Download or read book Essays on Dynamic Effects of Exchange Rate Volatility Shocks on a Small Open Economy written by Hyung Suk Kim and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Motivated by the existence of time-varying volatility in exchange rates, the paper investigates the effects of exchange rate volatility shocks on a small open economy. First, we use a high-frequency dataset to generate a volatility measure for the period, instead of the traditional moving average standard deviation of exchange rates. The structural VAR impulse responses utilizing the volatility measure yield more significant and robust reactions of real variables to a volatility shock. Consumption, ouput, investment and net export exhibit non-trivial decrease upon impact of the shock. On the contrary, an exchange rate level shock and the traditional volatility measure fail to generate robust impulse responses under different Cholseky orderings. Second, we develop a theoretical model based on a standard New Keynesian small open economy, which can replicate the effects of a volatility shock observed in the VAR result. We solve the model up to a third order approximation so that the solution includes an explicit time-varying volatility term. The model impulse responses exhibit that real variables respond to a volatility shock and they are qualitatively consistent with the VAR result. The underlying mechanism is precautionary saving. The result is sensitive to various parameters such as the openness parameter and the elasticity of inter-temporal substitution. Finally, we make a welfare analysis regarding the optimal monetary policy. Two types of welfare measures are used: the unconditional mean of utility and the conditional welfare. The conditional welfare suggests that policy makers should raise the interest rate when volatility increases. The seemingly counter-intuitive result is due to the fact that the conditional welfare measure reflects dynamic response of the agent throughout her life-cycle. Under the optimal policy suggested by the conditional welfare, the initial consumption adjustment is severe but agents work less and eventually enjoy a higher level of consumption from savings carried over from earlier periods.

Download or read book Essays on the Real Effects of Monetary Shocks in Closed and Open Economies written by Scott Leonard Baier and published by . This book was released on 1996 with total page 462 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Essays on Economic Variability Dynamics of Adjustment and Exchange Rate Flexibility written by and published by . This book was released on 2004 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation revisits the literature on the role of exchange rate flexibility in smoothing the adjustments of the economy to different disturbances. Recently, the role of flexible exchange rates in stabilizing the economy against real shocks has been challenged by the new open economy models, which build on some empirical regularities, such as the low pass-through from nominal exchange rates to import prices. We take three approaches in an attempt to enrich this literature. Firstly, we incorporate factors of production into welfare analyses of fully-specified general equilibrium models. We find flexible exchange rate regimes reduce terms of trade and consumption volatility for primary commodity economies, particularly oil-exporting. Secondly, in an empirical investigation, using a panel Vector Autoregressive Regression of nine of the OECD's major oil-importing countries and the Reinhart and Rogoff's de facto classification of exchange rate regimes, we find support for the hypothesis that flexible exchange regimes better absorb oil-price shocks. We also document feedback from the real effective exchange rate and inflation rate to the domestic-currency real oil price shocks, supporting the growing notion that oil price shocks are not purely exogenous to developed economies. Thirdly, in a micro-level empirical investigation, we find a significant improvement in estimating the degree of nominal exchange rate pass-through to import prices when the adjustment costs and the equilibrium degree of pass-through assumptions are considered. More specifically, using a vector threshold cointegration model, we find increases in both the initial reaction and the long-run equilibrium response of import prices to nominal exchange rate changes for five industries in 16 OECD countries, especially for the manufacturing industry.

Download or read book Supply Shocks and Real Exchange Rate Volatility in a Small Open Economy written by Nestor Azcona and published by . This book was released on 2016 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the effect of overall and sector-specific productivity shocks on the real exchange rate in small open economies. A dynamic stochastic small open economy model shows that productivity shocks impact the real exchange rate mostly through changes in the relative price of non-traded goods and are unable to explain the large deviations from purchasing power parity for traded goods prices observed in the data. This paper also studies how the effect of productivity shocks on the real exchange rate changes when a country adopts a fixed exchange rate regime.

