Response Of Exchange Rate Research Articles

Incomplete exchange rate pass-through and simple monetary policy rules

This paper investigates the performance of various monetary policy rules in an open economy with incomplete exchange rate pass-through. Implementing monetary policy through an exchange rate augmented policy rule does not improve social welfare compared to using an optimized Taylor rule, irrespective of the degree of pass-through. A direct exchange rate response improves welfare only if the other reaction coefficients, on inflation and output, are sub-optimal. However, an indirect exchange rate response, through a policy reaction to Consumer Price Index (CPI) inflation rather than to domestic inflation, is welfare enhancing. This result is independent of whether society values domestic or CPI inflation stabilization.

Exchange Rate Models Are Not as Bad as You Think [with Comments and Discussion

Standard models of exchange rates, based on macroeconomic variables such as prices, interest rates, output, and so forth, are thought by many researchers to have failed empirically. We present evidence to the contrary. First, we emphasize the point that beating a random walk in forecasting is too strong a criterion for accepting an exchange rate model. Typically models should have low forecasting power of this type. We propose a number of alternative ways to evaluate models. We examine in-sample fit, but emphasize the importance of the monetary policy rule and its effects on expectations in determining exchange rates. Next we present evidence that exchange rates incorporate news about future macroeconomic fundamentals, as the models imply. We demonstrate that the models may well be able to account for observed exchange rate volatility. We discuss studies that examine the response of exchange rates to announcements of economic data, and then present estimates of exchange rate models in which expected pre...

The high-frequency response of exchange rates and interest rates to macroeconomic announcements

The joint movements of exchange rates and U.S. and foreign term structures over short-time windows around macro announcements are studied using a 14-year span of high-frequency data. In order to evaluate whether the joint effects can be reconciled with conventional theory, the implications of these joint movements for changes in expected future exchange rates and changes in foreign exchange risk premia are deduced. For several real macro announcements, a stronger than expected release appreciates the dollar today, and must either (i) lower the risk premium for holding foreign currency rather than dollars, or (ii) imply net expected dollar depreciation over the ensuing decade.

Simulations of anthropogenic change in the strength of the Brewer–Dobson circulation

The effect of climate change on the Brewer–Dobson circulation and, in particular, the large-scale seasonal-mean transport between the troposphere and stratosphere is compared in a number of middle atmosphere general circulation models. All the models reproduce the observed upwelling across the tropical tropopause balanced by downwelling in the extra tropics, though the seasonal cycle in upwelling in some models is more semi-annual than annual. All the models also consistently predict an increase in the mass exchange rate in response to growing greenhouse gas concentrations, irrespective of whether or not the model includes interactive ozone chemistry. The mean trend is 11 kt s−1 year−1 or about 2% per decade but varies considerably between models. In all but one of the models the increase in mass exchange occurs throughout the year though, generally, the trend is larger during the boreal winter. On average, more than 60% of the mean mass fluxes can be explained by the EP-flux divergence using the downward control principle. Trends in the annual mean mass fluxes derived from the EP-flux divergence also explain about 60% of the trend in the troposphere-to-stratosphere mass exchange rate when averaged over all the models. Apart from two models the interannual variability in the downward control derived and actual mass fluxes were generally well correlated, for the annual mean.

The effect of root pressurization on water relations, shoot growth, and leaf gas exchange of peach (Prunus persica) trees on rootstocks with differing growth potential and hydraulic conductance

It is well known that rootstocks can have an effect on the vegetative growth and development of the tree; however, there has been no clear explanation about the physiological mechanism involved in this phenomenon. Evidence indicates that the rootstock effects on tree vegetative growth may be related to hydraulic limitations of the rootstock. The objective of these experiments was to investigate the shoot growth, water potential, and gas exchange of peach trees on different rootstocks in response to manipulations of water relations of trees on rootstocks that differ in root hydraulic conductance. Tree water relations were manipulated by applying different amounts of pneumatic pressure on the root system and then relative shoot extension growth rate, tree transpiration rate, leaf water potential, leaf conductance, leaf transpiration, and net CO(2) exchange rate responses were measured. Root pressurization increased leaf water potential, relative shoot extension growth rate, leaf conductance, leaf transpiration, and net CO(2) exchange rates of trees on both vigorous and dwarfing rootstocks. There was a significant positive linear correlation between applied pneumatic pressure and tree transpiration rate and leaf water potential. Leaf conductance, transpiration rate, and net CO(2) exchange rate as well as relative shoot extension growth rates were also positively correlated with the applied pneumatic pressure on the root system. These relationships were consistent across both vigorous and size-controlling rootstocks, indicating that rootstock hydraulic limitation may be directly involved in the vegetative growth control of peach trees.

