US Real Exchange Rate Research Articles

Purchasing power parity in Mexico since 1933

A new approach to cointegration developed by Enders et al. (Cointegration tests using instrumental variables with an example of the U.K. demand for money. Unpublished working paper. http://wenders.people.ua.edu/time-series-methods.html, 2008) is applied to long-span, high-frequency data to test for purchasing power parity in the Mexico–US real exchange rate. Overall the empirical results suggest that purchasing power parity (PPP) holds for the study period. The evidence for PPP is stronger when structural breaks are allowed in the real exchange rate.

Understanding the Effect of Productivity Changes on International Relative Prices: The Role of News Shocks

AbstractThe US real exchange rate and terms of trade have been found to appreciate when US labour productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard open‐economy sticky‐price dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labour productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home goods prices relative to foreign goods prices.

Does financial integration affect real exchange rate volatility and cross-country equity market returns correlation?

Existing empirical studies show that financial integration affects the behavior of average excess returns, cross-country equity market returns (EMR) correlations and real exchange rate (RER) volatility. We employ a recently developed two-country model with recursive preferences, frictionless and complete markets and highly correlated long-run innovations to examine whether full financial integration (i.e. full risk-sharing) affects the US-Canada EMR correlation and the US RER volatility, consistently with existing empirical findings. First, full risk-sharing gives rise to a relatively high RER volatility. Second, it induces very strong positive cross-country EMR correlations. Both quantities are higher than those observed in the US-Canada asset pricing data, and increase as the risk-sharing incentive increases. In contrast, “international consumption quantities” are weakly sensitive to changes in the level of aversion to consumption and utility risk.

Productivity, commodity prices and the real exchange rate: The long-run behavior of the Canada–US exchange rate

The paper examines the Canada–US real exchange rate since the early 1970s to test two popular explanations of the long-run real exchange rate based on the influence of sectoral productivities and commodity prices. The empirical analysis finds that both variables exert a significant long-run effect. However, the relation for the real exchange rate has shifted as the effect of each variable has become stronger and a positive trend is present since 1990. The effect of productivity, moreover, is opposite to that predicted by the standard Balassa–Samuelson theory. An explanation of these findings is suggested based on a general-equilibrium model that includes differentiated traded manufactures and homogeneous commodities.

Alternative estimators of cointegrating parameters in models with nonstationary data: an application to US export demand

This article presents Monte Carlo simulations which compare the empirical performance of two alternative single equation estimators of the equilibrium parameters in a dynamic relationship. The estimators considered are Stock and Watson's Dynamic Ordinary Least Squares (DOLS) estimator and Bewley's transformation of the general autoregressive distributed lag model. The results indicate that the Bewley transformation produces a lower mean-square error as well as superior serial correlation properties even with lower truncation lags for the lagged variables included in the estimation equation. An application is then provided which examines the nature of the equilibrium relationship between aggregate US exports, world trade and the US real exchange rate. This confirms that estimation of the equilibrium parameters of this relationship by the Bewley transformation produces results which are superior to estimation by DOLS.

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Purchasing Power Parity: Evidence from a New Testing Procedure in the Nonlinear Modified ESTAR Framework

The presence of transaction costs in trading implies a non-linear adjustment process of real exchange rates towards Purchasing Power Parity (PPP). This may make the traditional tests for PPP using a linear framework, which generally tend to refute the PPP hypothesis, unreliable. This study models the dynamics of the adjustment towards PPP using a modified exponential smooth transition autoregressive process which accounts for both a symmetric and asymmetric adjustment mechanism and tests for the validity of PPP using a new test. Using quarterly data from 10 APEC countries, our results suggest that the bilateral US real exchange rates are mean reverting. Our study provides strong evidence supporting the PPP hypothesis and resolves the inconclusiveness from previous empirical results.

