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quantity of one currency required to buy or sell one unit of the other currency. The exchange
rate can be quoted in 2 ways: as the price of the foreign currency in terms of home currency
(direct terms) or as the price of home currency in terms of foreign currency (indirect terms).
Three Exchange Rate Regimes
In theory, there are three exchange rate regimes, namely flexile, intermediate and fixed.
Under a flexible currency regime, the external value of a currency is determined more or less
by the force of market supply and demand. Because floating exchange rate permitting enough
flexibility to adjust fundamental disequilibria under international supervision, it can prevent
competitive depreciation. On the other hand, under a fixed exchange rate arrangement, the
monetary authority pegs the domestic currency to one or a basket of foreign currencies.
Exchange rates between currencies that are set at predetermined levels and do not move in
response to changes in supply and demand. The authority has to intervene in the foreign
exchange market whenever the prevailing rate deviates from the specific one. Immediate
exchange rate arrangement has a medium flexibility lying between flexible and fixed.
The arguments in favor of purely floating exchange rate regime:
1.
Certainty of exchange rate - the exchange rate volatility is low under the fixed
exchange rate regime. This reduces the investment risk resulted in larger imports,
exports, lending and borrowing. Thus, stable exchange rate promotes international
trade.
2. Nominal anchor - fixed exchange rate is an effective way of providing a nominal
anchor to monetary policy. Pegging the exchange rate will convince people that
inflation is unlikely. Lower inflation expectation yields a lower actual inflation rate.
Role of Central Bank Under Different Exchange Rate Regimes
Under a fixed exchange rate regime
For those countries with a fixed rate regime, operations in the foreign exchange market are
largely passive, with the central bank automatically clearing any excess demand or supply of
foreign currency to maintain a fixed exchange rate. When there is an increase in the demand
of foreign currency, central bank purchases the local currency against foreign currency.
When there is increase in the demand of foreign currency, central bank sells foreign currency
for local currency. Interest rates in the inter-bank market adjust to clear the market. Under
this system, both the stock and the flow of the monetary base must be fully backed by foreign
reserves. Hence, any change in the monetary base must be matched by a corresponding
change in reserves and the central bank is passive in intervening in the market.
Under a flexible exchange rate regime
Although central banks in countries adopt flexible exchange rate regimes, they have still
retained discretion to intervene in the foreign exchange market. Governments concern on FX
rates because changes in the rates affect the value of products and financial instruments. As a
result, unexpected or large changes can affect the health of nations' markets and financial
systems, as well as inflation and economic growth. For example, if the Japanese yen rises in
value compared with the dollar, U.S. exports become less expensive for the Japanese to buy;
that could lead to an increase in U.S. exports and a boost to U.S. employment. At the same
time, the lower value of the dollar compared with the yen could raise U.S. import prices and
act as an inflationary influence in the United States.
Why Central Banks Intervene in the Foreign Exchange Market?
Minimizing Overshooting Effect
The motivation for intervention decision has been widely researched and often discussed.
There is a general consensus that intervention may be warranted to stabilize the exchange rate
and provide liquidity to the market; and to correct an overshoot, in either direction, in the
exchange rate. Foreign exchange intervention is a tool used in the short-term to smooth the
transition in the exchange rate by minimizing overshooting when economic conditions are
changing or when the monetary authority believes that the market has misinterpreted
economic signals.
Reducing Exchange Rate Volatility
Limiting the volatility in the exchange rate may be important due to the adverse effects it can
have on sentiment both within financial markets and the economy. Especially, when the
management of the exchange rate is the major tool for implementing monetary policy,
excessive short-term volatility can erode the market's confidence in the regime.
Central bank wants to reduce the volatility because volatility may impede international
investment flows. By adding risk to the rate of return on a foreign asset, exchange rate
volatility may reduce investment in foreign financial assets. In addition, companies may be
reluctant to build a new plant or purchase a foreign company if exchange rate uncertainty
reduces the expected profits from such projects. As a result, exchange rate volatility creates a
disincentive for domestic investment and inefficient allocation of resources in the world
economy.
