Exchange Rates In Europe Research Articles

The shortage of safe assets in the US investment portfolio: Some international evidence

This paper develops a Bayesian Global VAR (GVAR) model to track the international transmission dynamics of two stylized shocks, namely a supply and demand shock to US-based safe assets. Our main findings can be summarized as follows. First, we find that (positive) supply-sided shocks lead to pronounced increases in economic activity which spills over to foreign countries. The impact of supply-sided shocks can also be seen for other quantities of interest, most notably equity prices and exchange rates in Europe. Second, a demand-sided shock leads to an appreciation of the US dollar and generally lower yields on US securities, forcing investors to shift their portfolios towards foreign fixed income securities. This yields sizable positive effects on US output, equity prices and a general decrease in financial market volatility.

Trends in European real exchange rates

We study a newly created panel data set of relative prices for a large number of consumer goods among 31 European countries over a 15‐year period. The data set includes eurozone members both before and after the inception of the euro, floating exchange rate countries of Western Europe, and emerging market economies of Eastern and Southern Europe. We find that there is a substantial and continuing deviation from purchasing power parity (PPP) at all levels of aggregation, both for traded and non‐traded goods, even among eurozone members. Real exchange rates (RER) exhibit two clear properties in the sample (a) they are closely tied to gross domestic product (GDP) per capita relative to the European average, at all levels of aggregation and for both cross country time series variation; (b) they are highly positively correlated with variation in the relative price of non‐traded goods. We then construct a simple two‐sector endowment economy model of real exchange rate determination which exhibits these two properties, calibrated to match the data. Simulating the model using the historical relative GDP per capita for each country, we find that for most countries, there is a close fit between the actual and simulated real exchange rate. In terms of policy relevance, the model can offer suggestions of the degree to which real exchange rates in Europe (both in and out of the eurozone) have been overvalued (by approximately 15% in Greece and Portugal and 6% in Italy and Spain). —Martin Berka and Michael B. Devereux

The Impact of Exchange Rate Volatility on Sectoral Exports: (1973–2004)

This paper looks at the impact of exchange rate volatility on real sectoral exports for Austria, Denmark, France, Ireland, Italy, Greece, Portugal, U.K., Finland, Netherlands, and Sweden for 1973–2004. Since we have not been able to identify any aggregate effects in previous empirical work in this study we examine sectoral exports of leather and rubber using the standard deviation of the moving average of the log of real exchange rate as a measure of exchange rate volatility. Overall, our results suggest that exchange rate volatility has a mixed effect on sectoral exports for the EU countries. With the move from fixed to flexible exchange rates in Europe in 1973, there was increasing concern about effects of exchange rate variability on trade. Economic theory is ambiguous on the impacts of increased exchange rate variation as some models can predict negative or positive impacts depending on key parameters. Empirical work in this field was pioneered by Arize in various papers (Arize, 1995, North American Journal of Economics and Finance; Arize, 1996, International Review of Economics and Finance; Arize, 1999, The International Trade Journal; Arize, Osang And Slottje, 2000, Journal of Business and Economic Statistics). The body of literature favours the conclusion that the relationship is negative and statistically significant, although there are still significant positive as well as insignificant results. In any case, there is little, if not at all, examination of sectoral effects of exchange rate volatility to exports for samples containing EU countries. Having in the past examined aggregate effects on EU countries (Serenis, Cameron, Serenis, 2008 Atlantic Economic Journal; Serenis, 2006, PhD. thesis), our analysis will now turn to sectoral effects from volatility to export quantity since Atl Econ J (2010) 38:117–118 DOI 10.1007/s11293-009-9207-5

The dynamics of the real exchange rates in Europe: a comparative study across countries using fractional integration

The annual structure of the real exchange rates in sixteen European countries is examined in this article by means of fractional integration techniques. The results show that the highest degree of dependence between the observations is obtained for countries Finland or Spain whereas Switzerland and the UK present the smallest orders of integration. Thus, stronger policy actions are required in the former countries to bring the variables back to their original levels.

