how to beat the random walk an empirical model of real exchange rates abstract an econometric model is developed for all possible bilateral real exchange rates between the united states the united kingdom germany and japan for the period february 1977 to june 1987 we extend the standard dornbusch frankel type of models using an error correction approach with an observable macro economic determinant of the long run real exchange rate for the econometric analysis we develop an efficient estimator by pooling the data for all currencies contrary to previous empirical tests on the long run behaviour of real exchange rates we find a notable and significant mean reversion component

can oil prices forecast exchange rates an empirical analysis of the relationship between commodity prices and exchange rates we show the existence of a very short term relationship at the daily frequency between changes in the price of a country s major commodity export and changes in its nominal exchange rate the relationship appears to be robust and to hold when we use contemporaneous realized commodity price changes in our regression however when we use lagged commodity price changes the predictive ability is ephemeral mostly appearing after instabilities have been appropriately taken into account

the out of sample success of term structure models as exchange rate predictors a step beyond abstract a large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate however there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities this paper proposes a term structure forecasting model of exchange rates based on a regime switching vector equilibrium correction model which is novel in this context our model significantly outperforms both a random walk and to a lesser extent a linear term structure vector equilibrium correction model for four major dollar rates across a range of horizons

exchange rate effects of financial regulations abstract in this paper we analyze the effects of financial constraints on the exchange rate through the portfolio balance channel we use a sharp policy discontinuity within the colombian financial system to empirically test for the portfolio balance channel using high frequency data during the period of 2004 2015 our findings suggest that the effects on the exchange rate are short lived and significant only when banking constraints are binding to understand the mechanism behind this result we construct a tractable two period general equilibrium model in which banking limits on foreign holdings inhibit capital flows when these limits bind departures from the uncovered interest rate parity enable sterilized foreign exchange interventions to influence the exchange rate

the european union currencies and the us dollar from post bretton woods to the euro abstract in this paper we study the evolution of the us dollar real exchange rate vis a vis the european union currencies in the floating post bretton woods era both before and after the birth of the euro in the first period we find that most of the persistence shown by this rate is due to the movements of the us dollar during the mid 1980s once these effects are isolated we can conclude that the us dollar real exchange rate exhibits stationarity with those currencies that are closely linked to the german mark however when we include the observations covering the period during which the euro was created we cannot reject the unit root null hypothesis for any currency

the monetary approach to exchange rate determination under rational expectations the dollar deutschmark rate abstract this paper reformulates the monetary approach after ascertaining that a money demand function with a partial adjustment mechanism had more empirical support than a money demand function which assumed instantaneous stock adjustment the resulting exchange rate equation is estimated by two rational expectations techniques the parameter estimates are reasonable and are robust to the estimation technique used to different specifications of the driving processes and to changes in the estimation period the structural model outperforms the random walk model and its own unconstrained equivalent a pure time series equation in outof sample forecasts

evaluating the predictability of exchange rates using long horizon regressions mind your p s and q s since the breakdown of the bretton woods agreement researchers have used a wide variety of structural models to try to predict exchange rate movements unfortunately finding consistent evidence that these models outperform a random walk has proven elusive in this paper we investigate the impact different methods of inference may have had on these conclusions using p values based on recently developed tests of forecast accuracy and encompassing as well as q values designed to mitigate multiple testing problems we provide stronger evidence consistent with these models having superior predictive ability our results suggest that previous studies inability to detect predictive ability may have been influenced by the statistics used and the manner in which they were employed

factor models and time varying parameter framework for forecasting exchange rates and inflation a survey a survey of models used for forecasting exchange rates and inflation reveals that the factor based and time varying parameter or state space models generate superior forecasts relative to all other models this survey also finds that models based on taylor rule and portfolio balance theory have moderate predictive power for forecasting exchange rates the evidence on the use of bayesian model averaging approach in forecasting exchange rates reveals limited predictive power but strong support for forecasting inflation overall the evidence overwhelmingly points to the context of the forecasts relevance of the historical data data transformation choice of the benchmark selected time horizons sample period and forecast evaluation methods as the crucial elements in selecting forecasting models for exchange rate and inflation