Another reason why authorities may want to reduce volatility is that it may adversely affect
international trade. Stable currency can facilitate international trade by reducing investment
risk. Because volatile exchange rates create uncertainty about the revenues to be earned on
international transactions, such volatility could force companies to add a risk premium to the
costs of goods they sell abroad. If these costs are passed on to consumers in the form of
higher prices, the demand for traded goods could decrease. In addition, firms themselves may
be more reluctant to engage in international trade if exchange rate volatility adds an extra risk
to their profits.
A final reason to reduce exchange rate volatility is that it could spill over into the financial
markets. If exchange rate volatility increases the risk of holding domestic assets, the prices of
these assets could also become more volatile. The increased volatility of financial markets
could threaten the stability of the financial system and make monetary policy goals more
difficult to attain.
Leaning-against-the-wind
Research and official pronouncements support the idea that monetary authorities with
floating exchange rates most often employ intervention to resist short-run trends in exchange
rates. The central bank intervenes the disorderly market to moderate the movements of the
exchange rate by providing support to either domestic or foreign currency. This kind of
intervening strategy is called "leaning-against-the-wind".
Correct Misalignment of Exchange Rate
Another motivation of is to correct medium-term "misalignments" of exchange rates away
from "fundamental" values. Where the exchange rate depart from fundamentals - such as
moving the inflation rate outside of a target range - it may be appropriate to intervene in the
market. The stabilizing role that a central bank can bring to the market may be sufficient to
alter investor sentiment and move the exchange rate back towards equilibrium.
Profitability of Intervention
There have been several empirical studies on the profitability of intervention for major
countries. One of the first was that published by Taylor (1982), which examined nine
industrial countries early in the floating period, from the early 1970s to the end of 1979.5
According to his estimates, central banks lost more than $US11 billion over the whole
period.
Several subsequent studies challenged Taylor's results, reworking his calculations using
several refinements. By lengthening the sample period and taking account of the interest
differential between investing in foreign currencies and the local currency, Argy (1982),
Jacobson (1983), and the Bank of England (1983) found that these large losses were in fact
profits. For the US, for instance, Jacobson estimated that total losses are around $US500
million for the 1973-79 period, but over the entire 1973-1981 period, net profits amounted to
almost $US300 million. Moreover, including a measure of net interest earnings increased
profits by up to $US470 million over the longer period.
The goal of foreign exchange intervention is to maintain orderly market conditions - to help
achieve macroeconomic goals like price stability or full employment. Therefore, profitability
of foreign exchange intervention is not a necessary condition for intervention.
Technical Trading Rule Profitability
A strong and consistent result in international finance is the evidence that technical trading
rules - rules that use the information on past price to determine trading decisions - can
generate persistent profits in dollar exchange rate markets.
Among the trading rules, moving average is the one that receives most attention. The rule
attempts to filter the data to discover trends in exchange rates. It is also called double
moving-average rules (MA rules). A double moving average prescribes buying an asset - e.g.
a foreign currency-denominated bank deposit - if a moving average of past exchange rates
over a short time window is greater than a moving average of past exchange rates over a
longer time window. Conversely, if the short moving average is less than the long moving
average, the rule instructs that the trader should sell the asset.
Evidence has accumulated in recent years that technical analysis can be useful in the foreign
exchange market (Sweeney (1986), Levich and Thomas (1993), Neely, Weller and Dittmar
(1997)). This finding has challenged the efficient markets hypothesis, which holds that
exchange rates reflect information to the point where the potential excess returns do not
exceed the transactions costs of acting (trading) on that information (Jensen (1978)).
Causes of Volatility
In the previous section, we mentioned that one of the objectives of foreign exchange
intervention is to smooth the exchange rate volatility. But what are the causes and
consequences of this volatility?
Exchange rate volatility is often attributed to three factors: volatility in market fundamentals,
changes in expectations due to new information, and speculative "bandwagons".