Introduction to “Exchange Rates in Europe and Australasia: Fundamental Determinants, Adjustments and Policy Implications”

The papers in this issue are concerned with the behaviour of exchange rates — their fundamental determinants, adjustment processes and policy implications. The authors combine theory with empirical evidence, test hypotheses as well as show the relevance of their analysis for policy. This Introduction addresses several questions. What are the contributions of the articles to the economics of exchange rates? Are they significant in increasing our understanding of the current issues and in addressing questions of policy? How can one explain the movements in the European and the Asian currencies? What can we expect to happen to the euro with the enlargement of the euro area? Do the papers provide frameworks to guide empirical research? In this Introduction, we highlight aspects of each paper that addresses these issues.

Policy Implications of "Second-Generation" Crisis Models

After the speculative attacks on government-controlled exchange rates in Europe and in Mexico, economists began to develop models of currency crises with multiple solutions. In these models, a currency crisis occurs when the economy jumps suddenly from one solution to another. This paper examines one of the new models, as presented by Obstfeld (1994), and finds that raising the cost of devaluation may make a crisis more likely. Consequently, slow convergence to a monetary union, which increases the cost to the government of reneging on an exchange rate peg, may be counterproductive. This conclusion is exactly the opposite of that obtained from earlier models.

Strategic trade policy and exchange rates in Europe: The case of Spanish tomato exports : Solana, Juan B and Martin, Miguel, A, 1995, “Estrategias comerciales y tipos de cambio en Europa: el caso de las exportaciones de tomates españoles”, Investigaciones Agrarias: Economía (Spain), Vol. 10 (2), pp.283–294

Strategic trade policy and exchange rates in Europe: The case of Spanish tomato exports : Solana, Juan B and Martin, Miguel, A, 1995, “Estrategias comerciales y tipos de cambio en Europa: el caso de las exportaciones de tomates españoles”, Investigaciones Agrarias: Economía (Spain), Vol. 10 (2), pp.283–294

Policy Implications of "Second-Generation" Crisis Models

After the speculative attacks on government-controlled exchange rates in Europe and in Mexico, economists began to develop models of currency crises with multiple solutions. In these models, a currency crisis occurs when the economy suddenly jumps from one solution to another. This paper examines one of the new models, finding that raising the cost of devaluation may make a crisis more likely. Consequently, slow convergence to a monetary union, which increases the cost to the government of reneging on an exchange rate peg, may be counterproductive. This conclusion is exactly the opposite of that obtained from earlier models.

Fiscal and monetary policy on the way to EMU

We present the simulations of fiscal adjustment policies to the Maastricht criteria in the European economies based on a rational-expectations model of the G7 economies. We find that an effort to achieve the fiscal criteria inflicts pronounced recessions on the European economies. Furthermore, the fiscal and the inflation criteria lack consistency. A return to fixed exchange rates in Europe worsens the results of fiscal retrenchment in Europe. All of this implies that a “hard” interpretation of the criteria is neither a desirable nor a credible strategy for EMU.

Regional Inequalities and the Business Cycle: An Explanation of the Rise in European Unemployment

