Differences In Exchange Rates Research Articles

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Examining nonlinear dynamics of exchange rates and forecasting performance based on the exchange rate parity of four Asian economies

This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear dynamic behavior of exchange rate deviations based on the exchange rate parity (ERP) theory in four Asian economies: Japan, South Korea, Taiwan and Singapore. In this study, quarterly data from 1978 Q1 through 2007 Q4 are analyzed. The empirical results indicate that the deviations in the exchange rate of all four countries reject the null of linearity. The rate deviations in the Japanese and Korean cases exhibit a dynamic and smoothly symmetric ESTAR type process, while those in the Taiwanese and Singaporean cases match the smoothly asymmetric LSTAR type with respect to depreciating and appreciating regimes. These nonlinear characteristics can be explained by the existence of heterogeneous behavior and asymmetric information among economic agents. Furthermore, the estimation results of a nonlinear least squares (NLS) regression indicate that most of the parameter estimates are significant at the 10 percent level. The forecasted Japanese and Korean rate deviations in the ESTAR model are not superior to those from the AR model, possibly because these two countries experienced a serious fluctuation during the Asian financial crisis that occurred in 1997. However, based on the criterion of the RMSE, the forecasted Taiwanese and Singaporean rate deviations in the LSTAR model outperform those in the AR model.

A test for the presence of central bank intervention in the foreign exchange market with an application to the Bank of Canada

In this article, a general nonlinear simultaneous equations framework for the econometric analysis of models of intervention in foreign exchange markets by central banks in response to deviations of exchange rates from target levels is proposed. The instrumental variables estimation of possibly nonlinear response functions and tests of intervention, when the functional form may be nonlinear, asymmetric, and may contain unknown shape parameters, is considered. The methodology applies techniques developed for testing in the presence of nuisance parameters unidentified under a null hypothesis to a nonlinear simultaneous equations model. The results of an empirical analysis of stabilization activity of the Bank of Canada, for the period from 1953 to 2009, with regard to the Canada–U.S exchange rate are reported here. A nonlinear specification is found necessary to capture activity after 1998.

EXCHANGE RATE MISALIGNMENT AND ECONOMIC GROWTH: EVIDENCE FROM PAKISTAN'S RECENT FLOAT

The paper empirically evaluates growth effects of real exchange rate misalignments in Pakistan for the flexible exchange rate period (1983Q1 to 2005Q4). First, real exchange rate misalignment is calculated as the deviation of the actual real exchange rate from its equilibrium value. It is found that the actual real exchange rate in Pakistan remained undervalued. Second, using the GMM estimation technique, it is found that undervaluation of the Pak-rupee has improved output growth in Pakistan and this result is robust to alternative growth equation specifications. The results also stress the role of other factors in determining output growth rate; particularly, capital per worker, democracy, corruption, human capital and deeper financial markets have the theoretical predicted signs and are statistically significant.

Can non-linear real shocks explain the persistence of PPP exchange rate disequilibria?

A core stylized fact of the empirical exchange rate literature is that half-life deviations of equilibrium real exchange rates from levels implied by Purchasing Power Parity (PPP) are very persistent. Empirical efforts to explain this persistence typically proceed along two distinct paths, resorting either to the presence of real shocks such as productivity differentials that drive equilibrium exchange rates away from levels implied by PPP, or the presence of non-linearities in the adjustment process around PPP. By contrast, we combine these two explanations in the context of an innovative panel estimation methodology. We conclude that both explanations are relevant to the behavior of exchange rates and that resulting half-lives are much shorter than estimated using linear PPP and more consistent with the observed volatility of nominal and real exchange rates.

Nonlinear dynamics in exchange rate deviations from the monetary fundamentals: An empirical study

This paper reexamines empirical performance of the monetary exchange rate model with nonlinear dynamics of exchange rate deviation from the monetary fundamentals. First, we apply unit root test of Park and Shintani (2005) to post-Bretton Woods exchange rate data and able to reject the null of unit root deviation from monetary fundamentals against alternative hypothesis of nonlinear stationary process for deutschemark, pound, and Swiss franc. Our empirical results find that exchange rates show high degree of mean-reversion with larger deviation and long periods of overvaluation and undervaluation of dollar. We also find empirical evidence of predictability of the monetary fundamentals at longer horizons.

Impact of the Exchange Rate Volatility on the Romanian Exports to the Euro Area

This paper approaches the relation between the exchange rate volatility and the Romanian exports to the Euro Area. We employ monthly values of the real exports and the standard deviation of the real exchange rate in a Vector Autoregressive model. We find a negative and weak influence of the exchange rate volatility on the exports, which could be connected with the fact that main Romanian exporters are multinational companies.

