monetary policy rules in the open economy effects on welfare and business cycles abstract this paper computes welfare maximizing taylor style interest rate rules in a business cycle model of a small open economy the model assumes staggered price setting and shocks to domestic productivity to the world interest rate to world inflation and to the uncovered interest rate parity condition optimized policy rules have a pronounced anti inflation stance and entail significant nominal and real exchange rate volatility the country responds to an increase in external volatility by holding more foreign assets the policy rule affects the variance and the mean of consumption the effect on the mean matters significantly for welfare

exchange rate volatility and export growth in nigeria this article examines the impact of exchange rate volatility on nigeria s exports to its most important trading partner the united states over the quarterly period january 1980 to april 2001 using cointegration and vector error correction vecm framework empirical tests indicate the presence of a unique cointegrating vector linking real exports real foreign income relative export prices and real exchange rate volatility in the long run furthermore the results show that increases in the volatility of the real exchange rate raise uncertainty about profits to be made which exert significant negative effects on exports both in the short and long run our results also show that improvements in the terms of trade represented by declines in the real exchange rate and real foreign income exert positive effects on export activity most importantly we found that the trade liberalization and economic reform policies implemented in the post 1986 structural adjustment period contributed to nigeria s export

nonlinear effects of exchange rate volatility on the volume of bilateral exports in this paper we investigate empirically the impact of exchange rate volatility on real international trade flows utilizing a 13 country data set of monthly bilateral real exports for 1980 1998 we compute one month ahead exchange rate volatility from the intra monthly variations in the exchange rate to better quantify this latent variable we find that the effect of exchange rate volatility on trade flows is nonlinear depending on its interaction with the importing country s volatility of economic activity and that it varies considerably over the set of country pairs considered copyright 2003 john wiley sons ltd

welfare and public policy the role of internationalized production i introduction micro foundations of the new open macroeconomics framework see lane 2001 for a comprehensive survey provide a well grounded welfare criterion to evaluate public policies contributions in this line of research suggest that whether a monetary or a fiscal innovation is detrimental or beneficial in terms of national welfare depends on various characteristics of the world economy under consideration 1 the complexity of this problem warrants further investigation on economic features along this line of research to sort out policy implications in this article i focus on a prevalent feature of the real world firms hiring both domestic and foreign production factors to produce national goods and call it internationalized production 2 production factors contribute to foreign production through various ways of globalized production processes for instance a country can utilize foreign factors through importing intermediate goods and firms can directly hire foreign production factors through establishing foreign owned firms and foreign direct investment abroad 3 the extent of internationalized production is not easy to measure however yet empirical evidence indicates that its scale and importance have been on the rise in recent years for many countries table 1 shows the imported inputs as a share of the value of production for selected countries computed by campa and goldberg 1997 in all the four countries except japan the shares of imported inputs have increased considerably in the last two decades hummels et al 1998 consider the imported inputs that are used to manufacture goods for export they call the trade of these inputs vertical trade table 2 summarizes some of their results although vertical trade accounts for a relatively small fraction of total trade as shown in the second and the third columns its contribution to total export growth as shown in the fifth column far exceeds its share of total trade in all countries except japan indicating its increasing importance in particular for canada and the netherlands almost 50 of the growth of exports from the first to the last year in the sample are due to growth in vertical trade table 3 taken from jungnickel and keller 2003 presents the scales of sales and employment of foreign owned firms in selected countries and years in the listed countries the sales and employment in percentage of the respective values for total manufacturing increase from 1985 to 1998 except in japan and italy the figures for germany are quite stable over time in particular foreign owned firms employed more than a quarter of the total employment in the manufacturing sectors of france and belgium in the year 1998 as demonstrated the factor markets have been increasingly connected across borders in production and it is therefore important to investigate the implications of public policies to the world economy in which internationalized production matters in this article i incorporate internationalized production into the model of corsetti and pesenti 2001 denoted cp hereafter and investigate its role played on the welfare effects of public policies this model generates many welfare implications different from cp s in particular an expansionary monetary shock can be beggar thy neighbor and a fiscal shock can improve national welfare in this model the ranges of parameter values which give rise to different welfare outcomes are derived i also derive the transmission mechanism of public policy which is quite different from theirs in particular in this model a fiscal shock affects the exchange rate and produces long run welfare effects even if it is temporary it is shown that internationalized production may not only cause tensions between countries but also widen the welfare gap between citizens in a country this opens up a discussion on the issues of international retaliation and coordination which i will discuss in the concluding remarks

