Comparing Capital- and Trade-weighted Measures of Australia's Effective Exchange Rate

Effective exchange-rate overvaluation is considered a leading indicator of currency crises. Yet, existing measures of nominal and real effective exchange rates focus on international trade in goods and neglect the importance of international trade in assets. This article develops a range of alternative effective exchange-rate indices for the Australian dollar, based mostly on international investment stocks and flows. Capital-weighted exchange-rate measures of the Australian dollar, in nominal and real terms, reveal a stronger exchange rate over recent decades than suggested by the standard measure. Similar measures for other currencies could improve understanding of exchange-rate behaviour.     

Exchange-Rate Uncertainty and Economic Performance

Some models support the notion that exchange-rate uncertainty promotes economic growth while others suggest that exchange-rate uncertainty slows growth. Most empirical work supports the latter hypothesis, leading policymakers to strive for more stable exchange rates. The authors question the appropriateness of the methodology usually employed, and variables constructed to measure the impact of exchange-rate uncertainty on growth. They use an alternative approach and find no discernable impact of exchange-rate uncertainty on economic performance as captured by production.     

Tail Estimates and the Ems Target Zone*

Characteristically, distributions of exchange-rate returns are fat-tailed. We use a nonparametric tail-index estimator based on extreme value theory for seven EMS currencies between April 1979 and October 1991. We find that the behavior of the Belgian franc, the Danish Krone, the French franc, and the Italian lira has become significantly less fat-tailed over time. We attribute this to the decline in the exchange-rate variance as observed in the EMS, which according to the target-zone literature should lead to a convergence of fixed exchange-rate behavior to that of floating rates. A comparison of tail estimates for the Deutsche mark and dollar exchange rates supports this notion.     

The long-run relationship between import flows and real exchange-rate volatility: The experience of eight European economies

This paper provides new evidence on the long-run relationship between imports and exchange-rate volatility in eight European countries. The period examined is 1973:2 through 1995:1. Cointegration analyses are based on Johansen's (1992, 1995) approach and robust single-equation methods. In conformity with theoretical considerations, the major results show that exchange-rate volatility has a significant negative effect on the volume of imports of six countries whereas for Greece and Sweden, it is positive and significant. These findings are reasonably robust in terms of measures of exchange-rate volatility, different estimation methods and membership in the European Exchange-rate Mechanism (ERM). Therefore, it can be argued that exchange-rate volatility will have significant effects on the allocation of resources by market participants and that policy-makers can no longer rely on an import demand with only conventional variables for long-term international trade planning, forecasting and policy formulation.     

Exchange-rate systems and interest-rate behaviour: The experience of Hong Kong and Singapore

The Currency Board System in Hong Kong and the monitoring band system in Singapore are important benchmarks for two different exchange-rate systems. In this paper we consider the implications of the two exchange-rate systems on the interest-rate behaviour of the two economies. We examine the domestic–US interest differentials under the two exchange-rate regimes during the Asian Financial Crisis as well as the pre-and post-crisis periods. Using a bivariate generalized autoregressive conditional heteroscedasticity model, we also investigate whether there is any change in the correlation between the domestic and US interest rates due to the Asian Financial Crisis.     

Exchange-rate volatility and export performance: Do emerging market economies resemble industrial countries or other developing countries?

Authors who do not distinguish between Emerging Market Economies (EMEs) and other developing countries, find evidence of negative and significant effects of exchange-rate volatility on trade. We investigate the effects of real exchange-rate volatility on exports of ten EMEs and eleven other developing countries that were not classified as EMEs over our estimation period. We use panel-data sets that cover the periods 1980:Q1–2006:Q4 for the EMEs and 1980:Q1–2005:Q4 for the other developing countries. We use two estimation methods — generalized method of moments (GMM) estimation and time-varying-coefficient (TVC) estimation. The TVC procedure removes specification biases from the coefficients, revealing the underlying stable parameters of interest. We obtain similar results as previous authors for only the eleven non-EME developing countries we consider. In contrast, our results for the EMEs do not show a negative and significant effect of exchange-rate volatility on the exports of the countries considered. Our findings suggest that the open capital markets of EMEs may have reduced the effects of exchange-rate fluctuations on exports compared with those effects in the cases of other developing countries.     