nonlinear adjustment to purchasing power parity in the post bretton woods era abstract this paper models the dynamics of adjustment to long run purchasing power parity ppp over the post bretton woods period in a nonlinear framework consistent with the presence of frictions in international trade we estimate exponential smooth transition autoregressive estar models of deviations from ppp which are obtained using the johansen cointegration method for both consumer price index cpi and wholesale price index wpi based measures and a broad set of us trading partners in several cases we find clear evidence of a mean reverting dynamic process for sizable deviations from ppp with the equilibrium tendency varying nonlinearly with the magnitude of disequilibrium analysis of impulse response functions also supports a nonlinear dynamic structure but convergence to long run ppp in the post bretton woods era is very slow

the response of exchange rates to permanent and transitory shocks under floating exchange rates abstract using the joint behavior of inflation and real exchange rates we develop an empirical model to uncover the sources of the fluctuations in the real dollar exchange rates of four major industrial countries under the current float this model allows us to construct two time series for each country pair one representing the permanent component of each real exchange rate and the other the purely transitory component over the period as a whole transitory shocks played a relatively small but statistically significant role real dollar exchange rates therefore did not simply evolve in response to permanent shocks instead there are instances in which temporary shocks made a substantial contribution we conclude that the random walk model though an approximate statistical description of real exchange rate behavior is a poor guide to model structure jel f31

long memory and mean reversion in real exchange rates in latin america this article examines the long run purchasing power parity ppp hypothesis for 12 latin american real effective exchange rates reers using fractional integration techniques the empirical result

oil prices and the rise and fall of the us real exchange rate abstract questions of the relative importance of real vs monetary shocks in explaining exchange rate movements still have no widely accepted answer despite their importance both for the research agenda and for policy questions we examine this issue using a variety of empirical techniques for the us effective exchange rate we find that a stable link exists between oil price shocks and the us real effective exchange rate over the post bretton woods period the results suggest that oil prices may have been the dominant source of persistent real exchange rate shocks and that energy prices may have important implications for future work on exchange rate behavior

a new technique for postsample model selection and validation abstract the model selection and granger causality literatures have focused on insample rather than postsample hypothesis testing this is because postsample model validation periods are usually short whereas the correlations in typical postsample forecast errors require large sample methods a resampling based postsample inference procedure is described which explicitly estimates the uncertainty which its large sample approximation induces in the inference significance levels it produces the procedure is applied to postsample forecasting errors from the ashley et al 1980 study examining granger causation between us consumption and advertising expenditures postsample model validation is apparently feasible but requires longer postsample periods than past studies have allocated

uncertainty and deviations from uncovered interest rate parity abstract it is well known that uncovered interest rate parity does not hold empirically especially at short horizons but is it really so we conjecture that uncovered interest rate parity is more likely to hold in low uncertainty environments relative to high uncertainty ones since arbitrage opportunity gains become more uncertain in a highly unpredictable environment thus blurring the relationship between exchange rates and interest rate differentials in this paper we first provide a new exchange rate uncertainty index that measures how unpredictable exchange rates are relative to their historical past then we use the new measure of uncertainty to provide empirical evidence that uncovered interest rate parity does hold in five industrialized countries vis a vis the us dollar at times when uncertainty is not exceptionally high and breaks down during periods of high uncertainty

ethical reporting in islami bank bangladesh limited 1983 2010 the main aim of this study is to undertake a critical examination of the ethical and developmental performance of an islamic bank as communicated in its annual reports over a period of 28 years 1983 2010 islami bank bangladesh limited s ibbl hereafter ethical performance and disclosures are further analyzed through interviews conducted with the bank s senior management the key findings include an overall increase in ethical disclosures during the study period however the focus on various stakeholders needs has varied over time reflecting the evolving nature of the islamic finance industry over the last three decades based on a secular economy ibbl focused in the first two decades on the particular shariah compliance disclosure as a way of establishing its reputation and differentiating itself from conventional banks in a dual banking system post 2005 the ethical performance and disclosure shifted to more universal disclosures such as sustainability charity employees and community related disclosures signaling responsible conduct and the bank s adoption of a wider stakeholder approach however the bank is still failing to provide full disclosure on certain significant categories such as sources and uses of disposable income thereby contradicting the principles of full and comprehensive disclosure and accountability in addition the structure of ibbl s investment portfolio reveals an overreliance on debt based financial instruments and a shortcoming in fulfilling the developmental and social objectives of islamic finance this is evidenced by the qualified shariah supervisory board reports that the bank consistently received this research provides further evidence that islamic banking and finance in its current practices reflect the global and the local influences in an era dominated by global conventional finance