Download or read book Market Volatility and Foreign Exchange Intervention in EMEs written by Banco de Pagos Internacionales (Basilea, Suiza). Departamento Monetario y Económico and published by . This book was released on 2013 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Exchange Rate Volatility and Trade Flows Some New Evidence written by International Monetary Fund and published by International Monetary Fund. This book was released on 2004-05-19 with total page 132 pages. Available in PDF, EPUB and Kindle. Book excerpt: NULL

Download or read book Essays on International Macroeconomics written by Yi Chen and published by . This book was released on 2011 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: My dissertation attempts to provide new theoretical explanations of some long-standing international macro-finance puzzles, including the consumption-real exchange rate anomaly (i.e. the Backus-Smith puzzle), the consumption correlation puzzle, the real exchange rate volatility puzzle, the equity home bias puzzle and the exchange rate disconnect puzzle, with a particular emphasis on the possible role(s) played by news shocks and / or recursive preferences à la Epstein and Zin (1989). News shocks, defined in a broad sense as shocks to the market's expectations about future changes in driving forces, can have dramatically different impacts on the model dynamics in contrast to traditional unanticipated shocks to the driving forces. Epstein-Zin preferences, by breaking two independent aspects of preferences (attitude toward risks and willingness to substitute consumptions over time), make consumers more sensitive to long-run risks and as a result amplify the impacts of news shocks. Both features have become increasingly popular in the recent closed-economy macro-finance literature. My dissertation is among the first few to use these features to explain a long list of international macro-finance puzzles. Chapter 1 deals with the consumption-real exchange rate anomaly, the consumption correlation puzzle and the real exchange rate volatility puzzle. Data show that real exchange rates are negatively correlated with cross-country relative consumptions; consumptions are less correlated internationally than outputs; and real exchange rates are much more volatile than consumptions. Chapter 1 argues that these facts don't necessarily point to a "lack of risk sharing across countries" or a "low degree of international goods market integration", as are widely thought to be responsible for the above phenomena. The idea is formalized in a frictionless endowment-driven two-country two-good model featuring long-run news, i.e. slowly-moving signals that change the market's expectations about future output growth, and Epstein-Zin preferences. The model predicts that (1) news has opposite effects on the relative consumption and real exchange rate, so the two can be negatively correlated; (2) news has opposite effects on the home and foreign consumptions, so the cross-country consumption correlation can be low; (3) news makes the inter-temporal marginal rate of substitution (IMRS) excessively volatile relative to consumption growth, so the real exchange rate-consumption volatility ratio can be high. Intuitively, prediction (1) is true because news shocks behave as a demand shifter in the short run. Unlike unanticipated supply shocks, news shocks disturb the relative demand curve and trace out an upward-sloping relative supply curve. Prediction (2) can be justified by the fact that news does not materialize on impact (Christmas hasn't come yet), meaning that responses of consumptions to news are essentially a "zero-sum game" in the short run. Prediction (3) can be understood by noticing that news generates a dynamic wedge between the IMRS and the contemporaneous consumption growth. Calibrated through a structural vector auto-regression (SVAR) exercise, the model quantitatively replicates all the puzzling facts mentioned above. I also investigate the plausibility of two alternative explanations of the puzzles. Neither an incomplete-market model nor a trade-cost model can jointly account for all the facts. Chapter 2 incorporates EZ preferences in an otherwise standard open-macro model and shows that EZ preferences play a role of raising the home bias in equities, i.e. the bias of equity portfolios toward home assets, relative to the standard constant-relative-risk-aversion (CRRA) preferences. This happens because EZ preferences generate a long-run risk hedging demand that contributes to a positive covariance between the relative expenditure and the excess equity return. As a result the domestic equity is more likely a good asset as it pays off more whenever investors are willing to spend more. Additional main findings can be summarized as follows. First, using least structural information, we show that the degree of equity home bias depends on the conditional covariance-variance ratio between the relative expenditure and the excess equity return, which is in contrast to the CRRA models' counterfactual prediction that the degree of equity home bias relies on the conditional covariance-variance ratio between the real exchange rate and the excess equity return. Second, we solve for the optimal portfolio as an explicit function of the structural parameters using Devereux and Sutherland (2011)'s approach. Analytical solutions clearly show that EZ models tilt optimal portfolios toward local equities for a wide range of parameterizations relative to CRRA models. Third, the decomposition of equity home bias into two terms indicates that the relative contribution of the consumption covariance term and the portfolio covariance term to the rise in home bias relies on the persistence of endowment shocks. Chapter 3 looks into the exchange rate disconnect puzzle. Exchange rates seem to be disconnected from macro fundamentals: current and past macro fundamentals have a hard time accounting for the movements in nominal exchange rates (also known as the Meese-Rogoff puzzle); both nominal and real exchange rates appear excessively volatile relative to macro fundamentals; exchange rates don't seem to follow the strong cyclical patterns implied by most standard models. Chapter 3 argues that allowing for news about future money supply in a sticky-price open-economy model can shed light on the disconnect puzzle. News shocks, unlike unanticipated shocks, can affect exchange rates on impact but have muted effects on the contemporaneous macro variables. Two additional assumptions are made to make the mechanism work. First, only a fraction of households have access to the international financial markets while the rest leads a hand-to-mouth life. As news shocks have opposite impacts on the consumptions of two types of households, the aggregate consumption is less responsive. Second, export prices are denominated in local currencies. This assumption helps eliminate the spending-switching effects of nominal exchange rate movements. Overall the model is shown to move things in right directions both qualitatively and quantitatively.

