Can gold hedge and preserve value when the US dollar depreciates?

This paper examines gold's hedging and value-preserving properties against fluctuations in the US dollar. We propose a likelihood ratio test that draws a distinction between hedging and safe-haven characteristics on the basis of the conditional dependence structure under different market conditions. Our evidence, based on an analysis of data for US dollar exchange rates with a broad set of currencies, indicates that gold can serve as a hedge against US dollar depreciation but is a weak safe haven against extreme US dollar movements. These results have implications for risk management and hedging strategies.     

Autoregressive conditional durations: An application to the Surinamese dollar versus the US dollar exchange rate

The parallel market nominal exchange rate of the United States dollar vis-à-vis the Surinamese dollar (USD/SRD) exhibited periods of severe volatility which were often followed by episodes of stability, usually at a cost of sharp depreciations. This study seeks to model this exchange rate using autoregressive conditional duration models. These models are suitable for modelling events occurring with irregular intervals. Exchange rates in developing countries have distinct features compared to exchange rates in countries with well-established and accessible financial markets. A key feature is that for these developing countries, exchange rates only occasionally experience jumps. Our findings suggest that past exchange rate changes appear to be a significant driver of future exchange rate jumps. Furthermore, our results show that money, international reserves, and commodity prices can explain jumps in the market USD/SRD exchange rate.     

Monetary Shocks and Real Exchange Rate Hysteresis: Evidence from the G-7 Countries

Long-run monetary neutrality specifies that nominal disturbances do not affect long-run real exchange rates. However, the "over depreciation" of the US dollar in the late 1980s, after its strong appreciation earlier in the decade, suggested to a number of observers that nominal disturbances alter long-run real exchange rates; that is, money supply shocks entail real exchange rate hysteresis. Using data from the G-7 countries and the post-1973 float, the paper measures the long-run effects of relative money supply disturbances on real US dollar exchange rates. Little evidence of hysteretic monetary policy effects is found.     

A dynamic econometric system for the real yen–dollar rate

This paper investigates the existence of theory-consistent cointegrating relationships between the real yen–dollar exchange rate and economic fundamentals in Japan and the US. After rigorous cointegration analysis, the paper constructs a data-congruent simultaneous equations system for the real yen–dollar rate. Multivariate cointegration analysis covering the post-Bretton Woods period reveals two long-run relationships which are consistent with macroeconomic theories: one is based on a condition of uncovered interest rate parity incorporating the Japanese current account balance, and the other on a structural balance-of-payments equation. Several topics in time series econometrics such as exogeneity are also discussed in the model construction. Finally, a parsimonious dynamic system centering on the real yen–dollar rate is presented as a set of equilibrium correction models conditional on weakly exogenous variables.      

US monetary policy shocks and the Chinese economy: a GVAR approach

Using a global vector auto regressive (GVAR) methodology, this article examines the impact of US monetary policy shocks on China’s major macroeconomic indicators. Our analysis reveals that a positive shock to the US money supply growth rate initially increases China’s inflation rate but after some time this effect completely disappears. This shock also raises China’s short-term interest rate and the Chinese currency appreciates against the US dollar. A positive shock to the US short-term interest rate increases China’s short-term interest rate but the real output growth and inflation rates decline and the Chinese currency appreciates.     

The relationship between agricultural commodity prices,crude oil prices and US dollar exchange rates: a panel VAR approach and causality analysis

This study examines the relationship between crude oil prices, US dollar exchange rates and 30 selected international agricultural prices and five international fertilizer prices in a panel framework. The study uses panel VAR methods and Granger causality tests on panel data sets of agricultural commodity prices (as well as specific agricultural commodity sub-groups) and fertilizer prices with monthly observations of the period from June 1983 to June 2013. The empirical results of the present study indicate that crude oil prices as well as US dollar exchange rates affect international agricultural commodity and fertilizer prices. Furthermore, contrary to the findings of several studies in the literature, the present study supports bidirectional panel causality effects between crude oil prices and international agricultural prices as well as between US exchange rates and international agricultural prices.     

Cointegration,structural breaks and monetary fundamentals of the Dollar/Yen Exchange

This paper reexamines the empirical performance of monetary exchange rate models for the dollar/yen exchange rate. We focus on the character of a potential long-run relationship between exchange rates and fundamentals. Using monthly data from 1976:01 to 2007:12 this paper applies a novel time-varying coefficient approach which allows a distinction between breaks in the cointegration vector and instabilities in the adjustment coefficients. We are able to show that most of the observed breakpoints can be traced back to major policy changes or specific economic developments. Our findings also show that macroeconomic fundamentals do matter for the U.S. dollar/Japanese yen exchange rate, but in different ways over different periods of time.     