Volatility in Market Fundamentals
Volatility in market fundamentals, such as the money supply, income, and interest rates,
affects exchange rate volatility because the level of the exchange rate is a function of these
fundamentals. For example, large changes in the money supply can lead to changes in the
level of the exchange rate. Changes in the level of the exchange rate in turn imply exchange
rate volatility.
Changes in Expectations
Changes in expectations about future market fundamentals or economic policies also affect
exchange rate volatility. When market participants receive new information, they alter their
forecasts of future economic conditions and policies. Exchange rates based on these forecasts
will also change, thereby leading to exchange rate volatility. For example, news about a
change in monetary policy may cause market participants to revise their expectations of
future money supply growth and interest rates, which could alter the level and hence the
volatility of the exchange rate.
Degree of Confidence
In addition to being affected by expectations of future fundamentals and policies, volatility is
also affected by the degree of confidence with which these expectations are held. Exchange
rate volatility tends to rise with increases in market uncertainty about future economic
conditions and tends to fall when new information helps resolve market uncertainty.
Speculative Bandwagons
Finally, exchange rate volatility can be caused by speculative bandwagons, or speculative
exchange rate movements unrelated to current or expected market fundamentals. For
example, if enough speculators buy dollars because they believe the dollar will appreciate,
the dollar could appreciate regardless of fundamentals. If speculators then think that the
market fundamentals will not sustain, active selling by the same speculators could cause the
dollar to depreciate. Fluctuation in the value of the dollar arising from such speculative forces
will contribute to exchange rate volatility.
Types of Foreign Exchange Intervention
Entrustment Intervention
"Entrustment Intervention" means intervention that is conducted in overseas markets with
funds of local monetary authorities. It is different from the intervention that is conducted in
overseas markets with funds of respective foreign monetary authorities.
Reverse-Entrustment Intervention
Similarly, when foreign monetary authorities need to intervene in a country's foreign
exchange market, say Tokyo market, the central bank of Japan can conduct interventions on
their behalf upon request. This is called "Reverse-Entrustment Intervention"
Large in amount - The larger the amount of interventions, the greater the possibility
of success.
2. Coordinated - Evidence suggests that coordinated intervention is more effective than
the individual intervention. It is because where the monetary authorities for both the
undervalued and overvalued currencies participate; the coordinated signals offered
by the intervention may view as more credible.
3. In series - spread out the intervention transaction over a number of days to maximize
the effects of intervention through the signaling channel. The intervention stance
may be perceived to be more credible to market participants if they see a series of
intervention transaction rather a one-off entry into market. Publicized - reported
interventions are the most effective central bank action because it is regarded as a
credible source of information about the future monetary policy while secret
interventions have little effect on exchange rate.
4. Publicized - reported interventions are the most effective central bank action
because it is regarded as a credible source of information about the future monetary
policy while secret interventions have little effect on exchange rate.
Draft Guidelines for Foreign Exchange Reserve Management
Although each country is free to manage its foreign reserve, management of foreign
exchange reserves is important because reserves are a key determinant of a country's ability
to avoid economic and financial crisis. Therefore, since 2000 the IMF - in collaboration with
the Bank for International Settlements (BIS), World Bank, and many member countries - has
been engaged in the development of a set of Draft Guidelines for Foreign Exchange Reserve
Management. For further information, we can approach to the IMF site
http://www.imf.org/external/np/mae/ferm/eng/
Keywords: Central Bank Intervention, Foreign exchange
intervention, Exchange Rate
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To Dollarize or not to Dollarize: Currency Choices for the Western
Hemisphere
URL: http://www.nsi-ins.ca/ensi/events/final.html
This paper was written by Roy Culpeper. The paper is divided into 4
parts: 1. Exchange Rate Policy Options 2. The Emergence of
Dollarization as a Policy Option 3. Exchange Rate Regimes, Sovereignty
and Politics 4. Areas of Agreement, Disagreement, and Issues for
Further Research Paper is published in HTML format.
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It's an interactive Financial Encyclopaedia which is the courtesy of
Investor's Galleria. It presents very brief entries which help if no other
source of information is available. This dictionary includes a number of
Standard terms which are accepted by a major standards setting body
such as the International Standards Organisation.