testing ppp hypothesis under temporary structural breaks and asymmetric dynamic adjustments we test the empirical validity of the ppp proposition under temporary structural breaks and dynamic nonlinear adjustments although several testing procedures have recently been proposed in the exi

multilateral trade liberalisation foreign direct investment and the volume of world trade a cournot duopoly model is used to explain the paradox that multilateral trade liberalisation has resulted in increases in both the volume of world trade and the amount of foreign direct investment fdi

regime linkages in the us uk real exchange rate real interest differential relation abstract using a multivariate regime switching framework and focusing on the period 1921 2002 which is characterized by different nominal exchange rate regimes and monetary regimes we find supportive evidence of the us uk real exchange rate real interest differential relation in terms of volatility regime dependence the two variables are jointly characterized by high volatility during periods of floating exchange rates and by low volatility during periods of fixed exchange rates thereby suggesting that the nominal exchange rate regime is the driving force behind the volatility regime switching thus allowing for regime switching in the real exchange rate real interest differential relation bridges the gap between popular theories of real exchange rate determination which predict such a relation and previous empirical studies which failed to uncover such a relation for the us uk real exchange rate

tests for symmetric and asymmetric nonlinear mean reversion in real exchange rates new tests based on smooth transition autoregressive models for mean reversion in time series of real exchange rates are proposed one test forces mean reversion to be symmetric about the integrated process central case while the other permits asymmetry the tests are applied to monthly series of seventeen real exchange rates against the u s dollar and fourteen against the deutsche mark they reveal stronger evidence against the unit root null hypothesis than does the usual dickey fuller test

the relative price of nontraded goods and sectoral total factor productivity an empirical investigation this paper examines the relationship between the relative price of nontraded goods and sectoral total factor productivities tfps in the context of the balassa samuelson model with perfect capita

are our feers justified the fundamental equilibrium exchange rate feer method of calculating an equilibrium real exchange rate is the most widely used alternative to ppp this paper presents the first comprehensive historical test of feer calculations for six major economies using estimates for the last 20 years we focus on unit root and cointegration techniques both at the individual country level and jointly using panel based estimation specifically we test whether real exchange rates cointegrate with time series for the feer even at an individual country level the results provide support for the feer particularly in canada the uk and germany panel unit root tests suggest that the real exchange rate and feer cointegrate overall the results suggest that the feer approach represents an improvement over ppp in explaining medium to long term trends in the real exchange rates of the major industrialised countries

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

real exchange rate adjustment in european transition countries abstract in single equation tests real exchange rates show mean reversion for nine of 10 central and eastern european transition countries for the period january 1993 to december 2005 because of the shift from controlled to market economies and accompanying crises failed policy regimes and changes in exchange rate regimes unit root tests for transition countries often require allowance for structural changes accounting for structural breaks gives substantially faster mean reversion speeds than those found for major industrialized countries these fast adjustment speeds are plausible transition countries had perhaps 10 years to make unprecedented adjustments required for accession to the european union a number of papers have applied non linear models to the central and eastern european countries this paper investigates four non linear models and compares them with piece wise linear break models the break models appear superior in detecting mean reversion for the central and eastern european transition countries

a re assessment of the relationship between real exchange rates and real interest rates 1974 1990 abstract this paper uses cointegration techniques and error correction models to re examine the link between real exchange rates and real interest rate differentials the results show that real exchange rates and real interest rates are nonstationary however they are not cointegrated with each other on the other hand the dynamic models indicate that there might be a long run relationship between these variables but this cannot be verified the final conclusion is that there is little empirical evidence in support of a systematic relationship and this result is robust across exchange rates time periods and measures of expected inflation