Monetary Policy in the Open Economy Revisited: Price Setting and Exchange-Rate Flexibility

This paper develops a welfare-based model of monetary policy in an open economy. We examine the optimal monetary policy under commitment, focusing on the nature of price adjustment in determining policy. We investigate the implications of these policies for exchange-rate flexibility. The traditional approach maintains that exchange-rate flexibility is desirable in the presence of real country-specific shocks that require adjustment in relative prices. However, in the light of empirical evidence on nominal price response to exchange-rate changes—specifically, that there appears to be a large degree of local-currency pricing (LCP) in industrialized countries—the expenditure-switching role played by nominal exchange rates may be exaggerated in the traditional literature. In the presence of LCP, we find that the optimal monetary policy leads to a fixed exchange rate, even in the presence of country-specific shocks. This is true whether monetary policy is chosen cooperatively or non-cooperatively among countries.     

Overshooting in the foreign exchange market: Evidence from the 1970s

This paper analyzes the reaction of spot and forward exchange rates to unanticipated weekly money supply changes. The empirical results tend to support the (overshooting) hypothesis that equilibrium exchange-rate changes that occur in the short run in response to an unanticipated event exceed the equilibrium exchange-rate change in the long rung.     

Testing for the effect of current-account ‘news’ on exchange rates: A critique

Dornbusch (1980) has observed a correlation between unexpected exchange-rate changes and unexpected current account balances, which he interprets as evidence in favor of the ‘news’ hypothesis of exchange-rate determination. It is shown here that his test is flawed by simultaneity problem.     

The impact of the post-1972 floating exchange-rate regime on US exports

By employing the techniques of cointegration and error-correction models, this article empirically investigates the impact of the post-1972 floating exchange-rate regime on the volume of US bilateral exports to Canada, Germany, Japan and the UK. The econometric models specified in the analysis were estimated using quarterly data for the sample period 1959:1–1997:4. The empirical results provide evidence that the post-1972 exchange-rate regime is less conducive to trade than the Bretton-Woods fixed exchange rate regime.     

Methodical Madness: Technical Analysis and the Irrationality of Exchange-rate Forecasts

Substantial empirical research documents that exchange-rate forecasts are not formed rationally. This paper identifies a common technical trading signal, the head-and-shoulders pattern, as a potential source of departures from rationality in exchange-rate forecasts. Forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994, using two criteria for rationality: profitability and efficiency. Resulting profits, replicable in real-time, are tested for statistical significance using a bootstrap technique. We find that the rule is profitable, but not efficient, since it is dominated by simpler trading rules.     

Fiscal Policy,Expectations, and Exchange-Rate Dynamics*

This paper uses the sticky-price monetary model to analyze the effects of fiscal policy on the exchange rate under alternative assumptions about exchange-rate expectations. the use of different expectations mechanisms-specifically the perfect-foresight model and the popular models tested by Frankel and Froot: regressive, adaptive, and distributed-lag-is based on recent empirical evidence suggesting that exchange-rate expectations may not be rational. the most surprising finding in the paper is that with adaptive and distributed-lag expectations, fiscal expansion has no initial impact on the exchange rate, and the same may be true for regressive expectations.     

人民币汇率的非均衡分析与汇率制度的宏观效率

在现行制度背景下 ,本文从我国外汇市场经济主体微观行为出发 ,建立了我国的外汇需求和供给函数 ;进而分析了市场的均衡和非均衡态势 ,讨论了人民币汇率稳定运行态势后面的微观行为原因。分析发现 :1 .人民币汇率的非均衡是必然的和经常的 ,不能形成市场均衡汇率。在此背景下形成的现实汇率势必是扭曲的汇率 ,由此导致外汇资源的配置扭曲以及相应的真实资源配置扭曲。 2 .在汇率的稳定和调节机制上 ,当前汇率制度类似于“可调整的盯住汇率制” ,我国汇率制度因此具有固定汇率制的特征 ,但不具备固定汇率制的汇率稳定机制———稳定的汇率预期。 3 .现行汇率制度构成对汇率政策的严重制约 ,调节国际收支不得不倚重于直接管制政策的运用 ;货币政策丧失了独立性 ,加剧宏观经济的波动。这种低效率表明 ,我国当前汇率制度及其微观市场安排急待改革。     

APEC: INTERNATIONAL TRADE AND OUTPUT

Abstract.  This paper estimates the effect that the APEC 'currency union', loosely defined, has on trade and, via trade, on output per capita. A gravity model is used to measure the impact of exchange-rate variability on trade flows within APEC. The gain in trade flows from eliminating nominal exchange-rate variability through the formation of a currency union is less than 1%. Furthermore, every 1% increase in trade (relative to GDP) raises income per capita by roughly 0.3% for twenty years. Adopting the dollar currency union is much more profitable than adopting a yen currency union for each country in APEC.     

