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262
The New Open Economy Macroeconomics: A Survey”,
- Journal of International Economics
, 2001
"... Abstract Since the 1995 publication of Obsteld and Rogoff's Redux model, there has been an outpouring of research on open-economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities. This paper offers an interim survey of this recent literature. ..."
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Cited by 311 (4 self)
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Abstract Since the 1995 publication of Obsteld and Rogoff's Redux model, there has been an outpouring of research on open-economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities. This paper offers an interim survey of this recent literature.
Order Flow and Exchange Rate Dynamics
, 1999
"... Macroeconomic models of nominal exchange rates perform poorly. In sample, R 2 statistics as high as 10 percent are rare. Out of sample, these models are typically out-forecast by a naïve random walk. This paper presents a model of a new kind. Instead of relying exclusively on macroeconomic determina ..."
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Cited by 303 (23 self)
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Macroeconomic models of nominal exchange rates perform poorly. In sample, R 2 statistics as high as 10 percent are rare. Out of sample, these models are typically out-forecast by a naïve random walk. This paper presents a model of a new kind. Instead of relying exclusively on macroeconomic determinants, the model includes a determinant from the field of microstructure-order flow. Order flow is the proximate determinant of price in all microstructure models. This is a radically different approach to exchange rate determination. It is also strikingly successful in accounting for realized rates. Our model of daily exchange-rate changes produces R 2 statistics above 50 percent. Out of sample, our model produces significantly better short-horizon forecasts than a random walk. For the DM/ $ spot market as a whole, we find that $1 billion of net dollar purchases increases the DM price of a dollar by about 1 pfennig. eScholarship provides open access, scholarly publishing services to the University of California and delivers a dynamic
The effect of fixed exchange rates on monetary policy
- QUARTERLY JOURNAL OF ECONOMICS
, 2003
"... To investigate how a fixed exchange rate affects monetary policy, this paper classifies countries as pegged or nonpegged and examines whether a pegged country must follow the interest rate changes in the base country. Despite recent research which hints that all countries, not just pegged countries, ..."
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Cited by 136 (12 self)
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To investigate how a fixed exchange rate affects monetary policy, this paper classifies countries as pegged or nonpegged and examines whether a pegged country must follow the interest rate changes in the base country. Despite recent research which hints that all countries, not just pegged countries, lack monetary freedom, the evidence shows that pegs follow base country interest rates more than nonpegs. This study uses actual behavior, not declared status, for regime classification; expands the sample including base currencies other than the dollar; examines the impact of capital controls, as well as other control variables; considers the time series properties of the data carefully; and uses cointegration and other levels-relationship analysis to provide additional insights.
The Purchasing Power Parity Debate
- Journal of Economic Perspectives
, 2004
"... Our willingness to pay a certain price for foreign money must ultimately and essentially be due to the fact that this money possesses a purchasing power as against commodities and services in that country. On the other hand, when we offer so and so much of our own money, we are actually offering a p ..."
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Cited by 124 (11 self)
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Our willingness to pay a certain price for foreign money must ultimately and essentially be due to the fact that this money possesses a purchasing power as against commodities and services in that country. On the other hand, when we offer so and so much of our own money, we are actually offering a purchasing power as against commodities and services in our own country. Our valuation of a foreign currency in terms of our own, therefore, mainly depends on the relative purchasing power of the two currencies in their respective countries. Gustav Cassel, economist (1922, pp. 138–39) The fundamental things apply As time goes by. Herman Hupfeld, songwriter (1931; from the film Casablanca, 1942) P urchasing power parity (PPP) is a disarmingly simple theory that holds thatthe nominal exchange rate between two currencies should be equal to theratio of aggregate price levels between the two countries, so that a unit of currency of one country will have the same purchasing power in a foreign country. The PPP theory has a long history in economics, dating back several centuries, but the specific terminology of purchasing power parity was introduced in the years
Currency traders and exchange rate dynamics: A survey of the U.S. market
- JOURNAL OF INTERNATIONAL MONEY AND FINANCE
, 2001
"... We report findings from a survey of United States foreign exchange traders. Our results indicate that: (i) in recent years electronically-brokered transactions have risen substantially, mostly at the expense of traditional brokers; (ii) the market norm is an important determinant of interbank bid-as ..."