some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

volatility and irish exports we analyse the impact of volatility per se on real exports for a small open economy concentrating on irish trade with the uk and the us an important element is that we take account of the time lag between the trade decision and the actual trade or payments taking place by using a flexible lag approach rather than adopt a single measure of risk we also adopt a spectrum of risk measures and detail varied size characteristics and statistical properties we find that the ambiguous results found to date may be due to not taking account of the timing effect which varies substantially depending on which volatility measure is used

monetary union price level convergence and inflation how close is europe to the usa abstract the pattern of price dispersion across european and us cities from 1990 to 2004 is documented there is a striking decline in dispersion for traded goods prices in europe most of which took place prior to the launch of the euro dispersion in the euro area is now quite close to that of the usa this evidence provides useful facts for future work assessing the importance of various developments in europe harmonization of tax rates convergence of incomes and labor costs liberalization of trade and factor markets and increased coherence of monetary policy

the choice of exchange rate regime and the volatility of exchange rates after the asian crisis a counterfactual analysis the objective of this paper is to carry out a counterfactual analysis of the impact of alternative exchange rate regimes on the volatility of the nominal effective exchange rate neer and the bilateral rate against the us dollar for nine east asian countries after the asian financial crisis our hypothetical regimes include a unilateral basket peg ubp a common basket peg cbp and a hard peg against the dollar we find that a ubp would minimise effective exchange rate volatility for all countries and provides the highest regime gains compared to actual although the gains for a cbp are always less than those for a ubp the absolute differences between the two regimes appear to be small in terms of the bilateral relationship against the dollar the gains from a ubp or cbp could be quite significant for the non dollar peggers since a fall in effective instability would be accompanied by a fall in bilateral instability

real exchange rates and relative prices an empirical investigation abstract this paper uncovers a striking empirical regularity the consumer price of a good relative to a different good within a country tends to be much less variable than the price of that good relative to a similar good in another country this fact seems to hold for all goods except very simple homogeneous products models of real exchange rates are likely to have predictions regarding this relation so this fact may provide a useful gauge for discriminating among models

interest rate volatility and home mortgage loans the us economy has experienced substantial fluctuations in real and nominal interest rates since the 1970s this article investigates empirically the relationship between home mortgage loans and volatility in mortgage rates for the period 1971 02 to 2003 03 contrary to common wisdom we find a positive relationship between mortgage rate volatility and home mortgage loans further investigation indicates that this is due to volatility in the bond market in times of high interest volatility households disinvest in government securities and invest in real assets which yields a positive relationship between mortgage rate volatility and home mortgage loans

the impact of monetary union on macroeconomic integration evidence from west africa data from 19 african nations is used to investigate the hypothesis that monetary union represented in this case by the cfa franc zone augments the extent of macroeconomic integration the paper covers two key dimensions of integration the volume of bilateral trade and the magnitude of cross country business cycle correlation restricting our attention to a part of the world in which for historical reasons monetary union membership is exogenous to economic characteristics we can test whether the large single currency effects claimed by a rose apply within a sample of less developed countries

on the sensitivity of the volume and volatility of bilateral trade flows to exchange rate uncertainty we present an empirical investigation of the hypotheses that exchange rate uncertainty may have an impact on both the volume and variability of trade flows by considering a broad set of industrial countries bilateral real trade flows over the period 1980 1998 similar to the findings of earlier theoretical and empirical research our first set of results shows that the impact of exchange rate uncertainty on trade flows is indeterminate our second set of results provides new and novel findings that exchange rate uncertainty has a consistent positive and significant effect on the volatility of bilateral trade flows helping us better understand macroeconomic volatility jel f17 f31 c22