The Estimation of the Equilibrium Real Exchange Rate for Romania

This paper aims to estimate the equilibrium real exchange rate for Romania, respectively the real exchange rate consistent with the macroeconomic balance, which is achieved when the economy is operating at full employment and low inflation (internal balance) and has a current account that is sustainable (external balance). This equilibrium real exchange rate is very important for an economy because deviations of the real exchange rate from its equilibrium value can affect the competitiveness of a country. An overvalued real exchange rate will determine a lack of external competitiveness and deteriorate the country’s real activity. An undervalued exchange rate will increase on short term exports and it will lower the current account deficit but, on the long term it will increase the inflationary pressures. The equilibrium real exchange rate is also a very important variable for a country who wishes to join ERM II. In fact the central parity should be chosen to reflect the equilibrium exchange rate. The conclusion is that the real exchange rate had some important deviations from its equilibrium value which were determined by the liberalization of the prices and of the foreign exchange market and by the fluctuations of the nominal exchange rate. These deviations are not likely to put at risk the entry in ERM II.

PPP EXCHANGE RATE RULES, MACROECONOMIC (IN)STABILITY, AND LEARNING

In order to maintain competitiveness, governments in developing economies seem to have pursued purchasing power parity (PPP) exchange rate rules, by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target. This article shows that these rules are likely to induce macroeconomic instability, as they generate sunspot-driven fluctuations that are in fact learnable by agents in the Expectational-Stability sense. It finds that the existence of these “learnable sunspots” depends, among others, on open economy features, including the degree of openness and the degree of exchange rate pass-through to consumer's import prices.

Evidence on the contrarian trading in foreign exchange markets

This paper investigates the existence and price impacts of contrarian behavior in the foreign exchange markets. By utilizing a nonlinear behavioral model where the chartists and fundamentalists coexist, evidence obtained from two sample periods significantly supports the existence of contrarian trading in the British pound, the Japanese yen and the German mark markets. The contrarian trading can only partially offset the price impacts of trend-followers, therefore the price impact of the chartists as a whole is destabilizing. The ability that the contrarians can counterbalance the extrapolation of the trend-followers differs across markets. Traders in the BP market have the highest tendency to contrarian strategy, which in turn contributes to the least deviations of the BP exchange rates departing from its PPP fundamentals. The fundamentalists' confidence in trade fades during large misalignments, which make the mean reversion function of the fundamentalists weak under the circumstances. We find the magnitudes of interventions will be affected by the price impacts of contrarians and their abilities on market stabilization.

Determinants of Exchange Rate Instability in a Developing Economy: Conceptual Issues and Further Evidence from Nigeria (1970-2005)

This study examines the determinants of exchange rate instability (volatility of Real Exchange Rate) in a developing economy. The cardinal focus is to ascertain the determinants of exchange rate volatility (instability) in a developing economy with particular reference to Nigeria as well as assess the implications of volatility of real exchange rate on selected macroeconomic variables. The study used ordinary least square (OLS) technique in relation to time series data on exchange rate instability (VRER), current account balance (CABY), import (IMPY), External Reserves (EXTRESS), inflation and economic growth (GDP). Instability of exchange rate is measured by three years moving average of standard deviation of real exchange rate. This paper advocates that besides the basic macroeconomic variables which are acknowledged as determinants of exchange rate instability a realistic exchange rate capable of accelerating economic growth, reducing import and also stemming the tide of inflation are paramount in a developing economy and should be maintained. Equally, carefully handling unbridled exchange rate in an import dependent economy which is capable of inducing price escalation is a sine qua non in the economy.

Foreign Exchange Market and Economic Growth in an Emerging Petroleum Based Economy: Evidence from Nigeria

This study is an exposition of foreign exchange market and economic growth in an emerging economy - the Nigerian case. The paper focuses on the implications of exchange rate movement on economic growth. The ordinary least square (OL5) technique was adopted using time series data on exchange rate movement, volatility of exchange rate (EXCHR) labor force, gross domestic investment and technology, volatility of exchange rate is measured by three years moving average of standard deviation of real exchange rate. The paper maintains that in view of the positive relationship between exchange rate, volatility and economic growth in Nigeria, exchange rate policy should be designed to bridge the savings investment gap so as to enhance government revenue as well as reduce the fiscal Lacuna through the curtailing of deficit geared at increased and sustained economic growth. Gross domestic investment should also be sustained since this leads to significant economic development.

