House prices,collateral constraint,and the asymmetric effect on consumption

This paper investigates the asymmetric effect of house prices on various categories of consumption under constrained and unconstrained regimes. We first present a simple theoretical model based on Iacoviello (2004) and Luengo-Prado (2006), explicitly considering the dual role of housing and linking credit constraints to the behavior of consumption in a pair of aggregate Euler equations. We then estimate a threshold regression model and find that LC-PIH holds only under the unconstrained regime. More importantly, durable consumption exhibit a very strong asymmetric effect in response to changes in house prices, while other categories of consumption do not exhibit this asymmetry.     

Revisiting the interest rate–exchange rate nexus: a Markov-switching approach

In this paper the interest rate–exchange rate nexus and the effectiveness of an interest rate defense are investigated empirically. I present a reduced form evidence which characterizes the empirical relationship between interest rates and exchange rates. I use a Markov-switching specification of the nominal exchange rate with time-varying transition probabilities. Empirical evidence from six developing countries: Indonesia, South Korea, the Philippines, Thailand, Mexico, and Turkey indicates that raising nominal interest rates leads to a higher probability of switching to a crisis regime. Thus, the empirical results presented here may support the view that a high interest rate policy is unable to defend the exchange rate. Unlike other studies which consider linear models only, my findings are robust and consistent over different countries and crisis episodes (Asian 1997 crises, Mexico 1994 crisis, and Turkey 1994, 2001 crises). In order to explain the empirical findings, I construct a simple theoretical model by incorporating an interest rate rule in the model proposed by Jeanne and Rose (2002) [Jeanne, O., Rose, A.K., 2002. Noise trading and exchange rate regimes, Quarterly Journal of Economics. 117 (2) 537–569]. The model has multiple equilibria, and under plausible conditions, higher exchange rate volatility is associated with higher interest rates.     

Consumer confidence and stock returns over market fluctuations

This paper investigates the link between consumer confidence and stock returns over stock market fluctuations. In particular, I focus on whether the returns have asymmetric effects on confidence. The empirical results from both in-sample and out-of-sample tests provide strong evidence of the existence of an asymmetric linkage between stock returns and consumer confidence: the impacts of returns on confidence are larger in bear markets. Moreover, variables such as the term structure, changes in federal fund rates, changes in unemployment rates, and changes in world oil prices are found to be negatively associated with consumer confidence, as expected.     

Rational expectations,changing monetary policy rules,and real exchange rate dynamics

This paper reexamines the explanatory power of Taylor rule fundamentals for real exchange rate determination. We assume the agents know the time-varying parameters in central bank policy rules. The empirical results suggest that a monetary policy rule with regime switching is better able to explain the real Deutschemark/dollar exchange rate from 1976 to 1998 compared with a fixed-regime monetary policy rule. The findings show the importance of accounting for the expectation formation effect in changing policy rules as emphasized by the Lucas critique. Ignoring these effects can undermine the value of the rational expectations models.     

Politics and the UK's monetary policy

This paper examines whether politics causes regime shifts in deviations from the optimal monetary policy in the United Kingdom. After using a dynamic stochastic general equilibrium model to construct the welfare-maximizing policy rule and deviations from the optimal Taylor rule, we show that politics does indeed play an important role in explaining these deviations. In addition to politics, unemployment rates account for regime shifts in the Taylor rule deviations.     

Revisiting the empirical linkages between stock returns and trading volume

This paper investigates whether the empirical linkages between stock returns and trading volume differ over the fluctuations of stock markets, i.e., whether the return–volume relation is asymmetric in bull and bear stock markets. Using monthly data for the S&P 500 price index and trading volume from 1973M2 to 2008M10, strong evidence of asymmetry in contemporaneous correlation is found. As for a dynamic (causal) relation, it is found that the stock return is capable of predicting trading volume in both bear and bull markets. However, the evidence for trade volume predicting returns is weaker.     

Lack of consumer confidence and stock returns

This paper investigates the link between the lack of consumer confidence and stock returns during market fluctuations. Using a Markov-switching framework, we first focus on whether the shock to consumer confidence has asymmetric effects on stock returns. We also examine whether the decreased confidence pushes the stock market into bear territory. Empirical evidence using monthly returns on Standard & Poor's S&P 500 price index suggests that market pessimism has larger impacts on stock returns during bear markets. Moreover, the lack of consumer confidence leads to a higher probability of switching to a bear market regime.     

The liquidity effect in a flexible-price monetary model

This paper examines the impact of macroeconomic policy shocksin a flexible-price dynamic stochastic general equilibrium (DSGE)model with money. Rather than adopting a money supply rule,monetary policy is modelled as a central bank using a simpleinterest rate rule (Taylor rule). Without assuming price stickinessor frictions in financial markets, this model is found to accountfor liquidity effects, generate higher persistence in outputand inflation, and capture the positive unconditional cross-correlationsrelating inflation and output.     

Does extracting inflation from stock returns solve the purchasing power parity puzzle?

In a recent study by Chowdhry et al. (American Economic Review 95: 255–276, 2005), they suggest that the empirical failure of relative purchasing power parity (PPP) may be because the official inflation data are too sticky. Thus, after extracting the unobservable pure price inflation from equity markets, they find strong evidence supporting relative PPP in the short run. As a replication study, this paper first replicates their original findings successfully. We further investigate whether long-run relative PPP holds using the pure price inflation data constructed by Chowdhry et al. (2005). After constructing pure real exchange rate series using their pure price inflation data, we implement both unit root and cointegration tests on the pure real exchange rates. According to the test results, the evidence suggests that relative PPP does not hold in the long run. Thus, it may be too early to suggest a resolution of the PPP puzzle.     

ASSESSMENT OF WEYMARK'S MEASURES OF EXCHANGE MARKET INTERVENTION: THE CASE OF JAPAN

Abstract.  This paper assesses the validity of the index of foreign exchange market intervention proposed by Weymark. We construct the Weymark index for Japan and then compare it with Japanese public intervention data to evaluate its performance. The results suggest that research using the Weymark index should be interpreted with caution.