exchange rate pass through exchange rate volatility and exchange rate disconnect abstract this paper explores the hypothesis that high volatility of real and nominal exchange rates may be due to the fact that local currency pricing eliminates the pass through from changes in exchange rates to consumer prices exchange rates may be highly volatile because in a sense they have little effect on macroeconomic variables the paper shows the ingredients necessary to construct such an explanation for exchange rate volatility in addition to the presence of local currency pricing we need a incomplete international financial markets b a structure of international pricing and product distribution such that wealth effects of exchange rate changes are minimized and c stochastic deviations from uncovered interest rate parity together it is shown that these elements can produce exchange rate volatility that is much higher than shocks to economic fundamentals and disconnected from the rest of the economy in the sense that the volatility of all other macroeconomic aggregates are of the same order as that of fundamentals

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

an exploration in the theory of exchange rate regimes three exchange rate regimes a float a one sided peg and a cooperative peg are evaluated and compared in terms of efficiency and welfare levels the framework of analysis embodies country specific monies with the money of each country being used to transact in its commodity markets and its currency denominated bonds welfare levels depend only on consumption levels in the presence of perfect foresight all equilibrium allocations are pareto efficient in a floating exchange rate regime the perfect foresight equilibrium allocation coincides with an equilibrium of a costless barter economy the same result holds in a one sided peg if the pegging country s exchange rate stabilizing authority breaks even over time in a cooperative peg regime there is a different equilibrium allocation for each combination of exchange rate levels and monetary policies problems of policy coordination and conflicts in desired monetary policies are discussed

the expenditure switching effect welfare and monetary policy in a small open economy abstract this paper analyses the implications of the expenditure switching effect for the role of the exchange rate in monetary policy in a small open economy it is shown that when the elasticity of substitution between home and foreign goods is not equal to unity welfare depends on the variances of producer prices and the terms of trade producer price targeting is compared to consumer price targeting and a fixed exchange rate it is found that a fixed exchange rate yields higher welfare than the other regimes only when the elasticity of substitution between home and foreign goods is very high

exchange rate regimes and national price levels this paper explores the role of exchange rate regimes in explaining deviations from the classic theory of purchasing power parity examining a broad panel of countries i find that developing countries with fixed exchange rate regimes have national price levels that are 20 percent higher than those with flexible regimes for industrial countries the relation between regimes and price levels is qualitatively similar but weaker i investigate several explanations for this pattern and find that exchange rate overshooting in floats inflation inertia in pegs and expansionary policies can explain only 5 percentage points of the observed differences i also show that even though the observed pattern could be the outcome of a class of open economy models pioneered by obstfeld and rogoff the data provides limited empirical support for the predictions of this model

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

currencies and the allocation of risk the welfare effects of a monetary union in a general equilibrium model with incomplete asset markets nominal securities and mean variance preferences a monetary union is desirable when the gain from eliminating excess volatility of nominal variables exceeds the cost of reducing the number of currencies with which to hedge risks copyright 1998 by american economic association

exchange rate uncertainty and agricultural trade using a sample of bilateral trade flows across ten developed countries between 1974 and 1995 this article explores the effect of exchange rate uncertainty on the growth of agricultural trade as compared to other sectors based on a gravity model that controls for other factors likely to determine bilateral trade the results show that real exchange rate uncertainty has had a significant negative effect on agricultural trade over this period moreover the negative impact of uncertainty on agricultural trade has been more significant compared to other sectors

the impacts of exchange rate volatility on vegetable trade flows trade flows of commodities are generally affected by the principles of comparative advantage in a free trade however trade flows might be enhanced or distorted not only by various government interventions but also by exchange rate fluctuations among others this study applies a commodity specific gravity model to selected vegetable trade flows among organization for economic co operation and development oecd countries to determine the effects of exchange rate uncertainty on the trade flows using the data from 1996 to 2002 the results show that while the exchange rate uncertainty significantly reduces trade in the majority of commodity flows there is evidence that both short and long term volatility have positive effect on trade flows of specific commodities this study also tests the regional preferential trade agreements such as the north american free trade agreement nafta the asia pacific economic cooperation apec and the eu and their different effects on commodities

