exchange rate volatility and irish uk trade 1979 1992 this study examines how exchange rate volatility affected ireland s exports to its most important trading partner the united kingdom from 1979 to 1992 to ensure reliable inferences regarding income and price elasticities and the impact of exchange rate volatility on exports the time series properties of the series used are investigated the analysis here is conducted at both aggregate and 2 digit sitc division levels since exchange rate volatility can reasonably be presumed to affect sectors differently since expectations matter for exchange rate determination real volatility was generated according to a first order garch process both real and nominal volatility were important determinants for over 35 of irish uk trade with positive effects predominating this may be due to the nature of irish firms operating in a small open economy where they have little option in dealing with increased exchange rate risk except to weather the storm for fear of losing market share or facing costs of either exit

real exchange rate volatility financial crises and exchange rate regimes this paper examines real exchange rate rer volatility in eighty countries around the world during the period 1970 to 2011 two main questions are raised are structural breaks in rer volatility related to changes in exchange rate regimes or financial crises and do these two events affect the permanent and transitory components of rer volatility to answer them we employ two complementary procedures that consist in detecting structural breaks in the rer series and decomposing volatility into its permanent and transitory components our results suggest that structural breaks in rer volatility coincidence with financial crises and certain changes in nominal exchange rate regimes moreover our findings confirm that rer volatility does increase with the global financial crises and detect that the more flexible the exchange rate regime the higher the volatility of the rer using a de facto exchange rate classification

real effective exchange rate volatility and growth a framework to measure advantages of flexibility vs costs of volatility abstract by devising a real effective exchange rate reer index where bilateral exchange rates are weighted for relative trade shares we find that the reer volatility differently from the bilateral exchange rate volatility with the dollar has significant impact on growth of per capita income after controlling for other variables traditionally considered in conditional convergence estimates we also find that this cost of volatility effect can be reconciled with the concurring negative and significant effect on growth of the adoption of a fixed exchange rate regime advantage of flexibility effect where the latter may be also interpreted as the cost of choosing pegged regimes without harmonization of rules and macroeconomic policies with main trading partners the adoption of an reer volatility measure instead of a bilateral exchange rate with the dollar has the advantage of making it possible a joint test for these two effects this is because while fixed exchange rate regimes are strongly negatively correlated and almost collinear with bilateral exchange rate volatility with the dollar the correlation is much weaker when considering our reer volatility measure

evaluating the bank of england density forecasts of inflation we consider evaluating the uk monetary policy committee s inflation density forecasts using probability integral transform goodness of fit tests these tests evaluate the whole forecast density we also consider whether the probabilities assigned to inflation being in certain ranges are well calibrated where the ranges are chosen to be those of particular relevance to the mpc given its remit of maintaining inflation rates in a band around per annum finally we discuss the decision based approach to forecast evaluation in relation to the mpc forecasts

the impact of terms of trade and real exchange rate volatility on investment and growth in sub saharan africa abstract specialization in primary product exports reduces growth but why adverse trends in and the high variance of primary product prices are possible explanations the impact on investment and growth of the level and volatility of the terms of trade and the real effective exchange rate is estimated for a panel of 14 sub saharan african countries over 1980 1995 growth is negatively affected by terms of trade instability and investment by real exchange rate instability both growth and investment increase when the terms of trade improve and real exchange rate overvaluation is eliminated

constructing density forecasts from quantile regressions the departure from the traditional concern with the central tendency is in line with the increasing recognition that an assessment of the degree of uncertainty surrounding a point forecast is indispensable clements 2004 we propose an econometric model to estimate the conditional density without relying on assumptions about the parametric form of the conditional distribution of the target variable the methodology is applied to the u s unemployment rate and the survey of professional forecasts specification tests based on koenker and xiao 2002 and gaglianone et al 2011 indicate that our approach correctly approximates the true conditional density

investment and the exchange rate an analysis with firm level panel data abstract this paper investigates the relationship between exchange rate fluctuations and the investment decisions of a sample of italian manufacturing firms the results support the view that a depreciation of the exchange rate has a positive effect on investment through the revenue channel and a negative effect through the cost channel the magnitude of these effects varies over time with changes in the firm s external orientation as measured by the share of foreign sales over total sales and the reliance on imported inputs consistent with the predictions of our theoretical framework the effect of exchange rate fluctuations on investment is stronger for firms with low monopoly power facing a high degree of import penetration in the domestic market and of a small size we also provide evidence that the degree of substitutability between domestically produced and imported inputs influences the effect through the expenditure side

