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Author: Patrick Georges Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
The objective of this thesis is to study the operation of exchange rate regimes in the context of possible regime switches. An intuitive survey of the regime switching literature is given in Chapter 1, and three independent essays are presented in Chapters 2, 3, and 4. Using the theory of regulated Brownian motion, Chapter 2 derives the nonlinear relationship between the nominal exchange rate and its fundamentals during the transition period from the current free-float to a specified target zone (TZ), triggered at an announced state-dependent switch. It is shown that the derived nonlinear relationship is in general different from the relationship corresponding to a return to a fixed exchange rate regime. This is due to a "reflecting effect", the mirror image of the well known "honeymoon effect" of a target zone. and a "bandwidth effect". Also derived is a locus of "benchmark cases" demarcating the factors that lead to an immediate appreciation or depreciation of the domestic currency at the announcement of the future TZ. The target zone model developed in Chapter 3 incorporates the possibility of a future change in the trend in the fundamentals of the exchange rate as policy reaction to specific events (e.g., impending speculative attacks and nominal anchor debates). The market has subjective expectations about this possible trend revision, which can affect the exchange rate level even if the change in trend is not implemented. These expectations are treated, first, as entirely exogenous and, second, as state-varying. In both cases various correlation patterns between the exchange rate and interest rate differentials are possible. This result is consistent with the observed behaviour of the exchange rate and interest rate differentials within the European Monetary System. Chapter 4 studies an announced (state-dependent) regime shift from a free-floating to a permanently fixed exchange rate regime and introduces specific welfare considerations. The welfare issues introduced here try to explain why a specific exchange rate target level would be chosen instead of another one, if a return to a fixed exchange rate were on the public policy agenda and a given range for its pegged value had already been proposed. While this model does not provide a theory of choice between free-float and fixed rate regimes, it proposes a criterion to choose between fixed exchange rate regimes, taking into account the transition period from the free-float to the implementation of the fixed regime.
Author: Patrick Georges Publisher: ISBN: Category : Languages : en Pages : 0
Book Description
The objective of this thesis is to study the operation of exchange rate regimes in the context of possible regime switches. An intuitive survey of the regime switching literature is given in Chapter 1, and three independent essays are presented in Chapters 2, 3, and 4. Using the theory of regulated Brownian motion, Chapter 2 derives the nonlinear relationship between the nominal exchange rate and its fundamentals during the transition period from the current free-float to a specified target zone (TZ), triggered at an announced state-dependent switch. It is shown that the derived nonlinear relationship is in general different from the relationship corresponding to a return to a fixed exchange rate regime. This is due to a "reflecting effect", the mirror image of the well known "honeymoon effect" of a target zone. and a "bandwidth effect". Also derived is a locus of "benchmark cases" demarcating the factors that lead to an immediate appreciation or depreciation of the domestic currency at the announcement of the future TZ. The target zone model developed in Chapter 3 incorporates the possibility of a future change in the trend in the fundamentals of the exchange rate as policy reaction to specific events (e.g., impending speculative attacks and nominal anchor debates). The market has subjective expectations about this possible trend revision, which can affect the exchange rate level even if the change in trend is not implemented. These expectations are treated, first, as entirely exogenous and, second, as state-varying. In both cases various correlation patterns between the exchange rate and interest rate differentials are possible. This result is consistent with the observed behaviour of the exchange rate and interest rate differentials within the European Monetary System. Chapter 4 studies an announced (state-dependent) regime shift from a free-floating to a permanently fixed exchange rate regime and introduces specific welfare considerations. The welfare issues introduced here try to explain why a specific exchange rate target level would be chosen instead of another one, if a return to a fixed exchange rate were on the public policy agenda and a given range for its pegged value had already been proposed. While this model does not provide a theory of choice between free-float and fixed rate regimes, it proposes a criterion to choose between fixed exchange rate regimes, taking into account the transition period from the free-float to the implementation of the fixed regime.
Book Description
This thesis focuses applications of GARCH and regime switching models to financial markets and contains four chapters. The second chapter allows different parameters in the GARCH process for different situations of volatility in financial markets. The data generating process for asset returns has a second moment that is time-varying, persistent and subject to suddent regime shifts. The third chapter identifies how regime-dependent stochastic trends in fundamentals affect the behavior of exchange rates given an exchange rate determination model. Big swings in exchange rates in the chapter are the result of stochastic trends in fundamentals if exchange rates are an endogenous variable in the economy. Finally, the fourth chapter tests the forward-looking rational expectations monetary model of exchange rate determination with present value models, in a VAR context and when the data generation process is subject to changes in regime.
Author: Karen K. Lewis Publisher: ISBN: Category : Foreign exchange Languages : en Pages : 48
Book Description
This paper describes a class of stochastic stabilizing policies within asset price regimes that can be easily incorporated into the framework of regime switching recently proposed by Froot and Obstfeld (1991). In contrast to previous treatments of market-driven fundamentals within the regime, authorities stochastically counteract movements in these fundamentals before asset prices reach boundary points. The paper describes how the stabilizing intra-regime intervention policies can be used to characterize the behavior of monetary authorities before fixing an exchange rate, as in the case studied by Flood and Garber (1983). An intervention policy within target zone bands consistent with empirical evidence is also a member of this class of policies. Furthermore, the stylized features of these intervention policies may be matched to actual data in a natural way.