a note on the determinants of unexpected exchange rate movements abstract in this paper we study the relative importance of surprises in fundamentals in explaining unexpected exchange rate movements employing a unique survey dataset that contains matched exchange rate and interest rate expectations we are able to derive a number of interesting conclusions a variance decomposition of unexpected exchange rate movements into various components reveals that interest rate news is relatively unimportant but that changes in perceptions about risk premia and more importantly revisions of expectations with regard to future exchange rate levels are crucial in explaining unexpected exchange rate movements

testing long horizon predictive ability with high persistence and the meese rogoff puzzle a well known puzzle in the international finance literature is that a random walk predicts exchange rates better than economic models meese and rogoff 1983a b and 1988 this paper offers a potential explanation for this finding when exchange rates and fundamentals are highly persistent long horizon forecasts of economic models are asymptotically biased by the estimation error in the parameter that measures the persistence when this bias outweighs the benefits from exploiting economic information the random walk model will forecast better this happens even if the economic model is the true data generating process the reason is that a random walk model imposes a unit root rather than estimates it the paper thus proposes a test for equal predictive ability in the presence of highly persistent variables when applied to the meese rogoff exercise this test shows that the poor forecasting ability of economic models does not imply that the models are not a good description of the data

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

is there a j curve abstract if the response of the value of the trade balance to movements in the real exchange rate is described by a j curve then a real depreciation initially worsens a balance of trade deficit only improving it over time this paper investigates whether a j curve can be detected in the last twenty five years of american data no statistically reliable evidence of a stable j curve is detected the model is checked extensively to support this finding

sources of fluctuations in real and nominal exchange rates this paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates the distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period nominal shocks are required to have no permanent effect on the level of the real exchange rate given this identification scheme the author analyzes the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates the findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies copyright 1992 by mit press

on the failure of purchasing power parity for bilateral exchange rates after 1973 point estimates suggest mean reversion in real exchange rates however it still remains uncomfortable that models without any mean reversion are often compatible with data from the floating period studies with data over longer periods find mean reversion but at the cost of mixing in data from earlier exchange rate arrangements pooling the floating period data potentially mixes country pairs with and without mean reversion we examine tests for mean reversion for individual country pairs where greater power against close alternatives is gained through modeling other economic variables with the real exchange rate by increasing the power of the tests we find strong evidence of mean reversion

real exchange rates and real interest rates once again a multivariate panel cointegration analysis this paper employs multivariate panel cointegration techniques to re examine the empirical relationship between bilateral real exchange rates and real interest rates the results from a panel of 1470 quarterly observations on canada france germany italy japan uk and usa over the period 1977 to 1994 indicate the absence of any long run relationship between the two variables

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

ruling out divergent speculative bubbles abstract the growth in the empirical literature on testing for divergent in mean speculative bubbles indicates that existing theoretical arguments for ruling out such price paths are not sufficiently compelling here we strengthen the case for ruling out explosive or implosive bubbles a priori by filling in two gaps first we demonstrate why divergent stochastic bubbles arising from purely extrinsic uncertainty as in blanchard 1979 cannot be equilibria in a monetary optimizing model second we show why existing arguments for ruling out implosive price bubbles are insufficient in some cases and we provide stronger arguments

nonlinearities in real exchange rate determination do african exchange rates follow a random walk in this article we aim at modelling the long run behaviour of the real effective exchange rates reer for a pool of african countries not much attention has been paid to this group of countries in particular to the existence of nonlinearities in the long run path of such a variable controlling for two sources of nonlinearities i e asymmetric adjustment to equilibrium and nonlinear deterministic trends allows us to gain some insight about the behaviour of the african reer we find that these sources of nonlinearities help us to explain the apparent unit root behaviour found applying linear unit root tests for most of the countries

imperfect information and the comovement of the exchange rate and the interest rate a signal extraction approach this paper analyzes the joint determination of the exchange rate and the interest rate in a signal extraction framework in principle a given disturbance should generate a systematic relationship between the exchange rate and the interest rate as two endogenous variables in the context of any specified economic model when expectations matter however the introduction of imperfect information would weaken the comovement between the two endogenous variables that results from a given disturbance this simple point is demonstrated in a flexible price model of a small economy