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Foreign Currency Notes Exchange Rates
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Economagic: Economic Time Series Page
URL: http://www.EconoMagic.com/
This website is made by Ted Bos of University of Alabama, at
Birmingham. This page is meant to be a comprehensive site of free,
easily available economic time series data useful for economic
research, in particular economic forecasting. This site (set of web
pages) was started in 1996 to help students in an Applied Forecasting
class. The idea was to give students easy access to large amounts of
data, and to be able to quickly get charts of that data. There are more
than 100,000 time series for which data and custom charts can be
retrieved. Though the greatest utility of this site is the vast number of
economic time series, and the easily modified charts of that same data,
an overlooked facility of great utility is the availability of Excel files for
all series. The majority of the data is USA data. The core data sets
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bulk of the data is employment data by local area -- state, county,
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Bloomberg.com : Currency Rates
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Bloomberg's Currency Calculator is used for searching for the foreign
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top 11 countries, regional currency rates, and a quick listing of
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http://econ.ohio-state.edu/efisher/pppuip.pdf
Remarks:
Haircuts or Hysteresis? Sources of Movements in Real Exchange
Rates
Author: Rogers,John H.; Jenkins, Michael
Book: Journal of International Economics
Year: 1995 Vol: 38(3-4), pages 339-60.
The authors empirically assess the importance of two sources of real
exchange rate movements. In models where purchasing power parity
holds only among traded goods, real exchange rate variation results
from relative price movements within countries. An alternative
explanation relies on hysteretic price-setting and nominal exchange
rate changes. Using disaggregated price data from eleven OECD
nations, the authors find some support for the nontraded goods
models. For example, prices of haircuts in Canada and the United
States are related in the long run. The authors find stronger evidence
to support models that emphasize sticky prices, transportation costs,
or other impediments to frictionless trade.
Remarks:
Risk, Policy Rules, and Noise: Rethinking Deviations from Uncovered
Interest Parity
Author: Nelson Mark, Ohio State University Yangru Wu, West Virginia
University
Book:
Year:
This paper attempts to understand why the forward premium helps to
predict the future change in the exchange rate, but with the wrong
(negative) sign. A corollary to the negative forward premium bias is
that the rational deviation from uncovered interest parity (DUIP) is
negatively correlated with the rationally expected rate of depreciation.
These facts have long posed a challenge to international economic
theory. In this paper, they explore three approaches to explain these
puzzles: (i)the standard representative-agent asset pricing model, (ii)a
monetary-policy rule model with exchange-rate feedback, and (iii)a
model of noise trading. They begin by presenting some stylized facts
that characterize the problem. They obtain implied values of the
rational DUIP and the rationally expected depreciation from a vector
error correction model (VECM) for log spot and forward exchange rates
and demonstrate the credibility of the estimates of these unobserved
series by showing that they match a number key sample moments.
With these credible estimates of the rational DUIP in hand, They then
ask if they behave like risk premia implied by the standard
representative agent asset pricing approach. The answer to this
question is no. The risk premium is a conditional covariance between
the intertemporal marginal rate of substitution of money and the
payoff from forward currency speculation. Since the rational DUIP
fluctuates between positive and negative values, according to the risk
premium hypothesis, this conditional covariance must also. Our
empirical analysis shows, however, that required conditional
correlations required by the theory are largely absent from the data.
Next, they re-examine a recent contribution by McCallum~(1994), who
develops a non-risk interpretation of the rational DUIP. There,
monetary policy involves the setting of the interest differential
hypothesis holds in the long run but not in the short run. Further, the
error-correction models suggested that deviations of the actual
exchange rate from its long-run PPP value were corrected in
subsequent periods. Finally, the high frequency monthly data models
did a better job of tracking the turning points of the actual data than
the low-frequency quarterly and yearly models.