DEMERTZIS M. and HUGHES HALLETT A. (1996) Regional inequalities and the business cycle: an explanation of the rise in European unemployment, Reg. Studies 30, 15–29. The introduction of a system of fixed exchange rates in Europe has succeeded in inducing price convergence amongst its participants, but at the same time has increased the divergence between their rates of unemployment. In this paper we attempt to measure the level of the inefficiency imposed on the labour markets as a result of having different labour market structures under one monetary policy, and then use these results to provide a new explanation for the secular rise in European unemployment based on the degree of labour market heterogeneities and the asymmetries in wage settings in each market. As a closer monetary union of its own regions, the UK is used as a comparison for the Europe-wide results. DEMERTZIS M. et HUGHES HALLET A. (1996) Les inégalités régionales et le cycle économique: une explication de la montée du chômage en Europe, Reg. Studies, 30, 15–29. En Europe l'etablissement d'un système de taux de change fixe a réussi à inciter à la convergence des prix aux pays membres, mais en même temps il a fini par accentuer les divergences des taux de chômage. Cet article cherche à mesurer l'importance de l'inefficacité imposée aux marchés du travail qui résulte de l'existence de differentes structures des marchées du travail relevant d'une seule politique monétaire. Ces résultats se voient utiliser afin de fournir une nouvelle explication de la montée cyclique du chômage en Europe à partir des hétérogénéités et des asymétries de la fixation des salaires dans chacun des marchés. Vu que c'est une union monétaire plus étroite de ses propres régions, on met le Royaume-Uni en comparaison avec l'Europe. DEMERTZIS M. und HUGHES HALLETT A. (1996) Regionale Ungleichheiten und der Konjunkturzyklus: Eine Erkärung des Ansteigens der Arbeitslosigkeit in Europa, Reg. Studies 30, 15–29. Dank der Einführung eines Systems fester Wechselkurse in Europa ist es gelungen, eine Preiskonvergenz unter den Beteiligten herbeizuführen, doch die Divergenz zwischen den Arbeitslosenquoten ist gleichzeitig angestiegen. In diesem Aufsatz wird versucht, die Höhe der Leistungsun-fähigkeit zu messen, die dem Arbeitsmarkt infolge verschiedener Arbeitsmarktstrukturen unter einer Finanzpolitik auferlegt wurde, und dann diese Ergebnisse zu einer neuen Erklärung des wiederholt auftretenden Anstiegs der Arbeitslosigkeit in Europa zu benutzen, die auf dem Ausmaß der Arbeitsmarktungleichheiten und den Assymmetrien der Lohnfestsetzungen im jeweiligen Markt beruhen. Das Vereinigte Königreich mit seiner engeren finanziellen Union seiner Regionen wird als Vergleich zu den europäischen Ergbnissen herangezogen.

Dual Exchange Rates in Europe and Latin America

This article uncovers some important empirical regularities surrounding the operation of formal dual exchange rates in Europe and Latin America in the 1970s and 1980s. Although there are parallels between the European and Latin American experiences, there are also interesting differences in terms of the size and nature of the distortion created by two official exchange rates; the response of the distortion to foreign interest rates, real commercial exchange rates, and domestic budget deficits; and the motives for adopting this exchange rate regime. Empirical work on dual exchange rate regimes is made difficult by the transitory nature of these regimes and by frequent changes in institutional practices.

SEIGNORAGE AND EUROPEAN MONETARY UNION

Inflation differentials in Europe have narrowed substantially since the inception of the European Monetary System in 1979. However, their persistence after more than a decade raises the question of why these differentials are so difficult to eliminate. Some European Community countries systematically use seignorage—financing government expenditures with money creation—while others do not. This increases the difficulty of achieving the convergence of monetary policies and inflation rates required for irrevocably fixed exchange rates in Europe. This paper, utilizing a model of government finance that minimizes the social cost of financing government expenditures, examines monetary finance in the European Community. It rejects soundly the social cost minimization model of seignorage collection.

The Purchasing Power Parity Theory Reexamined

Theoretical Criticism. One of the earliest and perhaps the best of Professor Cassel's expositions of the purchasing power parity theory appeared in the already mentioned Money and Foreign Exchange after z914. Professor Cassel has reaffirmed his belief without important modifications more recently in The Downfall of the Gold Standard (1936). In the first of these books Professor Cassel set out to explain what it was that determined currency exchange rates in Europe when the gold standard was not functioning, that is, when currencies were on an inconvertible basis. Laymen and even bankers, as late as 92.2., were talking as if pre-war (gold standard) rates of exchange were normal, and that actual exchange rates of European nations could be expected soon to return to those normal rates, presumably in some automatic fashion, even though the currencies of those nations were no longer on gold-standard bases. To