exchange rate volatility exchange rate regime and trade volume evidence from the uk us export function 1889 1999 abstract this paper investigated the impact of exchange rate volatility and exchange rate regime on the british exports to the united states using data for the period 1889 1999 the empirical findings suggest that neither exchange rate volatility nor the different exchange rate regimes that spanned the last century had an effect on export volume

optimal aggregation of money supply forecasts accuracy profitability and market efficiency we present a general procedure for aggregating expert forecasts which exploits regularities in the structure of information within the forecaster population specific information structures lead to aggregation methods which adjust for additive bias differences in individual accuracy and correlation among forecasts as an application we construct composite predictions of the weekly change in the money supply from forecasts made by twenty major securities dealers for which high positive correlation is found to be a significant characteristic due to instability in the information structure our methods cannot improve on the accuracy of a simple average in this case however they do capture information about the correlation among money supply forecasts which is not fully impounded in short term interest rates forecasts from our models accurately predict the direction of price changes for treasury bills and treasury bill futures after a money supply announcement the adjustment of prices to information in financial markets has been studied at length mostly from the perspective of the efficient markets hypothesis market efficiency tests typically look at the behavior of prices the end product

monetary policy and food inflation in south africa a quantile regression analysis abstract although optimal monetary policy stabilizes food inflation theoretically empirical studies remain limited not only in the context of volumes and the estimation approaches but are focused on selected advanced and emerging countries to the neglect of africa where poverty and dominance of food in the consumption basket are more pronounced we provide empirical evidence in the context of south africa using quantile regressions rising food prices are destabilized even further by restrictive monetary policy a finding that has ramifications for inflation targeting especially given that a quarter of the country s population is food poor

international trade and exchange rate volatility for currencies with well developed forward markets several papers have investigated the conjectured negative relationship between trade and short term exchange rate volatility without being very successful a theoretical explanation for the empirical anomalies is provided by solving explicitly for the forward rate because importers and exporters are on opposite sides of the forward market so is their exposure towards exchange rate volatility moreover which trade flow benefits and which one loses from increased volatility is determined by the signs of the aggregate net foreign currency exposure and the aggregate measure of risk aversion

exchange rate uncertainty and foreign trade abstract this paper starts with reviewing the existing literature on exchange rate uncertainty and trade flows it then argues that potential costs of medium term uncertainty in exchange rates and competitiveness are likely to be much larger than that of exchange risk which has been the focus of the existing literature two measures of medium term exchange rate uncertainty are constructed one is a weighted function of the magnitude of past movements in nominal exchange rates and the current deviation of the exchange rate from equilibrium while the second depends on both the duration and the amplitude of misalignment from equilibrium exchange rates the empirical evidence reported in the paper suggests that when exchange rate uncertainty is defined over a medium term period it does affect adversely trade flows of the industrial countries under review with the notable exception of the united states

why do forecasters disagree lessons from the term structure of cross sectional dispersion abstract key sources of disagreement among economic forecasters are identified by using data on cross sectional dispersion in forecasters long and short run predictions of macroeconomic variables dispersion among forecasters is highest at long horizons where private information is of limited value and lower at short forecast horizons moreover differences in views persist through time such differences in opinion cannot be explained by differences in information sets our results indicate they stem from heterogeneity in priors or models differences in opinion move countercyclically with heterogeneity being strongest during recessions where forecasters appear to place greater weight on their prior beliefs

unit roots and cointegration in estimating causality between exports and economic growth empirical evidence from the asean countries abstract this paper utilizes cointegration and error correction representation methodology in estimating the long run behavioral relationship between exports and economic growth in the asean countries

growth and exchange rate volatility a panel data analysis the aim of this article is to assess the role of real exchange rate rer volatility on long run economic growth for a set of 82 advanced and emerging economies using a panel data set ranging from 1970 to 2009 with an accurate measure for exchange rate volatility the results for the two step system generalized method of moments gmm panel growth models show that a more less volatile rer has a significant negative positive impact on economic growth the results are also robust for different model specifications