The Effects of News About Future Productivity on International Relative Prices: An Empirical Investigation

In this paper, we study the eects of news about future productivity changes (news shocks) and contemporaneous productivity changes (contemporaneous shocks) on the real exchange rate and terms of trade. Following Barsky and Sims’ (2010) identication method, we decompose US total factor productivity (TFP) into news and contemporaneous productivity changes. We nd that the identied news TFP shocks play a much more important role than the identied contemporaneous TFP shocks in driving the US real exchange rate and terms of trade. We also

Real exchange rates and real interest rate differentials: A present value interpretation

Although the real exchange rate–real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we re-investigate the RERI relationship using bilateral US real exchange rate data spanning the period 1978–2007. Instead of testing one particular model, we build on Campbell and Shiller [1987. Cointegration tests of present-value models. Journal of Political Economy 95, 1062–1088] to propose a metric of the economic significance of the relationship. Our empirical results provide robust evidence that the RERI link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons.

The International Dimension of Productivity and Demand Shocks in the US Economy

This paper investigates the international dimension of productivity and demand shocks to US manufacturing. Identifying shocks with sign restrictions based on standard theory predictions we find that productivity gains in manufacturing - our measure of tradables - have substantial aggregate effects, boosting US consumption and investment, relative to the rest of the world, thus raising real imports; net exports and US net foreign assets correspondingly decrease. We also ascertain substantial repercussions through the international financial adjustment mechanism, via a rise in US shares prices and nontrivial portfolio shifts in gross US foreign assets and liabilities. At the same time these shocks appreciate the US real exchange rate and improve its terms of trade. Shocks to the demand for US manufacturing also lead to real dollar appreciation; however, they appear to have less pronounced aggregate effects, with limited impact on trade and capital accounts. Our findings provide novel evidence on key channels of the international transmission of business cycle impulses, including financial channels, linking aggregate demand, the current account, international relative prices. Namely, asymmetric wealth effects amplify rather than attenuate the consequences of US shocks to tradables on domestic aggregate spending, driving endogenous aggregate demand fluctuations across countries.

Alternative Estimators of Cointegrating Parameters in Models With Non-Stationary Data: An Application to US Export Demand

This paper presents Monte Carlo simulations which compare the empirical performance of two alternative single equation estimators of the equilibrium parameters in a dynamic relationship. The estimators considered are Stock and Watson’s dynamic ordinary least squares (DOLS) estimator and Bewley’s transformation of the general autoregressive distributed lag model. The results indicate that the Bewley transformation produces a lower mean-square error as well as superior serial correlation properties even with lower truncation lags for the lagged variables included in the estimation equation. An application is then provided which examines the nature of the equilibrium relationship between aggregate US exports, world trade and the US real exchange rate. This confirms that estimation of the equilibrium parameters of this relationship by the Bewley transformation produces results which are superior to estimation by DOLS.

The International Dimension of U.S. Expansions: A Structural VAR Analysis

This paper investigates the international dimension of productivity and demand shocks in the US using sign restrictions based on standard theory predictions. Identifying shocks to US manufacturing — our measure of tradables — we nd that productivity gains have substantial aggregate demand e¤ects, boosting US consumption and investment, relative to the rest of the world, thus raising real imports; net exports and US net foreign assets correspondingly decrease. At the same time, however, these shocks appreciate the US real exchange rate, improve the terms of trade and raise stock prices. Shocks to the demand for US manufacturing appear to have less pronounced aggregate e¤ects, with little impact on trade and capital accounts; they lead to a (delayed) dollar appreciation, however. Our ndings provide novel evidence on key channels of the international transmission of shocks, pointing to a low degree of consumption risk sharing as an essential feature of the transmission mechanism, and suggesting that strong wealth e¤ects play an important role in generating aggregate demand ‡uctuations across countries. JEL classi cation: F32, F41, F42

Australian Wine Exports and the AUSFTA

Abstarct Using data from the Australian Wine and Brandy Corporation, this paper explores the potential effect of the Australia–United States Free Trade Agreement (AUSFTA) on Australian wine exports to the United States. Specifically, it examines the relationship between the Australian–US real exchange rate, and wine sales of nine different categories of Australian wine exports between 1990 and 2004. The analysis indicates that sales of mid-valued red wine, white wine and sparkling wines are more sensitive to changes in price than other types of wine. This suggests that AUSFTA is likely to generate a larger proportional impact on sales of these wines than other varieties.