FORECASTING THE UK/US EXCHANGE RATE WITH DIVISIA MONETARY MODELS AND NEURAL NETWORKS

This paper compares the UK/US exchange rate forecasting performance of linear and nonlinear models based on monetary fundamentals, to a random walk (RW) model. Structural breaks are identified and taken into account. The exchange rate forecasting framework is also used for assessing the relative merits of the official Simple Sum and the weighted Divisia measures of money. Overall, there are four main findings. First, the majority of the models with fundamentals are able to beat the RW model in forecasting the UK/US exchange rate. Second, the most accurate forecasts of the UK/US exchange rate are obtained with a nonlinear model. Third, taking into account structural breaks reveals that the Divisia aggregate performs better than its Simple Sum counterpart. Finally, Divisia‐based models provide more accurate forecasts than Simple Sum‐based models provided they are constructed within a nonlinear framework.     

Unconventional monetary policy and the dollar–euro exchange rate: first results from time-series analysis

This article examines the impact on the US dollar–euro (USD–EUR) exchange rate of the unconventional monetary policy conducted by the US Federal Reserve (Fed) and the European Central Bank (ECB). To that end, we make use of time-series analysis to obtain a reasonable long-run and short run representation of the data generation process and use dummy variables to study how announcements about monetary policy changes can affect the USD–EUR exchange rate. Our results indicate that the announcement and subsequent implementation of such measures by the ECB would have caused an appreciation of the dollar, while those by the Fed would have caused a depreciation of the dollar.     

Behavioural equilibrium exchange rate and total misalignment: evidence from the euro exchange rate

In the present paper we attempt to investigate whether the nominal exchange rate of the euro against the currencies of the four major trading partners of the eurozone, namely China, Japan, the UK and the USA, converges or not to its equilibrium level. Applying recent unit root and system cointegration techniques in the presence of structural shifts in the data, our results indicate that there exist an equilibrium relationship between each of the euro/yuan, euro/yen, euro/UK pound and euro/US dollar nominal exchange rates and the fundamentals defined by the monetary model. Following these results, our modified Behavioural Equilibrium Exchange Rate model suggests that at the end of the estimated period, the euro/Chinese yuan and the euro/UK pound nominal exchange rates follow an equilibrium process. Our empirical results also imply that the single European currency is considered as overvalued against the US dollar, while it is considered as undervalued against the Japanese currency.     

How the ECB and the US Fed set interest rates

Monetary policies of the European Central Bank (ECB) and US Fed can be characterized by ‘Taylor rules’, that is both central banks seem to be setting rates by taking into account the ‘output gap’ and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro–dollar exchange rate, thereby improving the ‘fit’ between actual and Taylor rule based rates. In general, Taylor rules appear to be a much better way of describing Fed policy than ECB policy. Simulations suggest that the ECB's short-term interest rates have been at a much lower level in the last 2 years compared with what a Taylor rule would suggest.     

Time-Varying Fundamentals of the Euro–Dollar Exchange Rate

Abstract

This study examines changes in the impact of the economic fundamentals on the euro–dollar exchange rate. First, the monetary model is augmented with the equity markets and the model is estimated in its structural form. Second, the time-varying impacts of the long-run fundamentals representing equilibrium in different markets on the euro–dollar exchange rate are examined using Kalman filtering. The time-varying structural model indicated that the relative importance of the different fundamentals was not equal and the impact of the fundamentals was time-dependent.     

Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach

This paper examines the equilibrium Chinese yuan/US dollar (CNY/USD) real exchange rate within the framework of the fundamental equilibrium exchange rate (FEER) model. Endogenous structural breaks are allowed for in all cointegration relationships. Macroeconomic fundamentals that affect medium‐term savings and investment and hence, the sustainable current account, are also highlighted. A unique set of quarterly data for the post‐reform period (1982–2009) is constructed. This paper finds structural breaks in all trade and the sustainable current account equations. The misalignment rates show that the real exchange rate was overvalued in most years until 2003, followed by undervaluation during 2004–09. However, the average misalignment rates and revaluation required to correct this undervaluation are not as large as suggested by previous studies, with the undervaluation rate declining sharply in 2009. Further, misalignment rates are computed using a sustainable current account of 3%. The findings suggest such exogenous input leads to results biased towards larger undervaluation.     