testing for absolute purchasing power parity abstract purchasing power parity ppp is an equilibrium condition equating the nominal exchange rate between two countries with the relative price of an identical bundle of goods in each country previous time series researchers use price indices to study ppp so they test relative ppp we use new data that measures price levels so we test absolute ppp price levels provide a test of absolute ppp because unlike price indices price levels do not contain a base period in which the nominal exchange rate equals the price ratio by construction we find support for absolute ppp

do relative prices of non traded goods determine long run real exchange rates in this paper the long run assumptions of so called equilibrium models of real exchange rates are investigated the assumption of purchasing power parity for tradable goods common to this class of models implies that the real exchange rate is a function of the relative prices of nontraded goods in the two countries while purchasing power parity for tradable goods is not directly testable exploitation of wholesale and consumer prices allows for direct estimation of the reduced form cointegration tests are performed for twenty one bilateral relationships while much of the evidence is consistent with the predictions of equilibrium models results are far from conclusive

exchange rates forecasting local or global methods exchange rates forecasters usually assume that local methods nearest neighbour dominate the global ones neural networks or genetic programming for example in this article first we use different generalizations of the standard nearest neighbours to predict the dynamic evolution of the yen us and pound sterling us exchange rates one period ahead second we compare our results with those employing global methods such as neural networks genetic programming data fusion and evolutionary neural networks finally we find out the existence of predictable structures periods ahead our results reveal a slightly but significant forecasting ability for one period ahead which is lost when more periods ahead are considered and no important predictive differences between local and global methods have been found

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

cost pass through in the u s automobile market we study cost pass through in the u s automobile market using a framework that incorporates the effects of cost changes on input decisions we find that accounting for firms factor market decisions significantly increases measured cost pass through although we reject the hypothesis of full cost pass through and constant markups in addition our evidence suggests that cost shocks common to all manufacturers have a greater effect on prices than do model specific cost shocks finally we examine how pass through varies with manufacturer nationality finding that u s firm cost pass through exceeds that of european and asian firms

an empirical analysis of ex ante profits from forward speculation in foreign exchange markets this paper constructs a time series band for ex ante profits from forward speculation and examines the permanent component of the median of the band for six different exchange markets the unpredictability of ex ante profits is rejected using nonparametric tests deviations of ex ante profits from forward premia are attributed to deviations of nominal exchange rates from martingale processes it is shown that movements in the terms of trade are responsible for most of the variability and serial correlation properties of ex ante profits t is by now widely recognized that the forward rate is not an unbiased predictor of future spot rates and that realized nominal profits from spec ulating in the forward market are nonnegligible and highly volatile see e g hodrick 1987 frankel and meese 1987 however the nature of these profits is as of yet undetermined this paper attempts to shed light on this issue by examining the time series properties of ex ante profits from forward speculations in six foreign exchange markets i focus on three aspects of the problem first i provide a measure of the range and the variability of ex ante profits two issues with contradictory evidence in the literature see hodrick 1987 and frankel 1988 for refer ences second i relate deviations from uncov ered interest parity to risk and to deviations of nominal spot rates from martingale processes third i link the time series properties of ex ante profits to the behavior of the real exchange rate since ex ante profits are not observable the empirical analysis requires the construction of a time series for the expected future spot rate frankel and froot 1987 ito 1988 cumby 1988 and diebold and nason 1990 have all suggested ways of computing this series here i provide an alternative method for constructing a time series for expected future spot rates and for statistically assessing the properties of ex ante profits expected future spot rates are measured as a 90 confidence band obtained from the simulated recursive distribution for the linear predictor of the series i simulate the distribution of the linear predictor rather than use simple point forecasts in order to reduce the forecast error due to parameter uncertainty an addi tional measure for expected future spot rates considered is a point estimate of the permanent component of the median of the band i use nonparametric tests to examine the rela tionship between ex ante profits and other series nonparametric tests are employed here for two reasons first i am interested in the entire popu lation properties of the data existing results are derived by examining only the first and second moments of the data second efficiency tests are generally based on linear parametric functional forms pagan and ullah 1988 have pointed out problems with these tests when the conditional mean of the data is nonlinear nonparametric tests overcome these problems the results indicate that nominal and real rates do not follow martingale processes that a risk premium rarely explains the behavior of the ex ante profits and that variations in expected terms of trade account for the time series proper ties of ex ante profits

