 7th in SWIFT usage. This paper exploits data of a recent period when the RMB became de-pegged from the USD and show some of the emerging Asian currencies co-moving with the RMB, more so than the USD. In the official sector, RMB is also increasing its weight. The Chinese central bank has extended the currency-swap agreements with 30-some countries, so that the RMB can be used for trade finance and liquidity assistance. The RMB is adopted as a composition currency of the Special Drawing Rights (SDR), effective in October 2016, with 10.92%, ranking number 3, surpassing the JPY and GBP. Finally, potential impending changes in the Asian monetary and exchange rate regimes in Asia are discussed. Projecting the growth of the Chinese economy into the future, the weight of the RMB in the financial markets will increase globally as well as in Asia.     

Currency bid-ask spread dynamics and the Asian crisis: Evidence across currency regimes

Using a sample of 21 emerging and developed country currencies, we evaluate the impact of the Asian crisis on bid-ask spreads. While the crisis had widespread and uniform volatility effects, the spread effects were not uniform across emerging and developed country currencies. For Asian emerging markets, spreads widened and spread volatility increased significantly during the crisis, while developed markets spreads narrowed and spread volatility decreased significantly. We investigate the impact of more flexible and less flexible exchange rate regimes on bid-ask spreads using panel data. In general, countries with tightly-managed regimes have significantly lower spreads than countries with more freely-floating regimes, while controlling for the influence of other factors such as volatility. Asian developing market spreads are higher than spreads of the other countries, again, after controlling for the influence of other factors.     

Is exchange rate risk priced in microfinance?

High microcredit interest rates have often been a source of criticism against the microfinance movement. Research has focused attention on the cost structure of interest rates and more recently on the macroeconomic and macro-institutional factors. While cost structure is probably the most important determinant of interest rates, other factors can also matter. This paper uses an innovative measure of foreign exchange risk to explore its impact on microcredit interest rates. We show that microfinance institutions that operate in countries with fixed exchange rate regimes tend to charge lower interest rates than those operating in countries with floating exchange rate regimes.