Real Exchange Rate Response to Capital Flows in Mexico: An Empirical Analysis

This study shows that in Mexico there is a long-run relationship between the real exchange rate and capital inflows, the external terms of trade, and productivity in the manufacturing sector. A once-and-for-all unit increase in the ratio of quarterly capital inflow to quarterly (annualized) GDP causes a long-run real appreciation of the peso of about 12 percent. The analysis also reveals a structural break in 1995, which coincides with the change to a floating exchange rate arrangement, and an overvaluation of the peso in real terms on the eve of the end-1994 crisis in the range of 12 to 25 percent.

Effect of late Spring defruiting on net CO2 exchange and leaf area development in apple tree canopies

SummaryThe influence of defruiting on vegetative development and its implications for the time response of canopy net CO2 exchange rate (NCERcanopy), transpiration (Tcanopy) and midday stem water potential ( stem) were analysed during the last 4 months of apple fruit development. Two crop-load treatments were applied 2 months after full bloom: defruited (DF) and fruited (F). The latter did not receive any fruit thinning. Four trees in two groups (with two replications of two trees per crop-load treatment), growing on a dwarfing rootstock (M-9), were monitored diurnally for NCERcanopy and Tcanopy, using a whole canopy gas exchange technique. The effects of defruiting were observed shortly after fruit removal. All parameters measured remained constant or increased over the 4 months until harvest. Canopy gas exchange decreased for all DF trees. Leaf NCER was also lower in DF trees until harvest. In contrast the leaf area of DF trees increased by 20% compared to F trees. Differences in NCERcanopy between treatments were reversed after harvest, when DF trees registered higher NCERcanopy values than F trees because of their larger leaf area. Leaf conductance and transpiration decreased, and stem increased for DF trees compared to F trees during the 4 month period of differential cropping. Daily NCERcanopy values decreased from late May until September, as did incident solar radiation, and temperatures were cooler in September. Inhibition of NCER at the leaf level increased linearly over time, from 10% immediately after thinning, up to 35% before harvest, and exceeded the 20% increase in vegetative growth in DF trees. This down-regulation, which increased proportionally with time, was interpreted as an inadequate replacement of fruit by vegetative sinks in DF trees over the 4 month research period.

Monetary Policy News and Exchange Rate Responses: Do Only Surprises Matter?

This paper shows that exchange rates respond to only the surprise component of an actual US monetary policy change and that failure to disentangle the surprise component from the actual monetary policy change can lead to an underestimation of the impact of monetary policy, or even to a false acceptance of the hypothesis that monetary policy has no impact on exchange rates. This finding implies that there is a need for reexamining the empirical analyses of asset price responses to macro news that do not isolate the unexpected component of news from the expected element. In addition, we add to the debate on how quickly exchange rates respond to news by showing that the exchange rates under study absorb monetary policy surprises within the same day as the news are announced.

Exchange Rate Disconnect in a Standard Open-Economy Macro Model

This paper demonstrates that the well-documented exchange rate disconnect can be explained within traditional exchange rate models. It is shown that even if the underlying fundamentals are invariant across exchange rate regimes, equilibrium real exchange rates are more volatile under flexible nominal exchange rates than under fixed rates. In particular, fixed rates reduce the requisite adjustments of the real exchange rate in response to both nominal and real shocks relative to a floating-rate scenario.

How Important are Nominal Shocks in Driving Real Exchange Rates? / Wie bedeutend sind nominale Schocks zur Erklärung realer Wechselkursbewegungen?