The US Dollar and the Trade Deficit: What Accounts for the Late 1990s?*

AbstractBased on a version of the IMF's global economy model set up to analyse macroeconomic interdependence between the United States and the rest of the world, this paper asks to what extent accelerating productivity growth in the United States may have contributed to the US real exchange rate appreciation and the trade balance deterioration witnessed in the second half of the 1990s. The paper concludes that productivity is only part of this story. A portfolio preference shift in favour of US assets, possibly triggered by faster productivity growth, and some uncertainty and learning about the persistence of both shocks are needed to match the data more satisfactorily.

Unit root tests for panel data

This paper develops unit root tests for panel data. These tests are devised under more general assumptions than the tests previously proposed. First, the number of groups in the panel data is assumed to be either finite or infinite. Second, each group is assumed to have different types of nonstochastic and stochastic components. Third, the time series spans for the groups are assumed to be all different. Fourth, the alternative where some groups have a unit root and others do not can be dealt with by the tests. The tests can also be used for the null of stationarity and for cointegration, once relevant changes are made in the model, hypotheses, assumptions and underlying tests. The main idea for our unit root tests is to combine p-values from a unit root test applied to each group in the panel data. Combining p-values to formulate tests is a common practice in meta-analysis. This paper also reports the finite sample performance of our combination unit root tests and Im et al.'s [Mimeo (1995)] t-bar test. The results show that most of the combination tests are more powerful than the t-bar test in finite samples. Application of the combination unit root tests to the post-Bretton Woods US real exchange rate data provides some evidence in favor of the PPP hypothesis.

The Japan–US trade imbalance: a real business cycle perspective

A structural vector autoregression is used to uncover the cause of the persistent US bilateral trade deficit with Japan. Identification of the estimated system is obtained by using long-run restrictions generated from a two-country real business cycle model. The primary cause of the trade imbalance is the continual depreciation of the US real exchange rate. The importance of exchange rate innovations is at odds with standard real business cycle theory where such relative price movements are endogenous. However, many other aspects of real business cycle theory are supported by the empirical results.

Testing the random walk hypothesis for real exchange rates

This paper tests the random walk hypothesis for the log-differenced monthly US real exchange rates versus some major currencies. The tests we use are variance ratio test, Durlauf's (1991) spectral domain tests and Andrews and Ploberger's ( 1996) optimal tests. The variance ratio test is calculated by using Andrews' (1991) optimal data-dependent methods. Finite sample properties of these tests are also reported. Because the results of applying these tests to the real exchange rates are occasionally inconsistent, tests to synthesize these test results are proposed and applied to the real exchange rates. These tests have often been used in meta-analysis, but have not previously been used to synthesize different test results. Simulation results for these tests are also reported. For the real exchange rate data from the post-Bretton Woods period, these tests reject the null only for the Swiss franc. But when longer-horizon data are used, there is more evidence of serial correlations in the log-differenced real exchange rates. Copyright © 1999 John Wiley & Sons, Ltd.

Oil prices and the rise and fall of the US real exchange rate

Questions of the relative importance of real vs. monetary shocks in explaining exchange rate movements still have no widely accepted answer, despite their importance both for the research agenda and for policy questions. We examine this issue using a variety of empirical techniques for the US effective exchange rate. We find that a stable link exists between oil price shocks and the US real effective exchange rate over the post-Bretton Woods period. The results suggest that oil prices may have been the dominant source of persistent real exchange rate shocks and that energy prices may have important implications for future work on exchange rate behavior.

Manufactured exports of developing countries and their terms of trade since 1965: A comment

The results of Sarkar and Singer (1991) on the trends in the relative unit values of the manufactured exports of developing countries are sensitive to the choice of end-year and to fluctuations in the unit values of US exports relative to those of the rest of the world. The relative unit values of US exports are highly correlated with movements in the US real exchange rate, and there is some evidence to suggest that Sarkar and Singer's findings primarily reflect changes in the real exchange rates of developing countries.