Real exchange rates and real interest rate differentials: A present value interpretation

Although the real exchange rate-real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we re-investigate the RERI relationship using bilateral US real exchange rate data spanning the period 1978-2007. Instead of testing one particular model, we build on Campbell and Shiller [1987. Cointegration tests of present-value models. Journal of Political Economy 95, 1062-1088] to propose a metric of the economic significance of the relationship. Our empirical results provide robust evidence that the RERI link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons.     

On the cross-sectional relation between exchange rates and future fundamentals

Using a cross-sectional perspective, we investigate the implications of the present-value model of exchange rates for a sample of 64 countries during 1971–2015, excluding periods of pegged exchange rates. Our paper uses all bilateral exchange rate pairs instead of choosing a reference currency and extends the list of fundamentals that have been examined in the previous literature by using the variables present in the behavioral equilibrium exchange rate (BEER) model. We document that exchange rates are strongly connected to future fundamentals using forecast horizons from one month to 10 years. Our findings highlight that unlike for time-series and panel data, the evidence against the “exchange rate disconnect puzzle” is more robust using a cross-sectional perspective. Given the relevance of fundamental factors in determining exchange rates dynamics we examine whether they are useful in constructing profitable investment strategies. Except for inflation, we find that a significant relation between exchange rates and a fundamental does not lead necessarily to a profitable investment strategy. Finally, we document that using the cross-rates of exchange rates leads to a significant improvement in the profitability of the carry trade strategy.     

Elections, exchange rates and reform in Latin America

In this paper, we study the link between real exchange rate (RER) depreciation and elections in Latin America. Our contribution is threefold. First, we employ a statistical model that takes into account the pervasive conditional heteroskedasticity found in financial data and includes a wide range of macroeconomic variables as regressors. Second, we test whether the wave of central bank reform that swept the region has had any effect on the existence or strength of the electoral cycle in exchange rates. Third, we test an additional hypothesis, namely, that financial liberalization may also be an important variable explaining changes in electoral effects on the real exchange rate. In a panel of 9 Latin American countries with available macroeconomic data and a history of exogenous election dates, we confirm the previous findings that real depreciation intensifies after elections even when modeling the significant conditional heteroskedasticity in these data. We also show, for the first time in the literature, that post-election exchange rates are significantly less predictable. We go on to test whether central bank reform has influenced the way in which elections affect the RER in Latin America. If reform has been effective at reducing political manipulation of the exchange rate, then any relationship we see between elections and the RER before central bank reform should be mitigated in the post-reform era. We find that the relationship disappears after reform and that post-reform real exchange rates are also significantly less volatile. Finally, we show that financial liberalization seems to have a stronger effect on the conditional variance of the RER than does central bank reform, but reform has a stronger impact on the conditional mean.     

Modelling real exchange rate effects on output performance in Latin America

This article empirically analyses real per capita GDP growth for six Latin American countries (Argentina, Brazil, Chile, Columbia, Mexico, Venezuela) in terms of real exchange rate depreciations, inflation and US interest rates, focussing on the role of the real exchange rate. We find evidence of nonlinearity in this relationship, which we capture through a smooth transition regression model. With the exception of Mexico, nonlinearity in economic growth is associated with changes in the real exchange rate, with depreciations leading to different relationships compared with appreciations. Regimes for Mexico are associated with the past growth rates, with effectively symmetric effects of real exchange rate changes. Although our results are in accord with other recent literature in that depreciations may have negative effects for growth, the asymmetries we uncover indicate that these effects depend on the conditioning state.     

Current Account Imbalances and Real Exchange Rates in the Euro Area*

Global current account imbalances have been one of the focal points of interest for policymakers during the last few years. Less attention has been paid, however, to the diverging current account balances of the individual euro area countries. In this paper we consider the dynamics of current account adjustment and the role of real exchange rates in current account determination in the EMU countries. After controlling for the effects of income growth, we find the relationship between real exchange rates and current accounts to be substantial in size and subject to nonlinear effects. We find that real exchange rates can offer further insights, beyond the effects of the income catch‐up process, relevant to current account determination in the EMU.     

The yield curve and the macroeconomy: Evidence from Turkey

This paper contributes to the literature on the relationship between the yield curve and macroeconomic variables by focusing on an emerging market case: Turkey. The most important result of the paper is that the relationship between the yield curve and macroeconomic variables is significantly affected by the change in monetary policy which is associated with the implementation of inflation targeting (IT) regime. While before the IT regime the yield curve is affected to some extent by macroeconomic variables, after the IT regime, it is mainly driven by macroeconomic variables. We also find that central bank has gained ability to affect the entire yield curve with the IT regime. The other important result is that in addition to inflation and real activities, the exchange rates also play an important role in the yield curve dynamics in Turkey.     