an empirical inquiry into the nature of the forward exchange rate bias abstract this paper tests whether anticipated real exchange rate movements fully account for the systematic time varying discrepancies between forward and future spot exchange rates the data do not reject this hypothesis the results demonstrate that 1 real exchange rate changes are predictable 2 anticipated real exchange rate changes are reflected in the forward bias and 3 information available at the signing of the forward contract is useless in forecasting differences between forward and future spot prices beyond the information s ability to predict real exchange rate changes the results emphasize the importance of real exchange rates in international asset pricing

do malaysian house prices follow a random walk evidence from univariate and panel lm unit root tests with one and two structural breaks in this article we apply univariate and panel lagrange multiplier lm unit root tests with one and twostructural breaks proposed by lee and strazicich 2003 2004 and im et al 2005 to examine housing prices for five different housing price indices all housing detached housing semi detached housing terrace housing and high rise housing in 14 states of malaysia to test whether housing prices exhibit a random walk our main finding from the univariate lm unit root tests is that for the vast majority of states housing prices follow a stationary process about a segmented trend the results of the panel lm unit root tests provide overwhelming evidence that house prices are segmented trend reverting

real interest parity rip over the 20th century new evidence based on confidence intervals for the largest root and the half life abstract in this paper we employ local to unity asymptotics to investigate the validity of real interest parity rip for three countries relative to the us using long span data we find that deviations from parity are corrected quickly and this is what could in principle be expected to happen in an integrated world where economic forces act rapidly so that discrepancies do not grow systematically over time moreover the observed speed of reversion raises important issues for policy in that the tendency for rates to converge implies that the impact of the domestic authorities stabilization polices might be limited finally there is no clear cut difference in the adjustment to shocks across fixed and floating regimes

real exchange rates under the gold standard purchasing power parity is one of the most important equilibrium conditions in international macroeconomics empirically it is also one of the most hotly contested numerous recent studies for example have sought to determine the validity of purchasing power parity using data from the post bretton woods float and have reached different conclusions we assert that most such studies are flawed for two reasons first the post 1973 data contain by definition only a very limited amount of the low frequency information relevant for examination of long run parity second the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low frequency dynamics both deficiencies are rectified in the present paper with dramatic results we construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period and we study deviations from parity using long memory models that allow for subtle forms of mean

stochastic trends and economic fluctuations in a large open economy abstract this study examines the role of stochastic trends in real exchange rates and foreign output in explaining economic fluctuations in the united states while many of the results are consistent with recent closed economy studies the evidence shows that external shocks have significant short run effects on economic fluctuations even in a large country a real appreciation of the dollar leads to permanent decreases in net exports and temporary decreases in output permanent shocks to real exchange rates have surprisingly large effects on output over the course of the normal business cycle

the exchange rate interest differential relationship in six east asian countries abstract this study shows that the real exchange rate real interest differential relation in six east asian economies changes with the nominal regime positive time varying correlations characterize the relation during pegged regimes correlations are negative during freely falling regimes

econometric approaches to empirical models of exchange rate determination abstract this paper identifies four principal econometric approaches to the estimation and testing of asset market models of exchange rate determination the traditional static reduced form approach the error correction and co integration dynamic reduced form approaches the simultaneous equations approach and large scale multi equation macroeconometric simulation models each of these econometric approaches is evaluated with respect to its theoretical validity and the comparative properties of the empirical results obtained this leads to the conclusion that although there may be little to choose between the different theoretical exchange rate models there may be grounds for favouring a multi equation simultaneous estimation procedure for this class of models