Author: Konstantinos Mavromatis Publisher: ISBN: Category : Languages : en Pages :
Book Description
The thesis consists of three chapters of self-contained empirical and theoretical studies. In Chapter 1, I examine whether the Balassa-Samuelson effect is indeed the reason behind the behaviour of the currencies of transition economies. So far, in the literature, transition Economies appear to be subject to the Balassa-Samuelson effect. This implies that their currencies experience a prolonged appreciation in real terms as their convergence goes on. However, in the current literature, the effects of the capital account have not been analyzed extensively. In this paper I show that the capital account, rather than productivity, is a key determinant of the appreciation of the currencies of transition economies. I find that a long-run relationship exists between the real exchange rate, productivity, the real interest rate differential and the capital account. Moreover, those variables are found to cointegrate in a nonlinear fashion according to a smooth transition autoregressive model. This implies that a multivariate smooth transition error correction model is the appropriate model to describe their short-run and long-run dynamics. In Chapter 2, I examine the importance of a real exchange rate target in the monetary policy of a central bank. I address that question both empirically and theoretically. Using monthly data I estimate of a structural VAR model for the Eurozone providing evidence in favour of real exchange rate targeting. I examine this case theoretically using a twocountry DSGE model; I find that when the home central bank includes a real exchange rate target in its interest rate rule, it achieves lower welfare losses compared to the Taylor rule. Contrary to similar papers, I compute the optimized coefficients in the interest rate rules considered. I show that the benefits from real exchange rate targeting at home rise as persistence in inflation and output increases. In the robustness analysis I show that a rise in the fraction of backward looking consumers affects negatively the performance of the real exchange rate targeting rule and positively that of the Taylor rule. Asymmetries in the degree of rule-of-thumb behavior in consumption have important effects, as regards the performance of a real exchange rate targeting rule. The performance of both rules is not sensitive to variations in the degree of backward looking price setting behavior . In Chapter 3, I show, using both empirical and theoretical analysis, that changes in monetary policy in one country can have important effects on other economies. My new empirical evidence shows that changes in the monetary policy behaviour of the Fed since the start of the Euro, well captured by a Markov-switching Taylor rule, have had significant effects on the behaviour of inflation and output in the Eurozone even though ECB's monetary policy is found to be fairly stable. Using a two-country DSGE model, I examine this case theoretically; monetary policy in one of the countries (labelled foreign) switches regimes according to a Markov-switching process and this has nonnegligible effects in the other (home) country. Switching by the foreign central bank renders commitment to a time invariant interest rate rule suboptimal for the home central bank. This is because home agents expectations change as foreign monetary policy changes which affects the dynamics of home inflation and output. Optimal policy in the home country instead reacts to the regime of the foreign monetary policy and so implies a time-varying reaction of the home Central Bank. Following this time-varying optimal policy at home eliminates the effects in the home country of foreign regime shifts, and also reduces dramatically the effects in the foreign country. Therefore, changes in foreign monetary regimes should not be neglected in considering monetary policy at home.
Author: Osman Kubilay Gursel Publisher: ISBN: Category : Languages : en Pages : 218
Book Description
In the first chapter the performance of two of the long memory tests, the Modified Rescaled Range Test and Geweke and Porter-Hudak Test for persistence in small samples is examined using Monte-Carlo methods. Some possible candidates for persistence in volatility are Autoregressive Conditional Heteroskedasticity (ARCH), Markov Regime Switching ARCH, and long memory. The long memory series are simulated through a Semi-Markov process with Pareto waiting times and lognormal realizations. The persistence in volatility arising from transition waiting probabilities for a Markov Regime Switching process, and from the tail index of the waiting time distribution for the Semi-Markov process is established through simulations with different parameter values. There is evidence that persistence in a regime switching process is closely linked to state transition probabilities and waiting times. The second chapter re-examines what structural vector autoregressive modeling of real exchange rates with differenced variables tells us about interesting macroeconomic questions. Using quarterly data from G-7 countries in the post Bretton-Woods period, the evidence suggests that shock identification is not an easy process in a Blanchard and Quah decomposition framework with long run restrictions. Confidence bands do not find significant impulse responses and the signs of the estimated impulse responses are very sensitive to the lag selection criteria adopted. Possible cointegration effects seem to be the main driving force behind the unsatisfactory performance of the structural approach. Chapter three extends the structural vector autoregression model by incorporating cointegration effects. Using the method of Warne (1993), in a simple four-variable vector autoregression (VAR) characterized by cointegration, the response of real exchange rates to various economic shocks are investigated with economically plausible long-run restrictions. The long-run relations and driving stochastic trends of the real exchange rate between United States and other G-7 countries are analyzed in a structural cointegrated framework. Productivity shocks depreciate the real exchange rate and the perverse sign effect of supply shock is corrected for most countries in the sample. More significant impulse responses are observed through confidence intervals. The structural vector error correction decompositions are also found to be not robust to estimating with different lag lengths owing to additional cointegration effects.
Author: Patrick Georges
Author: Patrick Georges
Author: André Oliveira Santos
Author: Karen K. Lewis
Author: Konstantinos Mavromatis
Author: Kenneth Froot
Author: Jinho Kim
Author: Osman Kubilay Gursel
Author: Martin Sola
Author: Kanda Naknoi
Author: Hongfang Zhang