Persistence Of Real Exchange Rates Research Articles

Persistência da taxa de câmbio real: um estudo a partir do estimador local de Whittle

Resumo: Diante do regime de câmbio flexível desde 1973, com a abertura comercial e a maior integração financeira entre os países, aumentou também a volatilidade da taxa cambial e a dificuldade de se encontrar evidências favoráveis à hipótese da paridade do poder de compra. O estudo investiga a possibilidade de queda na persistência da taxa de câmbio real em um contexto de aumento da integração financeira e comercial entre as economias. Com dados mensais para uma amostra de 20 países, a hipótese de mudança na persistência é testada com base na estimação do coeficiente fracionário d para dois períodos (1975-1994; 1995-2011). A utilização de um estimador robusto em relação à heteroscedasticidade condicional pode fornecer indícios mais confiáveis acerca da estacionariedade da taxa de câmbio real e consequentemente da paridade do poder de compra. Os resultados sugerem que não houve mudança significativa na persistência da taxa de câmbio real, que continua não estacionária.

Habit formation, asymmetric price adjustment, and real exchange rate persistence

This paper studies the eect of habit formation in consumption on the real exchange persistence under monetary policy shocks. Closed economy models of monetary policy have emphasized the ability of habit formation to generate endogenous persistence, which has en - couraged the open economy literature to incorporate habit forma - tion into theoretical models to generate greater persistence in the real exchange rate. However, there has not yet been a thorough evaluation of the habit formation eect in the real exchange rate context. By incorporating habit formation into the model of Be - nigno (2004), it is shown that the habit formation eect depends on the degree of price stickiness assumed within and across countries as well as the design of the monetary policy rule. Habit formation does not aect the dynamics of the real exchange rate under sym - metric price adjustment and does not signicantly contribute to the persistence of the real exchange rate for more general cases

A nonparametric study of real exchange rate persistence over a century

This paper estimates the degree of persistence of 16 long-horizon real exchange rates relative to the US dollar. We use nonparametric operational algorithms by El-Gamal and Ryu (2006) for general nonlinear models based on two statistical notions: the short memory in mean (SMM) and the short memory in distribution (SMD). We found substantially shorter maximum half-life (MHL) estimates than the counterpart from linear models. Our results are robust to the choice of bandwidth with a few exceptions.

Bayesian analysis of nonlinear exchange rate dynamics and the purchasing power parity persistence puzzle

We investigate the persistence of real exchange rates using Bayesian methods. First, an algorithm for Bayesian estimation of nonlinear threshold models is developed. Unlike standard grid-based estimation, the Bayesian approach fully captures joint parameter uncertainty and uncertainty about complicated functions of the parameters, such as the half-life measure of persistence based on generalized impulse response functions. Second, model comparison is conducted via marginal likelihoods, which reflect the relative abilities of models to predict the data given prior beliefs about model parameters. This comparison is conducted for a range of linear and nonlinear models and provides a direct evaluation of the importance of nonlinear dynamics in modeling exchange rates. The marginal likelihoods also imply weights for a model-averaged measure of persistence. The empirical results for real exchange rate data from the G7 countries suggest general support for nonlinearity, with the strength of the evidence depending on which country pair is being considered. However, the model-averaged estimates of half-lives are almost always as small or smaller than for the linear models alone, suggesting that the purchasing power parity persistence puzzle is less of a puzzle than previously thought.

Mussa redux and conditional PPP

The extreme persistence of real exchange rates found commonly in post-Bretton Woods data does not hold in the preceding fixed exchange rate period, when the half-life was roughly half as large in our sample. This finding supports sticky price models as an explanation for real exchange rate behavior, extending the classic argument of Mussa (1986) from a focus on short-run volatility to long-run dynamics. Two thirds of the rise in real exchange rate variance observed across exchange rate regimes is attributable to greater persistence of responses to shocks, including greater price stickiness, rather than to greater variance of shocks themselves.

Monetary Policy and Real Exchange Rate Dynamics in Sticky-Price Models

We study how real exchange rate dynamics are affected by monetary policy in dynamic, stochastic, general equilibrium, sticky-price models. Our analytical and quantitative results show that the source of interest rate persistence -- policy inertia or persistent policy shocks -- is key. When the monetary policy rule has a strong interest rate smoothing component, these models fail to generate high real exchange rate persistence in response to monetary shocks, as policy inertia hampers their ability to generate a hump-shaped response to such shocks. Moreover, in the presence of persistent monetary shocks, increasing policy inertia may decrease real exchange rate persistence.