exchange rate volatility and deviations from unbiasedness in a cash in advance model abstract this paper examines time series properties of exchange rate changes the forward premium and the forward bias in the context of a variant of svensson s cash in advance model the model is solved and simulated using realistic forcing processes whose law of motion is estimated from u s japan data and then approximated by a markov chain although method of moments estimation shows that the over identifying restrictions implied by the model are not rejected it fails dramatically in producing a sufficiently variable risk premium on forward market speculation this result is robust to various pertubations to the model s parameters forcing processes and preference structure the model also fails to match exchange rate and forward premium volatility simultaneously

towards a loanable funds amended liquidity preference theory of the exchange rate and interest rate abstract the objective is to develop a unified theory of the exchange rate and interest rate using a loanable funds amended liquidity preference approach in order to provide a new perspective on many puzzling facts associated with the post bretton woods international economy it is shown that i a monetary expansion can initially raise the interest rate but depreciate the home currency ii real demand shocks can cause interest rate and exchange rate overshooting iii an infinite interest elasticity for capital flows cannot cause exchange rate overshooting if an extended marshall lerner condition holds iv the home currency can appreciate when the current account is negative if the extended marshall lerner condition is not satisfied and v changes in the disequilibrium regime will cause instability in the estimates of reduced form coefficients

forecast performance of exchange rate models revisited this paper re evaluates the performance of reduced form exchange rate models by updating the messe rogoff study 1983 this paper confirms earlier tests showing that simple monetary models do not perform well but it finds more positive results for other monetary models that incorporate more dynamic econometric specifications a simple error correction monetary model out forecasts a random walk almost half of the time

three regime asymmetric star modeling and exchange rate reversion the breakdown of the bretton woods system and the adoption of generalized floating exchange rates ushered in a new era of exchange rate volatility and uncertainty this increased volatility leads economists to search for economic models able to describe observed exchange rate behavior in the present paper we propose more general star transition functions that encompass both threshold nonlinearity and asymmetric effects our framework allows for a gradual adjustment from one regime to another and considers threshold effects by encompassing other existing models such as tar models we apply our methodology to three different exchange rate data sets one for developing countries and official nominal exchange rates the second for emerging market economies using black market exchange rates and the third for oecd economies

some linear and nonlinear thoughts on exchange rates abstract after discussing the inconclusive results of linear structural models as applied to exchange rates this paper assesses the possibilities of using a particular form of nonlinear estimation called alternating conditional expectations as i a diagnostic tool and ii a forecasting method it contrasts the forecast performance of various linear in levels in differences error correction and nonlinear in levels in differences specifications of a sticky price monetary model augmented by a relative wealth variable the diagnostic results are as follows the optimal transformations are almost always nonlinear and often nonmonotonic forecasting results in sample and out of sample nonlinear forecasts yield substantial improvements over a random walk however in exercises with forecasts from rolling regressions the random walk specification still dominates over one quarter forecast horizons albeit only marginally and insignificantly so nonlinear specifications do slightly better than linear competitors at four quarter horizons

searching for nonlinearities in real exchange rates a recent innovation in modeling exchange rates has been the use of nonlinear techniques such as threshold autoregressive models and its smooth transition variants this paper investigates the smooth transition autoregressive star modeling strategy in an application to real exchange rates the key findings are as follows first using the methodology advocated by terasvirta 1994 we find evidence of nonlinear dynamics for several of the spot dollar real exchange rates using monthly data on five of the g7 countries however once estimated we find that the star specification is appropriate for only one of the three exchange rate series indicated to be an estar process moreover using simulations we show that the underlying methodology used to detect nonlinearities in the data exhibit substantial size biases which we attribute to influential observations we also investigate an alternative nonlinear specification and find that we can model the dollar sterling and the dollar lira real exchange rates better as an open loop tar process instead of a setar process

fed intervention dollar appreciation and systematic risk abstract in a four factor asset pricing model estimated on daily data fed intervention significantly affects betas of surprises in the market return expected inflation rate yield curve and corporate bond risk premium fed foreign currency sales cause economically and statistically significant increases in the systematic risk premium in appreciation and thus in the dollar s expected appreciation rate the direction the fed desires and consistent with the signaling but not the portfolio balance channel intervention s effects on actual appreciation are less reliable they depend on unpredictable risk factor realizations even successful intervention to strengthen the dollar may be costly by increasing the dollar s systematic risk intervention reduces the attractiveness of u s relative to foreign investments further uncertainty about future fed interventions may induce resource misallocation ceteris paribus investors find it harder to estimate risk adjusted discount rates and forecast the home currency value of cash flows