optimal monetary policy in open economies revisited abstract this paper revisits optimal monetary policy in open economies in particular focusing on the noncooperative policy game under local currency pricing in a two country dynamic stochastic general equilibrium model we first derive the quadratic loss functions which noncooperative policy makers aim to minimize then we show that noncooperative policy makers face extra trade offs regarding stabilizing real marginal costs induced by deviations from the law of one price under local currency pricing and that optimal monetary policy seeks to stabilize cpi inflation rates and more so under noncooperation than it does under cooperation as a result of the increased number of stabilizing objectives welfare gains from cooperation emerge even when two countries face only technology shocks still gains from cooperation are not large implying that frictions other than nominal rigidities are necessary to strongly recommend cooperation as an important policy framework to increase global welfare

should the exchange rate be a shock absorber this paper examines the welfare case for the exchange rate as a shock absorber cushioning an economy in face of shocks to world demand for its good we provide an example in which although the exchange rate acts perfectly as a shock absorber stabilizing output around the natural rate and eliminating the impact of nominal rigidities it may in fact be better to prevent the exchange rate from adjusting at all the explanation for this is that with incomplete international financial markets the natural rate is inefficient it does not respond enough to demand shocks while fixing the exchange rate increases the volatility of consumption the pro cyclical nature of monetary policy under a fixed exchange rate allows for a more efficient composition of consumption between home and foreign goods furthermore for the shocks examined a welfare maximizing monetary rule always dampens exchange rate volatility relative to that of a free float and in some cases may imply a fixed exchange rate d 2004 elsevier b v all rigths reserved

the effects of macroeconomic stability on foreign trade an analysis for spain 1986 2000 two main factors underlie the rebirth of interest in the study of the influence of the real exchange rate on trade the reduction of its volatility and the current trend towards price stability the objective of this study is to analyse the effects of the process of nominal convergence required of the european member states for the fulfilment of monetary integration on foreign trade flows the case of spain which is especially interesting in this context is studied for the period 1986 to 2000 the results of estimating the aggregate functions of the export and import of goods shows how macroeconomic stability has altered the behaviour of trade with respect to the two basic determinants income and prices how it has caused a significant structural change in the real exchange rate and finally how it has laid the explanatory bases for transactions in the twenty first century with the single currency the euro

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

monetary integration uncertainty and the role of money finance this paper considers the positive theory of monetary integration in a general equilibrium monetary model a role for money finance is presented which optimally reduces consumption variability when asset markets are incomplete importantly this role is independent of the aggregate money stock and so does not restrict inflation policy

exchange rate policy and endogenous price flexibility most theoretical analysis of exible vs flxed exchange rates takes the degree of nominal rigidity to be independent of the exchange rate regime choice itself but informal policy discussion often suggests that a credible exchange rate peg may increase internal price exibility this paper explores the relationship between exchange rate policy and price exibility in a model where price exibility itself is an endogenous choice of proflt maximizing flrms a flxed exchange rate can afiect the optimal degree of price exibility by altering the volatility of nominal demand facing price setting flrms we flnd that a unilateral peg such as a currency board adopted by a single country will increase internal price exibility perhaps by a large amount on the other hand when an exchange rate peg is supported by bilateral participation of all monetary authorities such as in a monetary union price exibility may actually be less than under freely oating exchange rates quantitatively we flnd that the endogenous increase in price exibility following a unilateral peg might be big enough that output volatility is no greater than it would be under a oating exchange rate regime

dynamic portfolio selection with process control abstract the risk inherent in the accumulation of investment capital depends on the true return distributions of the risky assets the accuracy of estimated returns and the investment strategy this paper considers risk control with value at risk and conditional value at risk using control limits to determine times for portfolio rebalancing optimal strategies and control limits are determined for a geometric brownian motion asset pricing model with random parameters the approaches to risk control are applied to the fundamental problem of investment in stocks bonds and cash over time