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Cited by 101 (5 self)
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We report findings from a survey of United States foreign exchange traders. Our results indicate that: (i) in recent years electronically-brokered transactions have risen substantially, mostly at the expense of traditional brokers; (ii) the market norm is an important determinant of interbank bid-ask spread and the most widely-cited reason for deviating from the conventional bid-ask spread is a thin/hectic market; (iii) half or more of market respondents believe that large players dominate in the dollar-pound and dollar-Swiss franc markets; (iv) technical trading best characterizes about 30 % of traders, with this proportion rising from five years ago; (v) news about macroeconomic variables is rapidly incorporated into exchange rates; (vi) the importance of individual macroeconomic variables shifts over time, although interest rates always appear to be important; (vii) economic fundamentals are perceived to be more important at longer horizons, while short-run deviations from the fundamentals are attributed to excess speculation and institutional customer/hedge fund
Exchange Rate Regime Durability and Performance in Developing versus Advanced Economies
- Journal of Monetary Economics
, 2005
"... Using new data and recent advances in the classification of exchange rate regimes, this paper finds pegged regimes confer important advantages to developing countries with little exposure to international capital. In these countries, pegs are associated with lower inflation and more durable regimes, ..."
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Cited by 75 (8 self)
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Using new data and recent advances in the classification of exchange rate regimes, this paper finds pegged regimes confer important advantages to developing countries with little exposure to international capital. In these countries, pegs are associated with lower inflation and more durable regimes, without increased risk of crisis. Among emerging markets— developing countries that are more integrated in global financial markets—and advanced economies, our findings generally support the earlier Baxter-Stockman result pointing to the absence of a robust relationship between economic performance and exchange rate regime. Emerging markets, however, tend to have less durable exchange rate regimes, and encounter crises more frequently under pegs. Absent major political shifts toward currency unions in the future, the number of pegs in the developing world will diminish over the next two decades, especially as poorer countries gain access to global capital and, consequently, see the durability of pegs erode. 1Husain and Mody are with the IMF’s Research Department where Rogoff, now with Harvard University, was Economic Counselor and Director when the research for this paper was undertaken. This paper draws on the authors ’ earlier work with Robin Brooks and Nienke Oomes (Rogoff et al, 2004), to which contributions from Andrew Berg, Grace Juhn, Paolo Mauro, and Antonio Spilimbergo are also gratefully acknowledged. The authors are indebted to Rex Ghosh for providing his dataset, and to Young Kim and Eisuke Okada for valuable research assistance. For many helpful comments, we would like to thank, without
Understanding Exchange rate Volatility without . . .
, 1999
"... Exchange rate regimes differ primarily by the noisiness of the exchange rate, not observable macroeconomic “fundamentals.” Fixed exchange rates are typically stable and floating exchange rates are volatile, but macro phenomena are regime-independent. Fundamentals only seem to be relevant for exchang ..."
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Cited by 74 (4 self)
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Exchange rate regimes differ primarily by the noisiness of the exchange rate, not observable macroeconomic “fundamentals.” Fixed exchange rates are typically stable and floating exchange rates are volatile, but macro phenomena are regime-independent. Fundamentals only seem to be relevant for exchange rates at low frequencies or when inflation is high. A basic task of international finance is explaining these cross-regime differences in exchange rate volatility. The evidence suggests that a switch in exchange rate policy is accompanied by a change in market structure; macroeconomic considerations are superfluous. We formalise this observation in a non-linear model with multiple equilibria.
HOW IS MACRO NEWS TRANSMITTED TO EXCHANGE RATES?
, 2003
"... This paper tests whether macroeconomic news is transmitted to exchange rates via the transactions process and if so, what share occurs via transactions versus the traditional direct channel. We identify the link between order flow and macro news using a heteroskedasticity-based approach, a la Rigob ..."
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Cited by 62 (4 self)
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This paper tests whether macroeconomic news is transmitted to exchange rates via the transactions process and if so, what share occurs via transactions versus the traditional direct channel. We identify the link between order flow and macro news using a heteroskedasticity-based approach, a la Rigobon and Sack (2002). In both daily and intra-daily data, order flow varies considerably with macro news flow. At least half of the effect of macro news on exchange rates is transmitted via order flow.