long run dynamics of black and official exchange rates abstract this paper examines the relationships among black and official foreign exchange rates its primary purpose is to investigate the way in which black and official markets process information application of cointegration tests to the turkish markets for us dollars and west german marks in the mid 1980s indicates that the two black markets are efficient information processors for the black and official markets of each currency evidence is found suggesting the possibility of overshooting by the black exchange rate this inefficiency may not be able to be arbitraged away because of restrictions on capital flows through official channels

real exchange rates and real interest differentials implications of nonlinear adjustment in real exchange rates abstract this paper investigates the relationship between real exchange rates and real interest differentials while sticky price exchange rate theories predict a relationship empirical evidence on the hypothesized link has proved elusive our conjecture is that the empirical difficulty is due to a failure to recognize nonlinearity in real exchange rate adjustment when we introduce threshold nonlinearity into a traditional model to take account of a transaction cost induced band of inaction for price adjustment only outside the band will the real exchange rate exhibit mean reversion and bear an association with real interest differentials our estimated nonlinear models provide evidence supporting this view

financial integration in the pacific basin region rip by panic attack abstract we exploit advances in panel data econometrics to test whether real interest parity holds in the pacific basin region we test for a unit root in the difference between either the us japanese or euro area real interest rate and the real interest rates from a panel of eleven pacific basin economies unlike extant studies that test for rip using panel data we use bai and ng s 2004 panic test which allows for a very general model of cross section dependence including the possibility of cross unit cointegration ignoring the possibility of cross unit cointegration can lead to severe size distortions and to an over rejection of the null hypothesis of a unit root we overturn earlier findings based on first generation panel tests and demonstrate that cross unit cointegration leads to incorrect conclusions we find that rip holds in the pacific region real interest rates converge to the us rate we find no support for the hypothesis that pacific basin real interest rates converge to either the japanese or euro area rates

real exchange rates and macroeconomics evidence and theory since the early 1980s a large body of research has thrown doubt on the relevance of macroeconomic models for understanding exchange rates the authors argue that a balanced reading of recent literature in exchange rate economics gives a more optimistic assessment many studies have established the pertinence of long run purchasing power parity ppp and the explanatory power of macroeconomic fundamentals in real exchange rate fluctuations a reasonably strong case can be made for a traditional macroeocnomic interpretation of real exchange rates which emphasizes short run price stickiness but long run ppp but a central new ingredient in this interpretation is the presence of international commodity market segmentation and persistent deviations from the law of one price an example is given of a dynamic general equilibrium model that can reproduce some of the observed features of real exchange rate fluctuations

cointegration tests of a long run relation between money demand and the effective exchange rate abstract for the period starting with the floating of the us dollar we find evidence that long run stationarity of the demand function for m2 but not m1 requires inclusion of the effective exchange rate these results lend some support to mckinnon s hypothesis that nonstationarity in the demand for money can be resolved by inclusion of the exchange rate jel f41 e41

cointegration and the long run forecast of exchange rates abstract multivariate cointegration is used to generate the long run forecast of the dollar dm exchange rate it is shown that while the random walk model outperforms the monetary structural models in the short run the latter based on the error correction model outperform the former in the long run

a re examination of the exchange rate interest differential relationship evidence from germany and japan abstract this paper presents empirical evidence which links the exchange rate interest differential relation over the recent floating rate period using johansen s cointegration test we find a long run relationship between real exchange rates and expected real interest differentials in addition empirical evidence is provided to show that our error correction framework leads to real exchange rate forecasts that are superior to those generated by a random walk forecasting model moreover this superiority in out of sample predictability is supported statistically by the test of diebold and mariano

evidence on the purchasing power parity in a panel of cities evidence is provided on the ppp hypothesis using a sample of 50 spanish cities for a long time period through the application of panel data unit root tests although results suggest non rejection of the ppp short run deviations as measured by half lives indicate that real factors might be causing a slow rate of convergence to a common price index even in highly integrated economies