Remarks: The whole paper is available at:
http://www.iaes.org/journal/iaer/aug_99/ramirez/
A Panel Project on Purchasing Power Parity: Mean Reversion Within
and Between Countries
Author: Jeffrey A. Frankel, Andrew K. Rose
Book: NBER Working Paper
Year: February 1995 Vol: No. W5006
Previous time-series studies have shown evidence of mean- reversion
in real exchange rates. Deviations from purchasing power parity (PPP)
appear to have half-lives of approximately four years. However, the
long samples required for statistical significance are unavailable for
most currencies, and may be inappropriate because of regime changes.
In this study, we re-examine deviations from PPP using a panel of 150
countries and 45 annual observations. Our panel shows strong
evidence of mean-reversion that is similar to that from long timeseries. PPP deviations are eroded at a rate of approximately 15%
annually, i.e., their half-life is around four years. Such findings can be
masked in time-series data, but are relatively easy to find in crosssections.
Remarks: The paper is downloadable at:
http://papers.nber.org/papers/W5006
External Shocks, Purchasing Power Parity, and the Equilibrium Real
Exchange Rate
Author: Shantayanan Devarajan, Jeffrey D. Lewis, and Sherman
Robinson
Book: The World Bank Economic Review
Year: January 1993 Vol: Volume 7, Number 1
Two approaches are commonly used to determine the equilibrium real
exchange rate in a country after external shocks: purchasing power
parity (PPP) calculations and the Salter-Swan, tradables-nontradables
model. There are theoretical and empirical problems with both
approaches, and tensions between them. In this article we resolve
these theoretical and empirical difficulties by presenting a model which
is a generalization of the Salter-Swan model and which incorporates
imperfect substitutes for both imports and exports. Within the
framework of this model, the definition of the real exchange rate is
consistent both with that of the PPP approach and with that of the
Salter-Swan model (suitably extended). Our model, however, is
capable of capturing a richer set of phenomena, including terms of
trade shocks and changes in foreign capital inflows. It also provides a
practical way to estimate changes in the equilibrium real exchange
rate, requiring little more information than is required to do PPP
calculations. The results are consistent with those of multisector
computable general equilibrium models, which generalize the trade
specification of the small model.
Remarks: The full text of this article is not available on-line. Many
past issues of the WBER can be purchased for $13 per issue at:
http://www.worldbank.org/research/journals/wber/revjan93/external.h
tm
Purchasing Power Parity: Three Stakes through the Heart of the Unit
Root Null
Author:
Book: Staff report of Federal Reserve Bank of New York.
Year: June 1999 Vol: Number 80
A recent influential paper (O'Connell 1998) argues that panel data
evidence in favor of purchasing power parity disappears once test
procedures are altered to accommodate heterogenous cross-sectional
dependence among real exchange rate innovations. We present
evidence to the contrary. First, we modify two extant panel unit root
panel unit root tests to eliminate the upward size distortion induced by
contemporaneous cross-sectional dependence. Second, we exploit a
recently-introduced test, based on SUR techniques, that also remains
valid in the presence of cross-sectional dependence. Using the three
new tests, we find overwhelming evidence in favor of real exchange
rate stationarity during the post-Bretton Woods era among OECD
s. We
also find emphatic evidence of stationarity using O'Connell's GLS test.
Bias-corrected parameter estimates indicate that deviations from PPP
erode more quickly for real exchange rates defined using wholesale
rather than consumer price indices. Monte Carlo experiments indicate
that several of the tests discussed here have considerable power
against the unit root null.