Summary Most of the extant literature identifies the sources of real exchange rate fluctuations by means of structural VAR analysis using long-run identification restrictions only. This paper presents an analogous decomposition on the basis of a simple textbook model of exchange rate determination, where identification is achieved after a suitable triangularization. This identification strategy allows for a calibration on the basis of the contemporaneous restrictions implied by the model. In order to facilitate a comparison with the results from the structural VAR studies, very similar data are used here as well. These are quarterly data collected on the bilateral exchange rates for the Deutsche Mark, the British Pound and the Japanese Yen, all relative to the U.S. Dollar. The implied impulse response functions of the model exhibit impact reactions of the exchange rate following either a monetary (nominal) or a real shock, thus conforming to the asset price property of exchange rates. This is in contrast to the delayed exchange rate responses typical in the structural VAR studies. Moreover, the variance decompositions indicate a dominant role for real shocks, with nominal shocks recognizable at best only in the short run. These results correspond quite closely to those obtained from structural VARs.

Rational Inattention: A Solution to the Forward Discount Puzzle

The uncovered interest rate parity equation is the cornerstone of most models in international macro. However, this equation does not hold empirically since the forward discount, or interest rate differential, is negatively related to the subsequent change in the exchange rate. This forward discount puzzle is one of the most extensively researched areas in international finance. It implies that excess returns on foreign currency investments are predictable. In this paper we propose a new explanation for this puzzle based on rational inattention. We develop a model where investors face a cost of collecting and processing information. Investors with low information processing costs trade actively, while other investors are inattentive and trade infrequently. We calibrate the model to the data and show that (i) inattention can account for most of the observed predictability of excess returns in the foreign exchange market, (ii) the benefit from frequent trading is relatively small so that few investors choose to be attentive, (iii) average expectational errors about future exchange rates are predictable in a way consistent with survey data for market participants, and (iv) the model can account for the puzzle of delayed overshooting of the exchange rate in response to interest rate shocks.

Response of gas exchange rates in Abies firma seedlings to various additional stresses under chronic acid fog stress

In order to clarify the chronic influence of acid fog on the gas exchange rates of momi fir (Abies firma Sieb. et Zucc.) trees, we exposed them to simulated acid fog (pH 3) for 3 years. The composition of the acid fog was similar to that observed in a region where momi fir trees have been declining, and it contained organic acids. We then treated the firs with various additional stresses, such as drought, low temperature, fine root cutting, ozone exposure, soil acidification, nitrogen load, and rhizosphere aluminum stress. Under chronic exposure to acid fog, the momi fir seedlings exhibited a pattern of stomatal behavior whereby they excessively opened in summer and closed in winter. Furthermore, the stomata of these seedlings tended to open during drought stress, and their needles were visibly injured after ozone exposure. The net photosynthesis rates of the seedlings exposed to acid fog were regulated by their stomatal aperture, rather than directly by acid fog. These results suggest that acid fog exposure disturbs the control of stomatal function in the momi fir seedlings. In addition, we found that chronic acid fog exposure suppressed the decrease in net photosynthesis rate, due to its nitrogen load.

Real or monetary? The US/UK real exchange rate, 1921–2002

This paper investigates the empirical link between the real exchange rate and the real interest differential, and the real exchange rate and the real output differential for the UK and the US. We use an extended set of monthly data for the period 1921–2002, which ensures high power of statistical tests, and a vector autoregression which allows for regime switches. In contrast to previous studies, we find evidence of both, a dynamic and a contemporaneous link between real exchange rate changes and the real interest rate differential. The real output differential is not linked with real exchange rate changes. The response of the real exchange rate to real interest differential shocks is much more persistent than its response to a real output differential shock. The results suggest that the real interest rate differential should receive further attention in building real exchange rate models.

Real exchange rate persistence and monetary policy rules

The objective of this paper is to analyze the effects of alternative monetary rules on real exchange rate persistence. Using a two-country stochastic dynamic general equilibrium with nominal price stickiness and local currency pricing, we will show how the persistence of purchasing power parity deviations can be related to a monetary theory of these deviations. When monetary policy lean against the wind, there is no relationship of proportionality between the time during which prices remain sticky and the persistence of the response of the real exchange rate: in this case high nominal price rigidity is not sufficient, per se, in generating any persistence following a monetary shock. Moreover, we emphasize the role of interest rates smoothing policies and relative price stickiness within countries in understanding the relationship between the real exchange rate and monetary shocks. With reasonable parameters values, a wide range of monetary policy rules can generate real exchange rate autocorrelations around the ones observed in the data.