Currency crises in Brazil: the role of the fundamentals and the rumours

The paper aims at identification of the main explanatory factors of the currency crises in Brazil. Following Choueiri and Kaminsky (1997) a VAR monetary model is used and the historical decomposition procedure developed by Sims (1980) to evaluate the importance of the ‘fundamentals’ represented by fiscal/monetary and exchange-rate policies, and the ‘external factors’ represented by foreign interest rates and contagious effects. The main results show the importance of the exchange-rate management on the overall period and the contagious effects more recently to explain the Brazilian currency crises.     

Temporary Stabilizations, Sudden Stops, and Asset Prices

The authors study a temporary exchange-rate based stabilization plan in which agents face a sudden stop of capital inflows. The model generates a rising path of real interest rates in advance of the exchange rate collapse. This generates a time-dependent non-monotonic path of required premium on domestic assets. The model-generated asset price dynamics closely mimic their empirical counterpart, as witnessed during recent collapses of exchange-rate based stabilization plans. The model also reproduces consumption and foreign reserve dynamics that closely mimic the data.     

Exchange-Rate Pass-Through With Intertemporal Linkages: Evidence At the Commodity Level

This paper argues that the stability of exchange-rate pass-through is not well tested in common econometric specifications of pass-through equations. This is because (a) expected future exchange-rate changes are an important omitted variable in these estimations, and (b) the use of aggregate data complicates inference. Commodity-level estimates obtained from applying the Kalman filter are consistent with the apparent instability in aggregate pass-through. Moreover, by comparing these estimates to actual exchange-rate movements, the observed instability is found to be consistent with forward-looking behavior as posited.     

Monetary Policy Coordination and the Level of National Debt

This paper uses the Canzoneri-Henderson benchmark framework of monetary policy coordination in interdependent economies to analyze how high levels of national debt affect monetary policy interactions. Using a two-country model, I first study how central banks interact in a flexible exchange-rate regime. I find that a low-debt country is better off interacting with a country with high debt, when both economies are affected by an aggregate inflationary shock. I also consider a political dependence scenario, in which central banks are subject to political pressure. In the case of a debt-burdened country, the political incentive to reduce interest payments on debt will spur a Gordon–Barro like inflation bias. However, under a flexible exchange-rate regime, the low-debt country will not be affected. Under a monetary union instead, political pressure may affect the low-debt country as well, and possibly create an inflation bias even greaterthan in the flexible exchange-rate regime. This scenario presents another example of how Rogoff's counterproductive monetary cooperation may arise under European Monetary Union.     

Does exchange-rate volatility depress export flows: The case of LDCs

In the area of international trade, few studies have examined whether increases in exchange-rate volatility depress trade flows of LDCs. The aim of this paper is to investigate empirically the impact of exchange-rate volatility on the export flows of 10 developing countries over the quarterly period 1973–98. The econometric analysis exploits the theory of cointegration, given the obvious nonstationarity of the data. Estimates of the cointegrating relations are obtained using Johansen's multivariate procedure. Evidence of stability of the cointegrating space is examined using Hansen's [1992a] tests. Short-run dynamic modelling is accomplished using the error-correction technique, and the stability test results are obtained using Hansen [1992b] tests. In conformity with theoretical considerations, the results indicate that increases in the exchange-rate volatility exert a significant negative effect upon export demand in both the short-run and the long-run in most of the countries studied. These effects may result in significant reallocation of resources by market participants.     

On investment and exchange-rate movements

We investigate the ways in which permanent exchange-rate changes may affect investment by influencing domestic and foreign revenue, the cost of imported variable inputs and the investment price of imported capital goods. We find that the revenue and investment-price channels have a quantitatively greater effect on investment than the cost channel. The negative effect of the revenue channel, which affects the marginal profitability of capital, outweighs the positive effect of the investment-price channel, which affects the marginal cost of capital, implying that exchange-rate appreciation has a net negative influence on investment. The estimation results are robust to different approaches to extracting the permanent components of exchange rates.