Remarks: The entire paper in PDF format can be downloaded at:
http://www.ny.frb.org/rmaghome/staff_rp/sr80.html
Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling
and Specification Biases in Mean-Reversion Tests of the Law of One
Price
Author: Alan M. Taylor
Book: NBER Working Paper
Year: March 2000 Vol: No. W7577
The PPP puzzle is based on empirical evidence that international price
differences for individual goods (LOOP) or baskets of goods (PPP)
appear highly persistent or even non-stationary. The present
consensus is these price differences have a half-life that is of the order
of five years at best, and infinity at worst. This seems unreasonable in
a world where transportation and transaction costs appear so low as to
encourage arbitrage and the convergence of price gaps over much
shorter horizons, typically days or weeks. However, current empirics
rely on a particular choice of methodology, involving (i) relatively lowfrequency monthly, quarterly, or annual data, and (ii) a linear model
specification. In fact, these methodological choices are not innocent,
and they can be shown to bias analysis to-wards findings of slow
convergence and a random walk. Intuitively, if we suspect that the
actual adjustment horizon is of the order of days then monthly and
annual data cannot be expected to reveal it. If we suspect arbitrage
costs are high enough to produce a substantial band of inaction' then a
linear model will fail to support convergence if the process spends
considerable time random-walking in that band. Thus, when testing for
PPP or LOOP, model specification and data sampling should not
proceed without consideration of the actual institutional context and
Australian and New Zealand dollars over the period 1985 to 1994.
Formal empirical evidence shows that spot and forward speculation do
not play any role in determining the forward exchange rate. The
significant deviations in 1985 are attributed to political risk. Further
shrinkage of the deviations in the 1990s is attributed to a possible
reduction in transaction costs resulting from financial deregulation.
Remarks:
Exchange Controls, Political Risk and the Eurocurrency Market: New
Evidence from Tests of Covered Interest Rate Parity
Author: Cody, Brian J.
Book: International Economic Journal
Year: 1990 Vol: 4(2), pages 75-86.
This study employs daily data to examine the effects on Eurocurrency
and onshore returns of the May 21, 1981 imposition of exchange
controls by French President Mitterand. Prior to this time, transaction
costs explain the average onshore deviations from covered parity;
however, these averages ignore short-lived political risk premia which
emerged just before the imposition of controls. As expected, there is
no evidence of political risk on Eurocurrency markets. Yet when
exchange controls were in effect, premia in excess of transaction costs
surfaced on nonfranc Eurocurrency deposits at the time of devaluations
of the franc within the EMS.
Remarks:
Forward and Spot Exchange Rates
Author: Fama, Eugene F.
Book: Journal of Monetary Economics
Year: 1984 Vol: 14(3), pages 319-38.
In this study Fama decomposes the forward premium into a risk
premium and an expected depreciation premium based on the
information set available. By constructing a statistical model on this
relation, he finds the relative importance of the risk premium and the
expected depreciation premium.
Remarks:
Exchange Rate Forecasting Techniques, Survey Data, and Implications
for the Foreign Exchange Market
Author: Frankel, Jeffrey A.; Froot, Kenneth
Book: International Monetary Fund Working
Year: 1990 Vol: Paper: WP/90/43, pages 26.
This paper examines the dynamics of the foreign exchange market.
The first half addresses a number of key questions regarding the
forecasts of future exchange rates made by market participants, by
means of updated estimates using survey data. Here the authors follow
most of the theoretical and empirical literature in acting as if all market
participants share the same expectation. The second half then
addresses the possibility of heterogeneous expectations, particularly
the distinction between "chartists" and "fundamentalists," and the
implications for trading in the foreign exchange market and for the
formation of speculative bubbles.
Remarks:
A Multivariate GARCH Model of Risk Premia in Foreign Exchange
Markets
Author: Malliaropulos, Dimitrios
Book: Economic Modelling
Year: 1997 Vol: 14(1), pages 61-79.
This paper investigates the existence of time-varying risk premia in
deviations from uncovered interest parity based on the market capital
asset pricing model. The empirical analysis is conducted using a broad
data set of seven major currencies against the US dollar, and a world
equity index in order to approximate the benchmark portfolio. The
conditional covariance matrix of excess returns is modelled as a
multivariate GARCH process. The results indicate significant conditional
systematic risk. Estimated conditional beta coefficients are very similar
across currencies and behave uniformly over time. The explanatory
power of the model is significantly higher compared to the constant
beta CAPM specification. Furthermore, estimation results suggest that
(1) expected excess returns are less volatile in foreign exchange
markets compared to stock markets, and (2) including nominal dollar
assets in international equity portfolios can reduce overall portfolio
risk.