The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements

Many recent papers have studied movements in stock, bond, and currency prices over short windows of time around macro announcements. This paper adds to the announcement effects literature in two ways. First, we study the joint announcement effects across a broad range of assets--exchange rates and U.S. and foreign term structures. In order to evaluate whether the joint effects can be reconciled with conventional theory, we interpret the joint movements in light of uncovered interest rate parity or changes in risk premia. For several real macro announcements, we find that a stronger than expected release appreciates the dollar today, but that it must either (i) lower the relative risk premium for holding foreign currency rather than dollars, or (ii) imply considerable future expected dollar depreciation. The latter implies an overshooting behavior akin to that described by Dornbusch (1976). Second, we use a longer span of high frequency data than has been common in announcement work. A longer span of high frequency data contributes to the precision of our estimates and allows us to explore the possibility that the effects of macro surprises on asset prices have varied over time. We find evidence, for example, that PPI releases had a larger effect on U.S. interest rates before about 1992 than subsequently.

Monetary policy's role in exchange rate behavior

We address the role of monetary policy shocks in exchange rate behavior using an inference procedure that allows us to relax dubious identifying assumptions. We find: (i) The peak exchange rate response may be delayed or nearly immediate; (ii) In every otherwise reasonable identification, monetary policy shocks lead to large uncovered interest rate parity (UIP) deviations; (iii) Monetary policy shocks may account for a smaller portion of exchange rate variance than found earlier. While (i) is consistent with overshooting, (ii) implies that the overshooting cannot be driven by Dornbusch's mechanism, and (iii) casts doubt on monetary policy shocks being the main source of exchange rate volatility.

The liquidity effects of foreign exchange intervention

This paper examines the effectiveness of foreign exchange intervention in a two-country, two-currency, general equilibrium model that allows for liquidity effects. Both sterilized and non-sterilized intervention operations have significant impacts on the allocation of liquidity in international financial markets. Whether intervention is successful in moving the exchange rate in the desirable direction depends upon the degree of sterilization of intervention and the intratemporal elasticity of substitution of the consumption goods. The model shows that there exist circumstances in which the response of exchange rate to intervention is ‘perverse’ as documented in the empirical literature.

The choice of exchange rate bands: balancing credibility and flexibility

This paper develops a framework for the optimal choice of exchange rate bands within an environment in which policymakers dislike nominal exchange rate variability, but value the flexibility to adjust the nominal exchange rate in response to shocks, in order to attain real exchange rate objectives. The paper provides an endogenous characterization of the optimal exchange rate band in terms of the underlying distribution of shocks to the current and capital accounts of the balance of payments and in terms of the commitment reputation of policymakers.

Import Protection, Capital Flows, and Real Exchange Rate Dynamics

This paper focuses on the effect of import protection on the response of the real exchange rate to capital flows. The central hypothesis is that barriers to imports blunt the expenditure and production shifting effects of changes in relative prices, and hence the ability of the real exchange rate to equilibrate the economy in response to international capital flows. Employing a cross-section approach, the study focuses on three broadly similar countries but with very different levels of protection: Argentina, Australia, and Canada. The empirical results are consistent with the central hypothesis.

The High-Frequency Response of Exchange Rates and Interest Rates to Macroeconomic Announcements

Many recent papers have studied movements in stock, bond, and currency prices over short windows of time around macro announcements. This paper adds to the announcement effects literature in two ways. First, we study the joint announcement effects across a broad range of assets--exchange rates and U.S. and foreign term structures. In order to evaluate whether the joint effects can be reconciled with conventional theory, we interpret the joint movements in light of uncovered interest rate parity or changes in risk premia. For several real macro announcements, we find that a stronger than expected release appreciates the dollar today, but that it must either (i) lower the relative risk premium for holding foreign currency rather than dollars, or (ii) imply considerable future expected dollar depreciation. The latter implies an overshooting behavior akin to that described by Dornbusch (1976). Second, we use a longer span of high frequency data than has been common in announcement work. A longer span of high frequency data contributes to the precision of our estimates and allows us to explore the possibility that the effects of macro surprises on asset prices have varied over time. We find evidence, for example, that PPI releases had a larger effect on U.S. interest rates before about 1992 than subsequently.