The effect of relative monetary surprises on spot exchange rates

This paper examines the hypothetical relationship between US and Canadian monetary surprises and the behaviour of US-Canadian spot exchange rates. Past studies have found that positive US monetary surprises were correlated with an appreciating US dollar in foreign exchange markets.

In this paper, it is argued that monetary surprises in the US must be measured relative to foreign monetary innovation (rather than in the conventional absolute sense) when examining their impact on exchange markets. Rational investors consider expected returns and risk differentials in the US and local markets jointly in determining whether to be net buyers or sellers of US dollars. The monetary actions of both the Fed and the Central Bank operating in the local (foreign) economy will be considered in the foreign exchange market. Because of the close synchronization between the weekly money supply announcements in Canada and the US, it is possible to examine whether the relative or absolute US monetary surprise is more significant in the foreign exchange market. The empirical findings provide considerable support for the relative over the absolute measure of US monetary innovations. With monetary innovations measured in relative terms, the empirical results provide support for the policy reaction over the inflation expectation hypothesis.     

The Canadian border and the US dollar: The impact of exchange rate changes on US retailers

This paper provides a micro‐level investigation into the impact of changes in the US–Canada nominal exchange rate on retailers in US regions lying close to the US–Canada border. Using a large data set on product‐level retail prices and sales in the United States over a nine year period, we explore the links between changes in exchange rates, cross‐border travel and the price and quantity responses of US retailers. This allows us to assess the importance of geography and distance in affecting the pass‐through of exchange rate changes into prices and quantities at the level of the consumer. We develop a two‐stage theoretical model of cross‐border travel and industry equilibrium for retail sales at the border. Our empirical results accord well with the implications of the model.     

Estimating an equilibrium exchange rate for the dollar and other key currencies

In this paper, we adapt the concept of fundamental equilibrium exchange rates ‘FEER’ in a complete model approach. We use it to determine the likely paths of the Dollar and other key currencies. The FEER is the (real) exchange rate that is consistent with internal balance and sustainable external balances. Here we examine the composition of a Dollar adjustment and hence the extent to which a FEER (for the US) depends on factors or rigidities elsewhere in the world, as well as at home. We find, the US still needs to accept an adjustment in her real exchange rate if the increase in her foreign liabilities is to come to an end. However, counterpart adjustments also have to be made in Canada, Mexico, and some Asian economies if this policy is to be successful. We also show that productivity growth differentials may act as a substitute for depreciation, and this provides an explanation for the failure of the dollar to depreciate in the 1990s.     

Nonlinear adjustment in the real dollar–euro exchange rate: The role of the productivity differential as a fundamental

In this paper we analyze the influence of productivity differentials in the dynamics of the real dollar–euro exchange rate. Using nonlinear procedures for the estimation and testing of ESTAR models during the period 1970–2009 we find that the dollar–euro real exchange rate shows nonlinear mean reversion towards the fundamentals represented by the productivity differential. In addition, we provide evidence about the ability of this variable to capture the overvaluation and undervaluation of the dollar against the euro.     

Interaction between oil and US dollar exchange rate: nonlinear causality,time-varying influence and structural breaks in volatility

This article examines the nonlinear Granger causality and time-varying influence between crude oil prices and the US dollar (USD) exchange rate using the Hiemstra and Jones (HP) test, the Diks and Panchenko (DP) test and the time-varying parameter structural vector autoregression model. By applying the iterated cumulative sums of squares (ICSS) algorithm and the DCC-GARCH model, the effects of structural breaks in volatility of the two markets are also investigated. The empirical analysis indicates that, first, crude oil prices are the nonlinear Granger-cause of the USD exchange rate, but not vice versa. Second, the USD exchange rate exerts a stronger and more stable negative influence on crude oil prices in the short term, and the influence gradually weakens after 2012. Finally, ignoring structural breaks can increase the negative volatility correlation between the oil and USD exchange rate markets, which is particularly remarkable during the financial crisis.     

Revisiting the exchange rate disconnect puzzle

One of the major anomalies in International Macroeconomics is the persistent finding that the exchange rate has no empirical relationship with a variety of macroeconomic fundamentals. Dubbed the ‘exchange rate disconnect puzzle’, this article examines this issue for five Australian dollar bilateral exchange rates, using quarterly data for the period 1984:1–2015:4. A novel feature of this article is that it departs from the extant literature by using a different approach to testing for cointegration. The results show that the exchange rates and fundamentals move together in the long run. Furthermore, the results show that fundamentals Granger cause exchange rates, both in the short run and the long run.