Large data sets,nonlinearity and the speed of adjustment to real exchange rate shocks

A well known puzzle in international finance concerns the very slow speeds of adjustment of real exchange rates observed in response to shocks. In this article, we explore whether allowing for a wide range of influences on the real exchange rate in a nonlinear framework can help resolve this puzzle. Using, recently proposed econometric methods for summarizing very large macroeconomic data sets into a small number of observable factors, we find that there is a long run relationship between these factors and real exchange rates. When put into a nonlinear framework, we find that allowing for the effects of macroeconomic factors dramatically increases the measured speed of adjustment of the real exchange rate.     

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.     

真实汇率与真实利率差异——基于人民币真实汇率的实证研究

本文详细考察了人民币对美元、日元、港币和欧元的双边真实汇率、真实利率差异与进出口之间的统计关系，结果发现：（1）人民币真实汇率与真实利率差异间不存在显著且稳定的统计关系；（2）人民币真实汇率具有较强的“自回归”性，并且存在比较明显的非线性动态调整特征。因此，研究人民币真实汇率自身的特定生成机制可能更具有重要意义。     

Financial Premium and Real Exchange Rate Misalignment

The literature overwhelmingly believes that the size of a financial premium could be an indicator of the extent of the real exchange rate misalignment under dual exchange rates. We wish to oppose this view. The strategy in this paper is to investigate the effects that monetary and real shocks from domestic or foreign origin have on these variables. We also extend the analysis of the theoretical model by discussing numerical simulations. Both theoretical and numerical examinations together show that such a relationship does not exist. Moreover, we find that the more volatile the financial premium, the more stable the real exchange rate. Received December 17, 2001; revised version received May 15, 2002 Published online: December 5, 2002     

A dynamic Nelson-Siegel yield curve model with Markov switching

This paper proposes a model to better capture persistent regime changes in the interest rates of the US term structure. While the previous literature on this matter proposes that regime changes in the term structure are due to persistent changes in the conditional mean and volatility of interest rates we find that changes in a single parameter that determines the factor loadings of the model better captures regime changes. We show that this model gives superior in-sample forecasting performance as compared to a baseline model and a volatility-switching model. In general, we find compelling evidence that the extracted factors from our term structure models are closely related with various economic variables. Furthermore, we investigate and find evidence that the effects of macroeconomic phenomena such as monetary policy, inflation expectations, and real economic activity differ according to the particular regime realized for the term structure. In particular, we identify the periods where monetary policy appears to have a greater effect on the yield curve, and the periods where inflation expectations seem to have a greater effect in yield determination. We also find convincing evidence of a relationship between the regimes estimated by the various switching models with economic activity and monetary policy.     

Remittances and the real effective exchange rate

We examine the long-run relationship between remittances and the real exchange rate for less-developed countries. In a key departure from the literature, we employ a panel cointegration approach using an innovative method for the measurement of the multilateral real effective exchange rate and we focus on high-remittance economies. We find a small inelastic, but significant, long-run relationship which confirms a Dutch disease type effect. The short-run relationship is explored using a panel vector error correction model which confirms that short-run causality is unidirectional running from remittances to the exchange rate. Potential asymmetries in this relationship are identified using quantile regression analysis.     

Oil currencies in the face of oil shocks: what can be learned from time-varying specifications?

While the oil currency property is clearly established from a theoretical viewpoint, its existence is less clear-cut in the empirical literature. We investigate the reasons for this apparent puzzle by studying the time-varying nature of the relationship between real effective exchange rates of five oil exporters and the real price of oil in the aftermath of the oil price shocks of the last two decades. Accordingly, we rely on a time-varying parameter VAR specification, which allows the responses of real exchange rates to different oil price shocks to evolve over time. We find that the reason of the mixed results obtained in the empirical literature is that oil currencies follow different hybrid models in the sense that oil countries’ real exchange rates may be driven by one or several sources of oil price shocks that furthermore can vary over time. In addition to structural changes affecting oil countries, structural changes arising from the oil market itself through the various, time-varying sources of oil price shocks are found to be crucial.     

Does purchasing power parity hold sometimes? Regime switching in real exchange rates

Standard unit root tests are not very powerful in drawing conclusions regarding the validity of Purchasing Power Parity (PPP). Rather than asking whether PPP holds throughout the whole sample period, we examine, in this study, if PPP holds sometimes by employing Hamilton-type (1989) Markov regime switching models. When at least one of multiple regimes is stationary, PPP holds locally within the regime. There are indeed various reasons that we should expect that the persistence of real exchange rates changes over time. Employing five real exchange rates spanning more than 100 years, we find herein strong evidence that the strength of PPP varies during the sample periods and that there exist stationary regimes in which PPP holds. Throughout the article, we also make comparisons to previous Markov regime switching estimation results by Kanas (2006) on the same data series. The new Markov switching model selection criterion of Smith et al. (2006), which is devised especially for discriminating Markov regime switching models, unambiguously indicates a preference for the Hamilton-type Markov regime switching model employed in this study. We also find that the evidence for PPP is not much different across different nominal exchange rate arrangements.     