modeling expectations of bounded prices an application to the market for corn the presence of farm programs should directly affect the expectations of producers this paper analyzes the formation of price expectations when price supports constitute an effective lower bound on the distribution of the expectations we first investigate what the expected price would be if the usual rational expectations formula is used this leads to a relationship that is not estimable we suggest two alternatives one based on a tobit approximation and the other based on a perfect prediction of when the support is going to be effective using a simplified model of the u s corn market the methodology is demonstrated and compared to an alternative method of using futures prices as the expectation of harvest price the analysis of supply response for the major u s field crops is made difficult due to government intervention in these markets this intervention has been characterized by the use of price supports acreage diversion storage incentives etc during the last thirty years many studies have analyzed producer behavior in the presence of governmental involvement such studies have typically been concerned with modeling the effect of supports and diversions in an ex post sense rather than with how producers used the knowledge of farm programs to form their expectations if producers are rational economic agents their expectations of harvest prices should be conditioned both by free market forces and the type and degree of governmental intervention in the market of course farm programs have varied in nature and extent during the past thirty years and it is doubtful that any structural model could capture their complexities in this paper we attempt to introduce rational expectations in a simplified model of the u s corn market in essence we focus on the formation of price expectations when price supports constitute an effective lower bound on the distribution of the expectations we proceed by developing a theoretical model that connects the rational expectations model with a model of bounded price variation it is shown that one representation that may characterize the corn market is a triangular structural system with endogenous switching a full information maximum likelihood estimator is proposed for the system next an empirical model is specified and estimated the model is evaluated in comparison to an augmented model that contains a futures price so that some inferences may be made concerning the rational expectations model s success in summarizing relevant market information expectations under bounded prices consider a market that may be represented by a simple supply and demand system q a pt a2w el supply function pt b qt b2xt e2t demand function 1 where p and q represent market price and quantity w and x represent supply and demand shifters and p represents the rational expectation of product price at the time production decisions are made note that this system has a familiar recursive structure when the expected price variable is specified in terms of one or more lagged prices when the restricted reduced form of the structural system is solved for in terms of the expected price and this expression is used to replace pj wallis 1980 then models similar to those of goodwin and sheifrin 1982 and shonkwiler and emerson 1982

the unemployment effect of exchange rate volatility in industrial countries using data on 17 industrial countries from 1982 to 2003 and controlling for a wide array of factors this paper finds that higher exchange rate volatility increases the unemployment rate the magnitude of the effect is small the results are robust to variations in specification

the real exchange rate and macroeconomic performance in sub saharan africa abstract pooled time series and cross section data for 33 countries in sub saharan africa ssa confirm the negative relationship between the real exchange rate rer misalignment and economic performance economic growth imports exports saving and investment macroeconomic instability also slows growth and other indicators of performance higher levels of misalignment are accompanied by higher levels of macroeconomic instability both lower levels of rer misalignment and instability lead to better economic performance the edwards model of rer determination performs well for the region black market premia tend to show a greater degree of misalignment in rer than alternative measures

why trade liberalisation is good for growth there are three titles that might have been assigned for this paper 1 why is growth so rapid with outer oriented trade strategies 2 do countries with outer oriented trade strategies grow faster and 3 the one actually assigned they are not the same of the three the first is probably the most difficult to answer the second is a factual question and the empirical demonstration is straightforward sachs and warner 1995 the third by focussing on trade liberalisation implies that developing countries have highly restrictive trade regimes and thus asks if a move away from those regimes is good for growth it is far easier to show why especially over time liberalising a restrictive trade regime is conducive to more rapid growth than it is to show why outer oriented trade strategies have been so highly successful trade strategies and development strategies are closely related and it is useful to start by defining a few terms an import substitution is industrialisation strategy was adopted by most developing countries in the years following the second world war in most cases those countries were then predominantly agricultural and exporters of primary commodities the belief then was that rapid industrialisation was the essential if not the sole feature of economic growth and that only by domestically producing goods then imported could developing countries industrialise 1 under is it was intended to provide protection to new industries during their developmental period until they could compete with their counterparts in industrialised countries in practice the is strategy pulled most new resources into import competing activites with a number of negative consequences discussed later and one result was that export earnings grew less rapidly than the demand for foreign exchange and usually less rapidly even than real gdp an almost universal policy response was then to impose restrictive import licensing in response to foreign exchange shortage the stated reasons for this were the need to conserve scarce foreign exchange for essential developmental needs the outcome was of course a restrictive trade regime for reasons to be discussed below as is strategies continued trade regimes increased in restrictiveness and growth slowed hence to discuss trade liberalisation is to address the removal or at least reduction of incentives for is industrialisation and because again to be discussed below growth spurred under an is industrialisation strategy slows