the effects of real exchange rate risk on international trade abstract by assuming real profit maximization and uncertain prices as well as exchange rates we conclude that it is uncertain percentage changes in the real exchange rate that are risky in international trade empirical estimation of fourteen bilateral trade flows among industrialized countries finds a significant negative effect on trade quantity from such risk in a number of these cases the expectation variable has a positive effect in a larger number of cases significant price effects from the expectation variable are fewer and from risk are negligible

real exchange rate volatility and international trade a reexamination of the theory one of the issues that have received considerable attention in the comparison of the properties of alternative exchange rate regimes is the effect of exchange rate risk on the volume of trade it has been argued that the higher volatility of exchange rates witnessed since the adoption of the floating regime in 1973 has led to a decrease in international trade transactions this is because most trade contracts are not for immediate delivery of goods and since they are denominated in terms of the currency of either the importer or the exporter unanticipated fluctuations in the exchange rate affect realized profits and hence the volume of trade it is implicitly assumed that forward exchange markets that can help traders eliminate this type of variations in profits either are not available as it is true for the majority of currencies because most are not fully convertible thereby impairing forward markets or for some reason they are not utilized to fully hedge exchange risk present in trade transactions the empirical evidence regarding the effect of exchange rate risk on trade has at best been inconclusive the large majority of the empirical studies are unable to establish a systematically significant link between exchange rate variability and the volume of international trade whether on an aggregate or on a bilateral basis abrams 1 akhtar and hilton 2 cushman 4 5 6 and kenan and rodrik 12 find some significant negative effects of exchange volatility on exports however bailey tavlas and uhlan 3 hooper and kohlhagen 10 and an international monetary fund study 11 do not find any supporting evidence for the depressing effect of exchange rate volatility on international trade it is also interesting to note that in many of these studies a significant positive effect of exchange rate volatility on the volume of trade is found for some cases however the positive effect believed to be at odds with the theory was either ignored or dismissed as a perverse result since as far as volumes are concerned theoretical considerations

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

does china really lose from rmb revaluation evidence from some export industries this study attempts to examine the impacts of real exchange rate rer misalignment on china s export performance using the sur methodology coupled with disaggregate panel export data it shows that china s export sector may not necessarily lose from the central government s decision to revalue its rmb against the us dollar because the negative impact of the rer appreciation on chinese exports may be diluted by the positive impacts attributing to a reduction in the rer misalignment

welfare effects of a monetary union the role of trade openness this paper evaluates the welfare effects of a monetary union mu compared to a e oating exchange rate regime using a quantitative business cycle model of a two country world with sticky prices it is assumed that under a e oat there are shocks to the uncovered interest rate parity uip condition these shocks are shown to have a negative effect on welfare the detrimental effect is stronger the higher the degree of trade openness a mu eliminates uip shocks and it may thus raise welfare the welfare gain from mu is positively linked to openness jel e4 f3 f4

central banks and macroeconomic policy choices relaxing the trilemma abstract macroeconomic policy choices in open economies are constrained by the trilemma according to which the objectives of exchange rate stability monetary independence and capital mobility cannot be attained jointly this paper shows that foreign exchange interventions provide an effective instrument to relax the trilemma an active reserve policy allows central banks to pursue independent monetary and exchange rate policies when the capital account is liberalised we use the framework of the portfolio balance model to show that exchange market interventions may substitute for capital controls both allow a country to achieve the other two objectives of the trilemma our empirical analysis of a large country panel data set covering the period 1970 2010 confirms this theoretical insight the weighted sum of the three trilemma objectives increases in the degree of foreign exchange market intervention the capacity to relax the trilemma constraint has increased over time and has been most effective in emerging markets

does exchange rate variability matter for welfare a quantitative investigation of stabilization policies abstract this paper studies what degree of exchange rate stabilization is optimal for several types of open economies this is accomplished through a quantitative evaluation of optimal monetary policy rules in a two country sticky price model first a calibrated benchmark model with incomplete asset markets supports past conclusions from simpler models emphasizing inflation stabilization rather than exchange rate stabilization it also highlights that the utility gains from optimal stabilization policy are small second while an economy extended to include consumer habits implies greater sensitivity by households to consumption variability it has only minor effects on the benchmark conclusions and benefits finally these conclusions are altered under an alternative environment where international asset markets exhibit asymmetry in the form of original sin such countries can benefit from policies that aggressively stabilize the exchange rate with utility gains larger than the previous cases

