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Working Paper
A utility based comparison of some models of exchange rate volatility
When estimates of variances are used to make asset allocation decisions, underestimates of population variances lead to lower expected utility than equivalent overestimates: a utility based criterion is asymmetric, unlike standard criteria such as mean squared error. To illustrate how to estimate a utility based criterion, we use five bilateral weekly dollar exchange rates, 1973-1989, and the corresponding pair of Eurodeposit rates. Of homoskedastic, GARCH, autoregressive and nonparametric models for the conditional variance of each exchange rate, GARCH models tend to produce the highest ...
Working Paper
A long-run view of the european monetary system
This paper analyzes the exchange rates and consumer price indices of the six largest countries of the European Monetary System (EMS). The analysis covers the entire period of floating exchange rates. This paper shows that many of the implied real exchange rates have unit roots, even when one allows for the possibility of a structural break occurring at the time of the formation of the EMS. Further, prices and exchange rates are not co-integrated during the EMS period. There is strong evidence that there is a quadratic time trend in these price indices and weak evidence that Exchange rates and ...
Working Paper
An empirical analysis of policy coordination in the United States, Japan and Europe
Coordination of macroeconomic policy has been a major topic at recent summit meetings, and has been the subject of a number of theoretical studies. However, relatively little empirical research exists on policy coordination. This paper is an attempt to help fill this gap. The paper considers the quantitative importance of the coordination of fiscal and monetary policy under flexible exchange rates. We also evaluate the mechanisms by which the effects of macroeconomic policy are transmitted abroad. The nature of the equilibrium reached in the absence of coordination is also analyzed, and the ...
Working Paper
The structure and properties of the FRB multicountry model.Part I: Model description and simulation results
The FRB Multicountry Model (MCM) is a linked system of five quarterly national macroeconometric models of the United States, Canada, Germany, Japan, and the United Kingdom. The MCM emphasizes international linkages, and has equations for trade in goods and services, investment income flows, and exchange rates. This paper documents the current version of the MCM. The paper describes the theoretical structure of the model, and presents the empirical estimation results. The paper also describes a series of simulations of fiscal and monetary policy scenarios and external shocks. A complete ...
Working Paper
A Simple Measure of the Intensity of Capital Controls
We propose a monthly measure of the intensity of capital controls across 29 emerging markets. Our measure, which is based on restrictions on foreign ownership of equities, provides information on the extent and evolution of financial liberalization. Using the measure, we show that a complete liberalization results in a much sharper decrease in the cost of capital than previously reported, but following a partial liberalization the cost of capital increases. Moreover, the more complete the liberalization is, the greater are the subsequent exchange rate appreciation and capital inflows.
Working Paper
Cross-board listings, capital controls, and equity flows to emerging markets
We analyze capital flows to emerging markets in a framework that incorporates two quantitative measures of financial integration, the intensity of capital controls and the extent of cross-border listings, while controlling for traditional global (push) and country-specific (pull) factors. Two important results emerge. First, the cross-listing of an emerging market firm on a U.S. exchange is an important but short-lived capital flows event, suggesting that the cross-listed stock is in effect a new security that U.S. investors quickly bring into their portfolios. Second, the effect of financial ...
Working Paper
Do indicators of financial crises work? an evaluation of an early warning system
The object of this paper is to develop an operational early warning system (EWS) that can detect financial crises. To achieve this goal the paper analyzes and extends the early warning system developed by Kaminsky, Lizondo, and Reinhart (1998) and Kaminsky and Reinhart (1999) that is based on the "signal" approach. This system monitors several indicators that tend to exhibit an unusual behavior in the periods preceding a crisis. When an indicator exceeds (or falls below) a threshold, then it is said to issue a "signal" that a currency crisis may occur within a given period. The model does ...
Working Paper
Optimal currency basket in a world of generalized floating : an application to the nordic countries
The purpose of this paper is to derive optimal weights for a currency basket taking into consideration the objective of the policymaker. We carefully distinguish between the two terms: effective exchange rate index and currency basket, which are often used interchangeably in the literature. In general, our analysis is an extension of the work of Branson-Katseli and Lipschitz-Sundararajan and then applied to the Nordic countries. We use the policy objective of minimizing fluctuation in export production and illustrate our results using Norway, Sweden and Finland. The weights we derive create ...