Exchange Rate Instability and Economic Management of an Emerging African Economy: A Case for Nigeria

This paper examines the movement of exchange rate and macroeconomic management in an emerging African economy with particular reference to Nigeria. Instability and variations have been the basic features of exchange rate in Nigeria and some other countries. The question is to ascertain the impact of instability of exchange rate on the performance of selected sectors of the macroeconomy. The ordinary least square (OLS) technique was adopted using times series data on exchange rate, Economic growth (GDP) import, export and inflation. Exchange rate instability is measured by three years moving average of standard deviation of the real exchange rate. The result of analysis is respectable. Economic growth, import and inflation have relationship with exchange rate and the instability of exchange rate impacts on these variables differently. The study advocates that a dynamic exchange rate policy should be put in place so as to enhance export promotion and greater productivity by the manufacturing/industrial sector thereby attracting more revenue into the export sector. This subsequently leads to sustained economic growth and stability.

Governance and Gross Domestic Investment in Developing Economies: Issues in Exchange Rate Instability in Nigeria

This paper examines governance, pubic policy and exchange rates instability in relation to gross domestic investment in developing economies with Nigeria as a focus. The technique adopted was the Ordinary Least Square (OLS) methodology by the use of time series data on exchange rate instability, gross domestic product, gross domestic investment, interest rate, exchange rate and inflation. The instability of exchange rate is measured by three years moving average of standard deviation of real exchange rate. The paper maintains that good governance should encourage stable exchange rate in an economy as well as desire private sector investment especially in the current global economic environment. It is further advocated that the best regime of governance and public policy is the one that stabilizes macroeconomic performance in terms of reducing instability in output, consumption, domestic price and other key macroeconomic variables. Government that does not recognize and/or maintain stability in the exchange rate, it is argued, renders governance a mirage capable of strangulating investment and economic fortunes of the state.

What Makes Currencies Volatile? An Empirical Investigation

Real effective exchange rate volatility is examined for 90 countries using monthly data from January 1990 to June 2006. Volatility decreases with openness to international trade and per capita GDP, and increases with inflation, particularly under a horizontal peg or band, and with terms-of-trade volatility. The choice of exchange rate regime matters. After controlling for these effects, an independent float adds at least 45% to the standard deviation of the real effective exchange rate, relative to a conventional peg, but most other regimes make little difference. The results are robust to alternative volatility measures and to sample selection bias.

Vývoj teorie parity kupní síly a rovnovážný měnový kurz

Paper inquires into historical development of key theoretical concepts related to purchasing power parity in 20th century. It presents theories which explain relation between price level, labor productivity and exchange rate. These theories explain the process of how the long-run equilibrium exchange rate is being achieved. On the other hand it elaborates on short-run exchange rate deviations. As the key factor which cause the deviations identified in the paper is presence of the prices of non-tradable goods in price indexes. Proposed is a case study which clarifies the process of equilibrium exchange rate achieving to emphasis some of the theoretical conclusions made in paper. Verification of theoretical conclusions is sketched out through the Big Mac Index statistics. Statistics is to prove proposed relations between price levels and exchange rates in different countries and is to verify the relevance of theoretical conclusions about long-run equilibrium of exchange rates.

External Shocks and Monetary Policy: Does it Pay to Respond to Exchange Rate Deviations?

There is substantial evidence suggesting that central banks in open economies react to exchange rate fluctuations, in addition to expected inflation and output. In some developing countries this reaction is comparatively larger and it is nonlinear. In an estimated structural macromodel for Chile, this paper assesses the advantages and potential costs of adopting such a reaction function. We conclude that, in the face of most of the external shocks, a policy rule that responds to exchange rate misalignments smooths inflation and output variability, while marginally increasing interest rate fluctuations. On the other hand, for some domestic innovations such a rule performs poorly. When all the shocks are considered at the same time, this rule generates important welfare gains. Finally, when the volatility of external shocks rises, increasing the response to exchange rate misalignments brings welfare improvements. In fact, a more aggressive response to the exchange rate offsets the impact that greater external volatility has on output and inflation, at the cost of inducing higher interest rate fluctuations. In this way, one can interpret the nonlinear reaction to the exchange rate as an optimal response to a more volatile external environment.

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Demand Changes and Real Exchange Rate Dynamics in a Finite‐Horizon Model with Sectoral Adjustment Costs

In this paper, we use the Blanchard‐type uncertain lifetime overlapping generations framework to develop a three‐good open economy to examine the effects of demand changes on the economic performance of small open economies with sectoral adjustment costs. Our simulation results reveal a discernible Harberger‐Laursen‐Metzler effect on both temporary and permanent terms‐of‐trade shocks. The inclusion of sectoral adjustment costs generates persistent deviations of the real exchange rate from its long‐run equilibrium in response to terms‐of‐trade shocks, with the degree of sectoral adjustment costs having an effect on the subsequent dynamic transition of the economy. We also find that an increase in the mortality rate leads to a lowering of the current account.