effects of tobin taxes in minority game markets we show that the introduction of tobin taxes in agent based models of currency markets can lead to a reduction of speculative trading and reduce the magnitude of exchange rate fluctuations at intermediate tax rates in this regime revenues for the market maker obtained from speculators are maximal we here focus on minority game models of markets which are accessible by exact techniques from statistical mechanics results are supported by computer simulations our findings suggest that at finite systems sizes the effect is most pronounced in a critical region around the phase transition of the infinite system but much weaker if the market is operating far from criticality and does not exhibit anomalous fluctuations

exchange rate regimes and international trade evidence from the classical gold standard era in this paper we show that the spread of the classical gold standard in the late nineteenth century increased international trade flows this positive effect was compounded whenever a group of countries formed a monetary union applying the gravity model of trade to more than 1 100 country pairs during the 1870 1910 period we find that two countries on gold would trade 60 percent more with each other than with countries on a different monetary standard moreover a monetary union would more than double bilateral trade flows our findings are relevant for current discussions on alternative monetary arrangements for the twenty first century

foreign exchange intervention in emerging markets a survey of empirical studies nowadays foreign exchange interventions occur in emerging market economies whereas empirical studies on interventions mainly refer to advanced economies however interventions in emerging markets are different from those in advanced economies they occur regularly and central banks have considerable leverage derived from relatively high reserves some non sterilisation the central bank s information advantage and capital controls consequently these interventions often successfully impact the level and volatility of exchange rates nevertheless more research on interventions in emerging markets is needed analysing the influence of heterogeneous institutional circumstances examining the role of central bank communication and using high frequency data

foreign money shocks and the welfare performance of alternative monetary policy regimes the welfare properties of monetary policy regimes for a country subject to foreign money shocks are examined in a two country sticky price model money targeting is found to be welfare superior to a fixed exchange rate when the expenditure switching effect of exchange rate changes is relatively weak but a fixed rate is superior when the expenditure switching effect is strong however price targeting is superior to both these regimes for all values of the expenditure switching effect a welfare maximising monetary rule yields lower output and exchange rate volatility than price targeting for a wide range of parameter values

pass through of exchange rates and competition between floaters and fixers this paper studies how a rise in the share of u s imports from china or any country with a fixed exchange rate could disproportionately lower pass through of exchange rates to u s import prices we develop a theoretical model showing how changes in the competitive environment induce exporters from other countries to lower markups in response to a dollar depreciation thereby moderating pass through the model indicates that a particular local bias condition is necessary for this effect and that free entry amplifies it the model also produces an approximately log linear structural equation for pass through regressions including the china share panel regressions over 1993 2006 indicate that the rising share of trade from china or from all countries with fixed exchange rates can explain a decline in pass through by about onefifth of its size

exchange rate uncertainty and us bilateral fresh fruit and fresh vegetable trade an application of the gravity model in order to analyse the effect of exchange rate uncertainty we apply an empirical gravity equation to two sets of us bilateral trade data fresh fruit over the period 1976 1999 for a panel of 26 countries and fresh vegetables over the period 1976 2006 for a panel of nine countries based on panel estimation methods and using both a moving sd measure and the peree and steinherr 1989 measure of exchange rate uncertainty the results show that us bilateral fresh fruit trade has been negatively affected by exchange rate uncertainty we also find some evidence that the exchange rate between the us dollar and the currencies of latin american trading partners accounts for most of the negative impact of exchange rate uncertainty on bilateral trade flows in fresh fruit in contrast when using panel estimation methods and both measures of exchange rate uncertainty we find no statistically significant evidence for any negative effect of exchange rate uncertainty on us bilateral fresh vegetable trade however

