Exchange Rate Economics: Theories and Evidence

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Target zone models 301 6 4 2 % per year 0 –2 –4 –6 1889 1891 1893 1895 1897 1899 1901 1903 1905 1907 Figure 12.7 Expected realignment rate,95% CI,franc-sterling,Classical Gold Standard. Source: Hallwood et al. (1996). 15 10 % per year 5 0 –5 1889 1891 1893 1895 1897 1899 1901 1903 1905 1907 Figure 12.8 Expected realignment rate,95% CI,dollar-sterling,Classical Gold Standard. Source: Hallwood et al. (1996). exchange rate movement in the opposite direction. Flood et al. (1991) present a range of scatterplots for the ERM experience and show no evidence of a negative relationship. Indeed,correlations between the exchange rate within the band and the interest differential (= E t s t+k ) are often positive. Giovannini (1993) confirms this for the Bretton Woods regime,although both Bordo and
302 Target zone models MacDonald (2005) and Hallwood et al. (1996) report negative relationships for key currencies participating in the Classical Gold Standard regime. A related prediction to that of negative correlation is the idea that the exchange rate should be mean-reverting within the band – for example,a current depreciation should be offset by an exchange rate movement in the opposite direction. Svensson (1992b) argues that ‘mean reversion is an important general property of target zone exchange rates that is independent of the validity of the specific Krugman model.’ Perhaps not surprisingly it turns out that there is close correspondence between mean reversion tests and the credibility tests discussed earlier. Anthony and MacDonald (1998,1999) propose using univariate tests of mean reversion for both the narrow and wide band ERM experiences. Recognising the well known low power of the Dickey–Fuller class of statistic,they supplement such tests with variance ratio test statistics which are known to be more powerful in a univariate setting. The basic finding in this paper is that the variance ratio statistics show clear evidence of mean reversion for currencies known to be credible,in particular the Dutch guilder and the Danish krone. Furthermore,it turns out that there is as much evidence of mean reversion in the wide band system as in the narrow band system. Hallwood et al. (1996) use both variance ratio and Dickey– Fuller type tests for both the Classical and inter-war Gold Standards and report strong evidence of mean reversion with both types of test for both gold standard regimes. For the Classical period the US/UK and FR/UK show very fast and significant mean reversion – for example,within 4 months half of a deviation is extinguished. For the inter-war period they again get clear evidence of mean reversion,although this is not as clear-cut (as fast or as significant) as in the Classical period. A key feature of the basic target zone model is that there should be a non-linear – S-shaped – function between the exchange rate and the composite fundamental. For the ERM period FRM find little evidence of non-linearities between exchange rates and fundamentals,and,indeed,there is some evidence to suggest that countries which appeared to be more committed to the ERM actually exhibited fewer manifestations of non-linearities. In sum,the s/f relationship appears to be approximately linear over the entire sample. For the Bretton Woods period Giovannini finds that most of the data,apart from the yen–dollar rate,is consistent with a linear relationship. For the gold standard period (Bordo and MacDonald 2005) there is clear evidence of a non-linear relationship but it is not S-shaped (although this could be due to the existence of gold points). More formal tests of non-linearity by FRM,using parametric methods,shows clear evidence of statistically significant non-linear relationship,of target zone type effect,for most countries and for most ERM regimes. However,this result also equally holds in the floating rate period,and FRM argue that the non-linearity they capture could be picking up some form of generic misspecification,not specific to target zone. Meese and Rose (1991) use non-parametric methods to test for nonlinearities in fixed rate regimes and find little evidence that non-linear models fit the data better than linear models in fixed rate regimes.
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Exchange Rate Economics Exchange Ra
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Firstpublished2007 by Routledge 2Pa
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Contents List of figures List of ta
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Figures 1.1 The balance of payments
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Figures 13.6 Fourth generation spec
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Preface This book is the second edi
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2 Introduction Although the textboo
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4 Introduction (orders to buy/sell
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6 Introduction Table 1.3 Currency d
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8 Introduction a truly flexible exc
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10 Introduction this has to be sati
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12 Introduction likely that the rel
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14 Introduction or F (1 + i) = S (1
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16 Introduction Consider now a fall
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18 Introduction The empirical evide
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20 Introduction (mean and variance)
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22 Introduction (a) (b) 0.3 0.25 0.
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24 Introduction clusters or that it
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26 Introduction 0.1 0.05 0 -0.05 -0
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28 Introduction 1.9 Exchange rate r
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30 Introduction fixed versus flexib
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32 Introduction influences. For exa
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34 Introduction 1.11 The determinan
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36 Introduction In the standard OCA
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38 Introduction most transactions i
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40 Purchasing power parity and the
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3 The economics of the PPP puzzle I
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70 The economics of the PPP puzzle
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4 The flexible price monetary appro
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96 The flexible price monetary appr
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98 The flexible price monetary appr
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100 The flexible price monetary app
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5 The sticky-price monetary model I
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108 The sticky-price monetary model
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6 The monetaryapproach to the excha
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136 Empirical evidence on the monet
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Table 6.5 SEM equations: United Kin
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7 Currencysubstitution models and t
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168 Currency substitution and portf
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200 Real exchange rate determinatio
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228 Equilibrium exchange rates rate
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230 Equilibrium exchange rates A nu
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232 Equilibrium exchange rates long
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234 Equilibrium exchange rates 5.1
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236 Equilibrium exchange rates term
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238 Equilibrium exchange rates 0.30
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240 Equilibrium exchange rates Detk
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242 Equilibrium exchange rates US i
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244 Equilibrium exchange rates The
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246 Equilibrium exchange rates 9.6.
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248 Equilibrium exchange rates 9.6.
Page 265 and 266: 250 Equilibrium exchange rates Conc
Page 267 and 268: 252 The new open economy macroecono
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352 Market microstructure approach
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15 Spot and forward exchange rates
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Notes 1 Introduction: some basic co
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398 Notes 4 Although the split betw
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400 Notes 3 The fact that the utili
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402 Notes 15 This result is familia
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404 Notes 6 Where ∫ ∞ vg(v) E(v
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406 References Artis,M. and M. Lewi
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408 References Bergin,P.,R. Glick a
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410 References Calvo,G.A. and C.A.
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412 References Clark,P.B. and R. Ma
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414 References Detken,C.,A. Dieppe,
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416 References Edwards,S. and I. Ma
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418 References Fischer,S. (2001),
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420 References Frieden,J.P.G. and E
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422 References Granger,C.W. and T.
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424 References Hooper,P. and J. Mor
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426 References Kearney,C. and R. Ma
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428 References Lewis,K. (1988),‘T
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430 References MacDonald,R. (2002),
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432 References Mark,N.C. (2001),Int
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434 References Obstfeld,M. and K. R
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436 References Roll,R. (1979),‘Vi
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438 References Tauchen,G.E. and M.
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Index Abadir,K. 389 Abuaf,N. 60 Adl
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442 Index Diba,B. 177-8 Dickey,D.A.
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444 Index Gagnon,J. 212 Gali,J. 128
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446 Index Miller,M.H. 120,123,128,1
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448 Index purchasing power parity (
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450 Index trade: interbank trade 34
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Exchange Rate Economics: Theories and Evidence

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