Remarks:
International Financial Relations under the Current Float: Evidence
from Panel Data
Author: Lothian, James R.; Simaan, Yusif
Book: Open-Economies-Review
Year: 1998 Vol: 9(4), pages 293-313.
This paper uses multi-country data for the period 1973-94 to
investigate five key equilibrium conditions in international finance-purchasing power parity, the Fisher equation, uncovered interest
parity, and the equity-return analogues of the latter two. The results
are largely consistent with theoretical expectations. Over the long run,
purchasing power parity, uncovered interest parity and the Fisher
effect prove to be rather good first approximations. The equity-return
relations, though somewhat less so are nevertheless much better
behaved than past studies would lead one to expect. Average rates of
equity returns keep pace with inflation within countries in almost all
instances; across countries, they are positively correlated with average
rates of inflation. This is particularly the case when the data period is
extended to include earlier decades.
Remarks:
An Alternative Approach to Testing Uncovered Interest Parity
Author: Bhatti, Razzaque H.; Moosa, Imad A.
Book: Applied-Economics-Letters
Year: 1995 Vol: 2(12), pages 478-81.
Supportive evidences of UIP hypothesis through a cointegration
analysis. The authors compare the Treasury bill rates denominated in
11 currencies to the U.S. dollar, and find a long-run relationship in all
cases.
Remarks:
Uncovered Interest Parity in Crisis: The Interest Rate Defense in the
1990s
Author: Flood, Robert P; Rose, Andrew K.
Book:
Year: 2001 Vol: This paper is available online at
http://haas.berkeley.edu/~arose/UIPC.pdf
This paper tests for uncovered interes parity (UIP) using daily data for
twenty-three developing and developed countries through the crisisstrewn 1990s. The authors find that UIP works better on average in the
1990s than previous eras in the sense the slope coefficient from a
regression of exchange rate changes on interest differentals yields a
positive coefficient (which is sometimes insignificantly different from
unity). UIP works systematically worse for fixed and flexible exchange
countries than for crisis countries, but we find no significant differences
between rich and poor countries. Finally, the authors find evidence that
varies considerably across countries and time, but is usually weakly
consistent with an effective "interest defense" of the exchange rate.
Remarks:
An Intraday Analysis of the Effectiveness of Foreign Exchange
Intervention
Author: Neil Beattie and Jean-Franois Fillion
Book:
Year: February 1999
This paper assesses the effectiveness of Canada's official foreign
exchange intervention in moderating intraday volatility of the
Can$/US$ exchange rate, using a 2-1/2-year sample of 10-minute
exchange rate data. The use of high frequency data (higher than daily
frequency) should help in assessing the impact of intervention since
the foreign exchange market is efficient and reacts rapidly to new
information. The estimated equations explain volatility in terms of four
major factors: intraday seasonal pattern; daily volatility persistence;
macroeconomic news announcements; and the impact of central bank
intervention. Rule-based (or expected) intervention apparently had no
direct impact on the reduction of foreign exchange volatility, although
the existence of a non-intervention band seemed to provide a small
stabilizing influence. This result is interpreted to mean that the
stabilizing effect of expected intervention came into play as the
Canadian dollar approached the upper or lower limits of the band.
When the dollar exceeded the band, actual intervention did not have
any direct impact because it was expected. Moreover, the results show
that discretionary (or unexpected) intervention might have been
effective in stabilizing the Canadian dollar, although the impact of an
intervention sequence diminished as it increased beyond a few days.
Remarks: The paper can be downloaded in PDF format at:
http://www.bankofcanada.ca/publications/working.papers/1999/wp994.pdf
Measuring the Profitability and Effectiveness of Foreign Exchange
Market Intervention: Some Canadian Evidence
Author: John Murray, Mark Zelmer, and Shane Williamson
Book: Technical Report No. 53
Year: March 1990
When the major industrial countries decided to move to a system of
managed flexible exchange rates following the collapse of the Bretton
Woods system, many observers thought that this would reduce, if not
eliminate, the need for official foreign exchange market intervention.