Euro-Dollar Real Exchange Rate Dynamics in an Estimated Two-Country Model PDF Download
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Author: Pau Rabanal
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 48
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Book Description
We use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics model using data for the United States and the euro area, and we perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility but at the cost of overestimating volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in Local Currency Pricing improves the fit of the baseline model but does not improve the fit as much as introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behavior of the real exchange rate, while both demand and technology shocks have been important.
Author: Pau Rabanal
Publisher: International Monetary Fund
ISBN:
Category : Business & Economics
Languages : en
Pages : 48
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Book Description
We use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics model using data for the United States and the euro area, and we perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility but at the cost of overestimating volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in Local Currency Pricing improves the fit of the baseline model but does not improve the fit as much as introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behavior of the real exchange rate, while both demand and technology shocks have been important.
Author: Pau Rabanal
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
Author: Vicente Tuesta Reátegui
Publisher:
ISBN:
Category :
Languages : en
Pages : 42
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Book Description
We use a Bayesian approach to estimate a standard two-country New Open Economy Macroeconomics model using data for the United States and the euro area, and we perform model comparisons to study the importance of departing from the law of one price and complete markets assumptions. Our results can be summarized as follows. First, we find that the baseline model does a good job in explaining real exchange rate volatility but at the cost of overestimating volatility in output and consumption. Second, the introduction of incomplete markets allows the model to better match the volatilities of all real variables. Third, introducing sticky prices in Local Currency Pricing improves the fit of the baseline model but does not improve the fit as much as introducing incomplete markets. Finally, we show that monetary shocks have played a minor role in explaining the behavior of the real exchange rate, while both demand and technology shocks have been important.
Author: Pau Rabanal
Publisher:
ISBN:
Category : Electronic books
Languages : en
Pages :
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Author: Pau Rabanal
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
Author: Camila Casas
Publisher: International Monetary Fund
ISBN: 1484330609
Category : Business & Economics
Languages : en
Pages : 62
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Book Description
Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.
Author: Ralph Johann
Publisher: GRIN Verlag
ISBN: 3640158733
Category : Business & Economics
Languages : en
Pages : 24
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Book Description
Seminar paper from the year 2005 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, California State University, Fullerton, course: International Economics, language: English, abstract: This paper will discuss the general relationship between the two major currencies of the world: the US-Dollar and the Euro and the determinants for the exchange rate fluctuations since the introduction of the Euro as the common currency of Europe during the period between January 1999 and November 2005. Since the introduction of the Euro as the common currency of the European Monetary Union (EMU) in 1999 this relationship was first characterized by a sharp depreciation of the Euro followed by a three year lasting appreciation of the same that passed over in a slight depreciation again from the beginning of 2005 in the long run.1 This paper will first focus on the History of the international currency exchange system from the 19th century until the end of the Bretton Woods System in 1973 and on the history of the currency system in the European community. It will then discuss the general determinants of exchange rates in the short and long run. It will be pointed out that in the short run interest rate differentials and expectations of international portfolio investors matter and in the long run the economic fundamentals such as inflation rates and GDP growth rates of either economic region are the main factors for the behaviour of the exchange rate. In this context the theories of the Law of one price and the purchasing power parity are introduced. In the third part of the paper the exchange rate theories introduced in the previous part are applied to the €-$ exchange rate in the time period between 1999 and 2005. Thus, the short term and long term factors are used to explain the relationship between the two currencies in this period. Finally, the last part serves as a conclusion.
Author: Ralph Johann
Publisher: GRIN Verlag
ISBN: 3640159772
Category : Business & Economics
Languages : en
Pages : 30
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Book Description
Seminar paper from the year 2005 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 1,3, California State University, Fullerton, course: International Economics, 8 entries in the bibliography, language: English, abstract: This paper will discuss the general relationship between the two major currencies of the world: the US-Dollar and the Euro and the determinants for the exchange rate fluctuations since the introduction of the Euro as the common currency of Europe during the period between January 1999 and November 2005. Since the introduction of the Euro as the common currency of the European Monetary Union (EMU) in 1999 this relationship was first characterized by a sharp depreciation of the Euro followed by a three year lasting appreciation of the same that passed over in a slight depreciation again from the beginning of 2005 in the long run.1 This paper will first focus on the History of the international currency exchange system from the 19th century until the end of the Bretton Woods System in 1973 and on the history of the currency system in the European community. It will then discuss the general determinants of exchange rates in the short and long run. It will be pointed out that in the short run interest rate differentials and expectations of international portfolio investors matter and in the long run the economic fundamentals such as inflation rates and GDP growth rates of either economic region are the main factors for the behaviour of the exchange rate. In this context the theories of the Law of one price and the purchasing power parity are introduced. In the third part of the paper the exchange rate theories introduced in the previous part are applied to the -$ exchange rate in the time period between 1999 and 2005. Thus, the short term and long term factors are used to explain the relationship between the two currencies in this period. Finally, the last part serves as a conclusion.
Author: Mariam Camarero
Publisher:
ISBN:
Category : Euro-dollar market
Languages : en
Pages : 30
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Book Description
Author: Mariam Camarero
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
In this paper we have applied two approaches to the study of the dollar real exchange rate in relation with the Euro-area currencies. First, using dynamic panel techniques, we estimate an error correction model for the dollar real exchange rate versus seven developed countries, four of them Euro-area members. Second, we aggregate the European variables and estimate a model for the Euro-dollar real exchange rate using time series techniques. After identification and model selection, the same specification can be adopted in the two cases, in an eclectic model including real interest rate and productivity differentials, together with relative fiscal policy and net foreign asset positions. This model turns out to be compatible with the very recent results obtained in the context of the New Open Macroeconomics literature.