relative prices and expenditure switching effect this study examines the impact of a monetary shock on a two country asymmetrical size general equilibrium model it is assumed that prices are sticky in the producer s currency and find that the expenditure switching effect is not significant

central bank independence revisited the case for central bank independence cbi while not a new one has been strengthened by a growing body of empirical evidence by recent developments in economic theory and by the temper of the times the case is a strong one 1 which is becoming part of the washington orthodoxy the purposes of this paper are both to make more precise the type of cbi that is likely to enhance economic performance and to point to some remaining open issues and anomalies i start with the two theoretical approaches to cbi

exchange rate shocks and trade a multivariate garch m approach abstract we build on the recent literature studying the effects of uncertainty on trade by introducing a model that combines a reduced form vector autoregression for the growth rates of exports foreign income and the real exchange rate rer with a multivariate garch model up to 12 lags of several conditional standard deviations are added to relevant mean equations and all parameters are estimated simultaneously using maximum likelihood thus allowing us to avoid two step procedures that are common in the literature using a large data set of both developed and emerging countries we find evidence that rer uncertainty negatively impacts trade for several less developed countries we also find that rer uncertainty tends to be associated with a real currency appreciation when we compute generalized impulse response functions to study the impacts of unexpected shocks to rer growth on export growth the results are typically asymmetric positive shocks generate substantial negative responses while unexpected depreciations produce relatively smaller positive responses especially in our developing country sample

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

a corporate balance sheet approach to currency crises this paper presents a general equilibrium currency crisis model of the third generation in which the possibility of currency crises is driven by the interplay between private firms credit constraints and nominal price rigidities despite our emphasis on microfoundations the model remains sufficiently simple that the policy analysis can be conducted graphically the analysis hinges on four main features i ex post deviations from purchasing power parity ii credit constraints a la bernanke gertler iii foreign currency borrowing by domestic firms iv a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short term lending facilities we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises we show that an interest rate increase intended to support the currency in a crisis may not be effective but that a relaxation of short term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

consumption real exchange rates and the structure of international asset markets abstract international real business cycle irbc models that assume complete asset markets yield strong restrictions for consumption and bilateral real exchange rate series empirical tests with data for the us japan france uk italy canada and sweden suggest that neither the trend behavior nor high frequency movements of consumption and real exchange rates are well explained by irbc models with complete markets it appears however that high frequency fluctuations of consumption and real exchange rates are consistent with unrestricted international trade in risk free bonds

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

international dimensions of optimal monetary policy abstract this paper provides a baseline general equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms and nominal rigidities an inward looking policy of domestic price stabilization is not optimal when firms markups are exposed to currency fluctuations such a policy raises exchange rate volatility leading foreign exporters to charge higher prices vis a vis increased uncertainty in the export market as higher import prices reduce the purchasing power of domestic consumers optimal monetary rules trade off a larger domestic output gap against lower consumer prices optimal rules in a world nash equilibrium lead to less exchange rate volatility relative to both inward looking rules and discretionary policies even when the latter do not suffer from any inflationary or deflationary bias gains from international monetary cooperation are related in a non monotonic way to the degree of exchange rate pass through

does exchange rate stability increase trade and welfare we develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare an important feature of the model is deviations from purchasing power parity caused by rigid price setting in buyers currency we find the following first exchange rate stability is not necessarily associated with more trade in a simple benchmark model with separable preferences and only monetary shocks trade is unaffected by the exchange rate system consistent with most evidence second both trade and welfare can be higher under either exchange rate system depending on preferences and on the monetary policy rules followed under each system finally in general there is no one to one relationship between the levels of trade and welfare across exchange rate systems