Median-unbiased estimation of structural change models: an application to real exchange rate persistence

Measuring deviations from purchasing power parity has been the subject of extensive investigation. The most common practice in empirical research for measuring real exchange rate persistence is to estimate univariate autoregressive (AR) time series models and calculate the half-life, defined as the number of periods for a unit shock to a time series to decay by 50%. In the presence of structural change, there are two potential biases in the parameter estimates of AR models: (1) a downward small sample median-bias and (2) an upward bias, which occurs when structural change is present and ignored. We conduct a variety of Monte Carlo simulations and demonstrate that the existence of structural change causes a substantial increase in the small sample bias documented in Andrews (1993). We then propose an extension of median-unbiased estimation, which explicitly accounts for structural change, and apply these methods to estimate half-lives of several long-horizon real exchange rates analysed by Lothian and Taylor (1996) and Taylor (2002). The upward bias from neglecting structural change dominates the downward median-bias for these real exchange rates. When structural change is present and accounted for, the median-unbiased half-lives towards a changing mean decrease and the confidence intervals tighten.

Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate

This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed to the conventional monetary model.

Persistent Appreciations and Overshooting: A Normative Analysis

Most economies experience episodes of persistent real exchange rate appreciations, when the question arises whether there is a need for intervention to protect the export sector. This paper presents a model of irreversible destruction where exchange rate intervention may be justified if the export sector is financially constrained. However, the criterion for intervention is not whether there are bankruptcies or not, but whether these can cause a large exchange rate overshooting once the factors behind the appreciation subside. The optimal policy includes ex-ante and ex-post interventions. Ex-ante (that is, during the appreciation phase) interventions have limited effects if the financial resources in the export sector are relatively abundant. In this case the bulk of the intervention takes place ex-post, and is concentrated in the first period of the depreciation phase. In contrast, if the financial constraint in the export sector is tight, the policy is shifted toward ex-ante intervention and it is optimal to lean against the appreciation.

The Dynamic Behavior of the Real Exchange Rate in Sticky Price Models: Comment

In an article published in the American Economic Review, Jón Steinsson (2008) argues that two sticky price models driven by real shocks can explain the observed persistence, volatility, and hump-shaped impulse response function of the real exchange rate. This comment shows, first, that correcting an error in one of Steinsson's models leads to substantially lower persistence and volatility of the real exchange rate; second, that Steinsson's models cannot match real exchange rate volatility relative to output; and, third, that reasonable variations of the model calibration or specification all lead to lower real exchange rate persistence and volatility (or both). (JEL F41, F44, E52)

Bayesian Analysis of Nonlinear Exchange Rate Dynamics and the Purchasing Power Parity Persistence Puzzle

We investigate the persistence of real exchange rates using Bayesian methods. First, an algorithm for Bayesian estimation of nonlinear threshold models is developed. Unlike standard grid-based estimation, the Bayesian approach fully captures joint parameter uncertainty and uncertainty about complicated functions of the parameters, such as the half-life measure of persistence based on generalized impulse response functions. Second, model comparison is conducted via marginal likelihoods, which reflect the relative abilities of models to predict the data given prior beliefs about model parameters. This comparison is conducted for a range of linear and nonlinear models and provides a direct evaluation of the importance of nonlinear dynamics in modeling exchange rates. The marginal likelihoods also imply weights for a model-averaged measure of persistence. The empirical results for real exchange rate data from the G7 countries suggest general support for nonlinearity, but the strength of the evidence depends on which country pair is considered. However, the model-averaged estimates of half-lives are uniformly smaller than for the linear models alone, suggesting that the purchasing power parity persistence puzzle is less of a puzzle than previously thought.

Inflation and Sectoral Output Growth Variability in Bulgaria

This paper analyzes the relationship between inflation and sectoral output growth variability in Bulgaria using a monthly data set from 2000:01 to 2012:08. The Bulgarian economy is working under a unique currency board setting that exclusively allows the government to influence the money supply through its fiscal position on the asset side of the central bank's balance sheet. Abrupt relative price changes across sectors bring fluctuations in sectoral output growth. Nevertheless, inflation effects on average output growth are positive and linear. Besides, persistent real exchange rate appreciation causes lower growth and higher variability under the pegged exchange rate regime.

Capital Account Policies and the Real Exchange Rate

Capital Account Policies and the Real Exchange Rate

Volatility and persistence of simulated DSGE real exchange rates

We investigate the time series properties of both filtered and unfiltered real exchange rate series produced by DSGE models that feature local currency pricing, home bias, nontraded goods, and incomplete markets. Detrended series produced by several specifications approach the empirically observed volatility, although none of the models generates enough persistence. Conversely, several models produce unfiltered series that possess the same degree of persistence as the data, but none can match its volatility.

The purchasing power parity in emerging Europe: Empirical results based on two-break analysis

The purpose of the paper is to evaluate the validity of purchasing power parity (PPP) for eight countries from the Emerging Europe: Hungary, Czech Republic, Poland, Romania, Lithuania, Latvia, Serbia and Turkey. Monthly data for euro and U.S. dollar based real exchange rate time series are considered covering the period: January, 2000 - August, 2011. Given significant changes in these economies in this sample it seems plausible to assume that real exchange time series are characterized by more than one time structural break. In order to endogenously determine the number and type of breaks while testing for the presence of unit roots we applied the Lee-Strazicich approach. For two euro based real exchange rate time series (in Hungary and Turkey) the unit root hypothesis has been rejected. For the U.S. dollar based real exchange rate time series in Poland, Romania and Turkey the presence of unit root has been rejected. To assess the adjustment dynamics of those real exchange rates that were detected to be stationary with two breaks, the impulse response function is calculated and half-life is estimated. Our overall conclusion is that the persistence of real exchange rate in Emerging Europe is still substantially high. The lack of strong empirical support for PPP suggests that careful policy actions are needed in this region to prevent serious exchange rate misalignment.