causality between exports and economic growth abstract this paper utilizes granger causality tests in investigating the relationship between exports and national income from a consistent data set for 47 developing countries in africa new empirical results as well as suggestions for future research are presented

the impact of exchange rate uncertainty on the level of investment conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment using the dixit pindyck model we find that there are situations where this will happen and situations where it does not there are threshold effects which allows us to identify when rising volatility would increase or decrease investment and also to identify which types of industries would gain and which would suffer from a move to fixed exchange rates this is important for monetary union in europe since it is likely that even if trade is insensitive to exchange rate volatility investment with its longer horizon will be affected textbook theories of investment under uncertainty present a rather oversimplified rule for a firm deciding whether to invest or not if the project s expected net present value npv is positive the firm invests otherwise it does not this implies that if the investment is reversible the firm will simply disinvest if the npv turns negative but if investment is irreversible then if a firm decides not to invest it will never invest this is not a realistic approach given uncertainty firms often find it convenient to wait rather than to commit themselves one way or another waiting is therefore a proper alternative to investing or not investing and firms will be confronted with an invest wait do not invest decision rather than an invest do not invest one dixit and pindyck 1994 have developed a model in which the option value of an investment project is evaluated to represent the value of waiting that option value then becomes part of the investment costs because once an irreversible investment is made the possibility of exercising this option to invest later on when better information is available has been lost thus the decision rule is still invest if npv 0 otherwise do not invest but the npv now represents the present value of the expected revenues less the value of the option to invest later less the present value of any other investment costs in this paper we extend the dixit pindyck model for varying degrees of uncertainty and price drift and specifically for the case where that uncertainty is caused by exchange rate volatility such an extension is important not only because it is a new development but also because we need to understand how monetary union will affect investment expenditures in europe for simplicity we assume the domestic prices are fixed and that the only uncertainty is in the exchange rate and hence the domestic value of foreign currency revenues that leaves us with various problems the first is to determine the threshold at which exchange rate price uncertainty is sufficient to affect investment adversely second under what conditions does that uncertainty actually reduce investment third do exchange rate misalignments or exchange rate volatility damage investment more we show that answers to such questions can be c55

evaluating density forecasts with applications to financial risk management density forecasting is increasingly more important and commonplace for example in financial risk management yet little attention has been given to the evaluation of density forecasts the authors develop a simple and operational framework for density forecast evaluation they illustrate the framework with a detailed application to density forecasting of asset returns in environments with time varying volatility finally the authors discuss several extensions copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

foreign direct investment exports and domestic performance in mexico a causality analysis abstract most empirical work on the effects of outward oriented policies in developing countries has identified openness with trade however openness involves much more than just trade this paper analyses the relationship among trade foreign direct investment and domestic income in mexico during the period 1980 i to 1999 iv on the basis of the granger non causality procedure recently developed by toda and yamamoto journal of econometrics 66 1995 225 and dolado and lutkepohl econometric review 15 1996 369 the results support the effectiveness of the outward looking orientation policy in this country

investment in manufacturing exchange rates and external exposure abstract this paper introduces a new measure of external exposure which emphasizes exposure to external markets both through export sales and imported inputs into production and uses this measure to explore the linkage between exchange rates and investment in us industry on average manufacturing sectors have evolved to being primarily import exposed by the early 1980s in low price over cost markup sectors markups are relatively unresponsive to exchange rate changes whereas sectoral investment patterns are strongly affected by contrast high markup industries absorb much of the exchange rate fluctuations in markups and pass relatively little through to real investment

causality between export growth and industrial development empirial evidence from the nics abstract this paper investigates the causal relationship between export growth and industrial development in eight newly industrializing countries nics results of sims causality test show that for most of the nics there is a strong bidirectional causality between the growth of exports and industrial development these findings support the export led growth strategy in that expansion in exports not only promote the growth of national income but also lead to structural transformation of the developing countries