Download or read book Economic Policies in Developing and Emerging Market Economies written by Shengzu Wang and published by . This book was released on 2008 with total page 118 pages. Available in PDF, EPUB and Kindle. Book excerpt:

Download or read book Dominant Currency Paradigm A New Model for Small Open Economies written by Camila Casas and published by International Monetary Fund. This book was released on 2017-11-22 with total page 62 pages. Available in PDF, EPUB and Kindle. Book excerpt: Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Download or read book Essays in Honour of Fabio Canova written by Juan J. Dolado and published by Emerald Group Publishing. This book was released on 2022-09-21 with total page 188 pages. Available in PDF, EPUB and Kindle. Book excerpt: Both parts of Volume 44 of Advances in Econometrics pay tribute to Fabio Canova for his major contributions to economics over the last four decades.

Download or read book Exchange Rate Economics written by Ronald MacDonald and published by Routledge. This book was released on 2005 with total page 334 pages. Available in PDF, EPUB and Kindle. Book excerpt: ''In summary, the book is valuable as a textbook both at the advanced undergraduate level and at the graduate level. It is also very useful for the economist who wants to be brought up-to-date on theoretical and empirical research on exchange rate behaviour.'' ""Journal of International Economics""

Download or read book Preventing Currency Crises in Emerging Markets written by Sebastian Edwards and published by University of Chicago Press. This book was released on 2002-11-15 with total page 782 pages. Available in PDF, EPUB and Kindle. Book excerpt: Economists and policymakers are still trying to understand the lessons recent financial crises in Asia and other emerging market countries hold for the future of the global financial system. In this timely and important volume, distinguished academics, officials in multilateral organizations, and public and private sector economists explore the causes of and effective policy responses to international currency crises. Topics covered include exchange rate regimes, contagion (transmission of currency crises across countries), the current account of the balance of payments, the role of private sector investors and of speculators, the reaction of the official sector (including the multilaterals), capital controls, bank supervision and weaknesses, and the roles of cronyism, corruption, and large players (including hedge funds). Ably balancing detailed case studies, cross-country comparisons, and theoretical concerns, this book will make a major contribution to ongoing efforts to understand and prevent international currency crises.

Download or read book Evolution and Performance of Exchange Rate Regimes written by Mr.Kenneth Rogoff and published by International Monetary Fund. This book was released on 2003-12-01 with total page 85 pages. Available in PDF, EPUB and Kindle. Book excerpt: Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility.

Download or read book Currencies Commodities and Consumption written by Kenneth W. Clements and published by Cambridge University Press. This book was released on 2013-01-31 with total page 401 pages. Available in PDF, EPUB and Kindle. Book excerpt: Discusses economic issues associated with exchange rates, commodity prices, the economic size of countries and alternatives to PPP exchange rates.

Download or read book Foreign Exchange Intervention Rules for Central Banks A Risk based Framework written by Romain Lafarguette and published by International Monetary Fund. This book was released on 2021-02-12 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

Download or read book Is Exchange Rate Stabilization an Appropriate Cure for the Dutch Disease written by Mr.Ruy Lama and published by International Monetary Fund. This book was released on 2010-08-01 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper evaluates how successful is a policy of exchange rate stabilization to counteract the negative effects of a Dutch Disease episode. We consider a small open economy model that incorporates nominal rigidities and a learning-by-doing externality in the tradable sector. The paper shows that leaning against an appreciated exchange rate can prevent an inefficient loss of tradable output but at the cost of generating a misallocation of resources in other sectors of the economy. The paper also finds that welfare is a decreasing function of exchange rate intervention. These results suggest that stabilizing the nominal exchange rate in response to a Dutch Disease episode is highly distortionary.

Download or read book The Chicago Plan Revisited written by Mr.Jaromir Benes and published by International Monetary Fund. This book was released on 2012-08-01 with total page 71 pages. Available in PDF, EPUB and Kindle. Book excerpt: At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher's claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.