Mussa Redux and Conditional PPP

Long half-lives of real exchange rates are often used as evidence against monetary sticky price models. In this study we show how exchange rate regimes alter the long-run dynamics and half-life of the real exchange rate, and we recast the classic defense of such models by Mussa (1986) from an argument based on short-run volatility to one based on long-run dynamics. The first key result is that the extremely persistent real exchange rate found commonly in post Bretton Woods data does not apply to the preceding fixed exchange rate period in our sample, where the half-live was perhaps half as large. This result suggests a reinterpretation of Mussa's original finding, indicating that up to two thirds of the rise in variance of the real exchange rate in the recent period is actually due to the rise in persistence of the response to shocks, rather than due to a rise in the variance of shocks themselves. The second key result explains the rise in persistence over time by identifying underlying shocks using a panel VECM model. Shocks to the nominal exchange rate induce more persistent real exchange rate responses compared to price shocks, and these shocks became more prevalent under a flexible exchange rate regime.

Non Tradable Goods and the Real Exchange Rate

How important are nontradable goods and distribution costs to explain real exchange rate dynamics? We answer this question by estimating a general equilibrium model with intermediate and final tradable and nontradable goods. We obtain reasonable estimated parameter values using Bayesian methods, and find that the estimated model can match real exchange rate persistence and, to less extent, volatility. Nontradable sector technology shocks explain about one third of real exchange rate volatility. We present impulse responses to better understand the transmission mechanism of shocks in the open economy. We also show that in order to explain the low correlation between the ratio of relative consumption and the real exchange rates across countries, fiscal policy shocks are necessary in the model, in addition to technology shocks.

Real Exchange Rate Dynamics in Sticky-Price Models with Capital

The standard argument for abstracting from capital accumulation in sticky-price macro models is based on their short-run focus: over this horizon, capital does not move much. This argument is more problematic in the context of real exchange rate (RER) dynamics, which are very persistent. In this paper we study RER dynamics in sticky-price models with capital accumulation. We analyze both a model with an economy-wide rental market for homogeneous capital, and an economy in which capital is sector specific. We find that, in response to monetary shocks, capital increases the persistence and reduces the volatility of RERs. Nevertheless, versions of the multisector sticky-price model of Carvalho and Nechio (2011) augmented with capital accumulation can match the persistence and volatility of RERs seen in the data, irrespective of the type of capital. When comparing the implications of capital specificity, we find that, perhaps surprisingly, switching from economy-wide capital markets to sector-specific capital tends to decrease the persistence of RERs in response to monetary shocks. Finally, we study how RER dynamics are affected by monetary policy and find that the source of interest rate persistence -- policy inertia or persistent policy shocks -- is key.

Real Exchange Rate Adjustment, Wage-Setting Institutions, and Fiscal Stabilization Policy: Lessons of the Eurozone's First Decade

In terms of macroeconomic performance, the Eurozone's first decade is a story of successful inflation-targeting by the ECB for the common currency area as a whole combined with the persistence of real exchange rate and current account disequilibria at member country level. According to the standard New Keynesian (NK) model of a small member of a currency union, policy intervention at country level is not necessary to ensure adjustment to country-specific shocks. Self-stabilization of shocks takes place through the adjustment of prices and wages to ensure that the real exchange rate returns to equilibrium. That this did not happen in the Eurozone appears to be related to the presence of non-rational wage setters in a number of member countries. A related second departure from the NK model was the transmission of non-rational inflation expectations to the real interest rate, propagating easy credit conditions in countries with inflation above target. Problems of real exchange rate misalignment among members were exacerbated by the ability of Germany's wage-setting institutions to deliver self-stabilization. The implications for policy focus on using fiscal policy to target the real exchange rate and/or on reforms to labour markets that deliver real exchange rate oriented wage setting. (JEL codes: E61, E62, E65, F41, O52) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

REAL EXCHANGE RATE PERSISTENCE: EVIDENCE FROM THE WESTERN OFFSHOOTS*

This study examines the persistence of real exchange rates for Western Offshoot countries over the post‐Bretton Woods System. The aggregate price levels are decomposed into both tradable and non‐tradable goods prices by three alternative categories. The median level of half‐lives (across methodologies) is 3.27 years for median‐unbiased estimation, but about twice as high for smooth transition autoregressive estimation. The median level of persistence (across categories) using a variety of methodologies ranges from 1.10 years for the consumer price index to 37.17 years for the producer price index. The half‐lives indicate that considerable heterogeneity exists across alternative categories and methodologies.