the effect of real exchange rate uncertainty on exports empirical evidence unless very specific assumptions are made theory alone cannot determine the sign of the relation between real exchange rate uncertainty and exports on the one hand convexity of the profit function with respect to prices implies that an increase in price uncertainty raises the expected returns in the export sector on the other potential asymmetries in the cost of adjusting factors of production for example investment irreversibility and risk aversion tend to make the uncertainty exports relation negative this article examines these issues using a simple risk aversion model export equations allowing for uncertainty are then estimated for six developing countries contrary to the ambiguity of the theory the empirical relation is strongly negative estimates indicate that a 5 percent increase in the annual standard deviation of the real exchange rate can reduce exports by 2 to 30 percent in the short run these effects are substantially magnified in the long run

exports growth and causality in ldcs abstract using akaike s optimal lag criterion in a granger causality test the causal relationship between export growth and economic growth and vice versa is re examined for 20 countries it is argued that earlier analyses which ignore optimal lags in granger or sims causality tests suffer from certain shortcomings which are overcome by the present approach the results suggest some support for the export promotion hypothesis especially in the case of well known nics and thus differ from previous applications of granger test which did not adopt an optimum lag criterion and which showed no causality from export growth to economic growth in such cases however they are inconclusive in evaluating competing hypotheses

exchange rate volatility and international trading strategy abstract it is usually argued that an increase in exchange rate volatility reduces the volume of international trade as trading firms are risk averse this paper shows that exporting firms benefit under fairly general conditions from an increase in exchange rate volatility firms optimally adjust their export volumes to the level of the exchange rate exporting is an option which is exercised if profitable in addition the paper presents conditions under which the volume of international trade grows with exchange rate volatility

a medium term framework for analyzing the real exchange rate with applications to the philippines and tanzania a competitive official real exchange rate is important to external balance and sustainable medium term growth in developing countries this article presents a methodology for estimating appropriate real rate and provides a basis for evaluating the extent to which the prevailing rate is misaligned in particular the medium term equilibrium real exchange rate is evaluated by estimating the effects of structural factors on the trend observed for a country s real rate compared with the rates of its major trading partners taking into account the effects of macroeconomic policy structural factors include terms of trade external capital flows and trade policy plus other factors relevant to the circumstance of individual countries the implied change in the medium term equilibrium real rate is compared with that of a historical reference period the application of this methodology to two developing countries the philippines and tanzania illustrates how it can complement and improve upon other analytic approaches such as those using purchasing power parity and analysis of parallel rates this approach is complemented by an analysis of the relation between a country s real exchange rate and those of its major competitors

cointegration causality and export led growth in portugal 1865 1985 abstract this paper considers the relationship between cointegration and causality and uses tests of cointegration as pre tests for granger tests of causality such methods are utilized on portuguese data 1865 1985 where the export led growth hypothesis is rejected in favour of reverse causality

exchange rate volatility international trade and the value of exporting firms abstract increased exchange rate volatility positively affects the value of exporting firms via the price and volume impacts of exchange rates and also makes an exporting strategy more attractive relative to the direct investment investment in export production capacity could therefore be a positive function of exchange rate volatility firms would also be more willing to sustain losses i e to engage in dumping before they abandon their export markets the effect on the volume and value of trade is ambiguous

constructing optimal density forecasts from point forecast combinations summary decision makers often observe point forecasts of the same variable computed for instance by commercial banks imf and the world bank but the econometric models used by such institutions are frequently unknown this paper shows how to use the information available on point forecasts to compute optimal density forecasts our idea builds upon the combination of point forecasts under general loss functions and unknown forecast error distributions we use real time data to forecast the density of us inflation the results indicate that the proposed method materially improves the real time accuracy of density forecasts vis a vis those from the unknown individual econometric models copyright 2013 john wiley sons ltd

has exchange risk depressed international trade the impact of third country exchange risk abstract this paper argues that the effect of exchange risk on bilateral and aggregate trade flows should be analyzed by including the impact of third country exchange risk factors in addition to direct bilateral or multilateral risk after a theoretical examination of these effects us bilateral export flow to its six largest trading partners are analyzed empirically i find individuality and jointly significant third country risk effects in most cases in contrast to some recent bilateral efforts i find a steadily growing negative impact on trade flows from exchange risk during floating and in contrast to recent aggregate trade flow studies i conclude that there was no temporary decline in exchange risk during the late 1970s

a note on the estimation of limited dependent variable models under rational expectations abstract in this paper we derive the expressions for the expected price in a disequilibrium model with upper and lower limits on prices under rational expectation relaxing the assumption of perfect foresight made in earlier studies we prove the uniqueness of the solution to the rational expectations model and outline the estimation method and iterative procedure