Small,young, and exporters: New evidence on the determinants of firm growth

This work investigates how the export status of the firm influences the patterns of employment growth at different age classes. We address this research question resorting to a novel set of data that links together the universe of Italian firms and detailed data on export transactions. We find that the positive relationship between export status and growth declines with firm age. Further, we also find that, even when accounting for the role of age, the negative size-growth relationship does not disappear, contrary to some recent evidence. These results suggest a positive signaling role of the export status that is stronger for young exporters or born globals. Exploiting the product-country level dimension of the customs data, we also provide, for the first time, evidence on differences in exchange rates pass-through between young and experienced exporters. In particular, we find that early exporters appear to be better equipped than established firms to face exchange rates variations as their exports decrease less following a currency appreciation.     

Anchor currency and real exchange rate dynamics in the CFA Franc zone

Currency misalignments have been one of the focal points of interest in the literature devoted to the CFA Franc zone. Less attention has been paid, however, to the convergence process of real exchange rates towards equilibrium. In this paper, we analyze the short-run dynamics of real exchange rates of the CFA Franc zone countries and the role played by the anchor currency in their adjustment process. After controlling for the effects of the 1994 devaluation, we find the relationship between real exchange rates of the CFA Franc zone countries and of the euro to be substantial in size and subject to nonlinear effects.     

Oil price and exchange rates: A wavelet based analysis for India

In this paper, we explore linear and nonlinear Granger causalities between oil price and the real effective exchange rate of the Indian currency, known as ‘rupee’. First, we apply the standard time domain approach, but fail to find any causal relationship. So, we decompose the two series at various scales of resolution using the wavelet methodology in an effort to revisit the relationships among the decompose series on a scale by scale basis. We also use a battery of non-linear causality tests in the time and the frequency domain. We uncover linear and nonlinear causal relationships between the oil price and the real effective exchange rate of Indian rupee at higher time scales (lower frequency). Although we do not find causal relationship at the lower time scales, there is evidence of causality at higher time scales only.     

The changing nature of the real exchange rate: The role of central bank preferences

We investigate the sources of real exchange rate fluctuations. We do so, first, in the context of a DSGE model that explicitly considers the central bank's preferences. Then we estimate SVAR models, where shocks are identified by sign restrictions derived from the DSGE model. We perform this exercise for twelve countries, nine of which have adopted inflation targeting during the period analyzed. In sharp contrast to the previous evidence in the literature, we find that exchange rate (country risk premium) shocks have become the main drivers of real exchange rate dynamics, while real shocks play a less important role. Evidence from the DSGE model reveals that, as the central bank becomes more averse to inflation movements, and cares less about nominal exchange rate fluctuations, the impact of nominal shocks on the real exchange rate tends to increase, while the impact of real shocks decreases. Our results suggest that the adoption of inflation targeting, along with a floating exchange rate, contributes to a shift in the relative importance of demand and country risk premium shocks in determining the RER.     

A Test of Long-run Purchasing Power Parity Allowing for Structural Breaks*

If exchange rates and prices are integrated processes, standard econometric tests of the purchasing power parity (PPP) hypothesis may be biased towards rejection. This paper avoids this problem by using the Engle and Granger (1987) theory of cointegrated processes. If the absolute version of purchasing power parity is true, and nominal exchange rates and prices are integrated processes, inter-commodity arbitrage should ensure that the real exchange rate is stationary. The stationarity hypothesis is tested using Australian real exchange rate data for the 1890–1984 period We find that the effective real exchange rate cannot be modelled as a stationary process and therefore reject the absolute version of PPP. We also employ a test for structural breaks due to, for instance, the oil price shock and find mixed results. Another interpretation of our results is that the real exchange rate was affected by a series of permanent, real shocks during the sample period     

Nonlinearities in the real exchange rates: new evidence from developed and developing countries

This paper investigates nonlinearities in the dynamics of real exchange rates. We use Monte Carlo simulations to establish the size properties of the Teräsvirta-Anderson test, when the dynamics of the real exchange rate is influenced by an exogenous process. In addition, we show that a modified nonlinearity test, which includes additional right-hand-side variables, performs much better than the original in both Monte Carlo exercises and in the actual data on 1431 bilateral real exchange rate series. Finally, we investigate the dynamics of the real exchange rate for both developed and developing countries using the modified test for the recent floating period. In general, the results find a greater incidence of nonlinear dynamics for developing country real exchange rates.