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

excess capacity monopolistic competition and international transmission of monetary disturbances analyzes the excess capacity monopolistic competition and international transmission of monetary policy disturbances in the united states sheds light on the international impact of monetary policy emphasis on the spillover effects of monetary disturbances similarity of framework used with open economy macroeconomics

macroeconomic effects of nominal exchange rate regimes new insights into the role of price dynamics abstract this paper analyzes the effects of pegged and floating exchange rates using a two country dynamic general equilibrium model that is calibrated to the us and a european aggregate the model assumes shocks to money productivity and the interest rate parity condition it captures the fact that the sharp increase in nominal exchange rate volatility after the end of the bretton woods bw system was accompanied by a commensurate rise in real exchange rate volatility but had no pronounced effect on the volatility of gdp this holds irrespective of whether flexible or sticky prices are assumed which casts doubt on the widespread view that the roughly equal post bw rise in nominal and real exchange rate volatility reflects price stickiness a flex prices variant of the model captures better the fact that the correlation between us and european gdp has been higher in the post bw era than under bw

policy instrument choice and non coordinated monetary policy in interdependent economies abstract non coordinated monetary policy is analyzed in a stochastic two country general equilibrium model non coordinated equilibria are compared in two cases one where policy is set in terms of state contingent money supply rules and one where policy is set in terms of state contingent nominal interest rate rules in general the non coordinated equilibrium differs between the two types of policy rule but a number of special cases are identified where the equilibria are identical the endogenous choice of policy instrument is analyzed and the nash equilibrium in the choice of policy instrument is shown to depend on the interest elasticity of money demand

a new look at pass through abstract this paper examines the relationship between exchange rates and prices rather than assuming exchange rate changes are exogenous shocks that affect prices i use a long run restrictions var to identify shocks and explore the way domestic prices import prices and exchange rates react to a variety of shocks consumer price pass through is nearly complete in response to some shocks but low in response to others alternatively import prices and exchange rates typically respond in the same direction and pass through seems quick this supports the idea that import prices are set in the producer s currency and that lower cpi pass through is a result of changes in quantities or margins further down the supply chain

monetary rules for small open emerging economies abstract this paper develops a variant of the imf s global economic model suitable to analyze macroeconomic dynamics in open economies and uses it to assess the effectiveness of taylor rules and inflation forecast based ifb rules in stabilizing variability in output and inflation our findings suggest that a simple ifb rule that does not rely upon any direct estimates of the equilibrium real interest rate and places a relatively high weight on the inflation forecast may perform better in small open economies than conventional taylor rules

uncertainty and export performance evidence from 18 countries we study a sample of nine developed and nine developing countries to evaluate the questions of how foreign income uncertainty and real exchange rate rer uncertainty impact international trade and how those impacts vary according to stage of development rer uncertainty has a negative and significant impact on export growth for six of the nine less developed countries in our sample while it has an insignificant effect for a majority of the developed countries in both groups foreign income uncertainty has a more pervasively significant and frequently larger influence on trade than does rer uncertainty

is there a unit root in the inflation rate evidence from sequential break and panel data models summary using sequential trend break and panel data models we investigate the unit root hypothesis for the inflation rates of thirteen oecd countries with individual country tests we find evidence of stationarity in only four of the thirteen countries the results are more striking with the panel data model we can strongly reject the unit root hypothesis both for a panel of all thirteen countries and for a number of smaller panels consisting of as few as three countries the non rejection of the unit root hypothesis for inflation is very fragile to even a small amount of cross section variation 1997 john wiley sons ltd

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

transmission of nominal exchange rate changes to export prices and trade flows and implications for exchange rate policy we discuss how the welfare ranking of fixed and flexible exchange rate regimes in a new open economy macroeconomics model depends on the interplay between the degree of exchange rate pass through and the elasticity of substitution between home and foreign goods we identify combinations of these two parameters for which flexible and fixed exchange rates are superior with respect to welfare as measured by a representative household s utility level we estimate the two parameters for six non emu european countries czech republic hungary poland slovakia sweden and the uk using a heterogeneous dynamic panel approach

a positive theory of foreign currency debt abstract this paper makes a case for foreign currency debt as a hedging device in an open economy subject to stochastic shocks to output a government can reduce uncertainty in wealth and in consumption by issuing foreign or domestic currency debt if unexpected domestic and foreign inflation are negatively correlated with domestic output foreign currency debt is desirable in comparison to domestic currency debt if growth rates of output of both countries are closely related and if domestic inflation is relatively uncertain it has an additional advantage if domestic debt creates time consistency problems