42 research outputs found
Testing for PPP: Should We Use Panel Methods?
A common finding in the empirical literature on the validity of purchasing power parity (PPP) is that it holds when tested for in panel data, but not in univariate (i.e. country specific) analysis. The usual explanation for this mis-match is that panel tests for unit roots and cointegration are more powerful than their univariate counterparts. In this paper we suggest an alternative ex-planation for the mismatch. More generally, we warn against the use of panel methods for testing for unit roots in macroeconomic time series. Existing panel methods assume that cross-unit cointegrating or long-run relationships, that tie the units of the panel together, are not present. However, using empirical examples on PPP for a panel of OECD countries, we show that this assumption is very likely to be violated. Simulations of the properties of panel unit root tests in the presence of long-run cross-unit relationships are then presented to demonstrate the serious cost of assuming away such relationships. The empirical size of the tests is substantially higher than the nominal level, so that the null hypothesis of a unit root is rejected very often, even if correct.
What drives investors’ behaviour in different FX market segments? A VAR-based return decomposition analysis
We apply the Campbell-Shiller return decomposition to exchange rate returns and fundamentals in a stationary panel vector autoregression framework. The return decomposition is then used to analyse how different investor segments react to news as captured by the different return components. The results suggest that intrinsic value news are dominating for equity investors and speculative money market investors while investors in currency option markets react strongly to expected return news. The equity and speculative money market investors seem able to distinguish between transitory and permanent FX movements while options investors mainly focus on transitory movements. We also find evidence that offsetting impact on the various return components can blur the effect of macroeconomic data releases on aggregate FX excess returns. JEL Classification: C23, F31, F32, G15FX return prediction, investor flows, news surprises, panel estimation, stationary VAR
Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective
This paper provides a discussion of methodological issues relating to the estimation of the long-run relationship between exchange rates and fundamentals for Central and Eastern European acceding countries, focusing on the so-called behavioural equilibrium exchange rate (BEER) approach. Given the limited availability and reliability of data as well as the rapid structural change acceding countries have been undergoing in the transition phase, this paper identifies several pitfalls in following the most straightforward and standard econometric procedures. As an alternative, it looks at the merits of a two-step strategy that consists of estimating the relationship between exchange rates and economic fundamentals in a panel cointegration setting - using a sample which excludes acceding countries - and then "extrapolating" the estimated relationships to the latter. While focusing on the first step of such a strategy, the paper also delves into discussing technical aspects underlying the "extrapolation" stage. As a result, the paper endows the reader with the methodological and empirical ingredients for computing equilibrium exchange rates for acceding countries, providing estimates for the long-run coefficients between real exchange rates and economic fundamentals and a discussion of how to apply these results to acceding countries data. JEL Classification: C23, F31acceding countries, BEER, Equilibrium exchange rates, Panel Cointegration
Global commodity cycles and linkages a FAVAR approach
In this paper we examine linkages across non-energy commodity price developments by means of a factor-augmented VAR model (FAVAR). From a set of non-energy commodity price series, we extract two factors, which we identify as common trends in metals and a food prices. These factors are included in a FAVAR model together with selected macroeconomic variables, which have been associated with developments in commodity prices. Impulse response functions confirm that exchange rates and of economic activity affect individual nonenergy commodity prices, but we fail to find strong spillovers from oil to non-oil commodity prices or an impact of the interest rate. In addition, we find that individual commodity prices are affected by common trends captured by the food and metals factors. JEL Classification: E3, F3commodity prices, Exchange Rates, FAVAR, Globalisation, Oil Price
Determinants of the euro real effective exchange rate: a BEER/PEER approach
This paper presents an empirical analysis of the medium-term determinants of the euro effective exchange rate. The empirical analysis builds on synthetic quarterly data from 1975 to 1998, and derives a Behavioural Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). Four different model specifications are retained, due to the difficulties encountered in specifying an encompassing model. Results indicate that differentials in real interest rates and productivity, and (in some specifications) the relative fiscal stance and the real price of oil, have a significant influence on the euro effective exchange rate. Assessing the existence and the extent of the over- or undervaluation of the exchange rate is not straightforward, since these different specifications often lead to contrasting findings. However, all four models point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen JEL Classification: F31, F32
Determinants of the euro real effective exchange rate: a BEER/PEER approach
This paper presents an empirical analysis of the medium-term determinants of the euro effective exchange rate. The empirical analysis builds on synthetic quarterly data from 1975 to 1998, and derives a Behavioural Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). Four different model specifications are retained, due to the difficulties encountered in specifying an encompassing model. Results indicate that differentials in real interest rates and productivity, and (in some specifications) the relative fiscal stance and the real price of oil, have a significant influence on the euro effective exchange rate. Assessing the existence and the extent of the over- or undervaluation of the exchange rate is not straightforward, since these different specifications often lead to contrasting findings. However, all four models point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen.euro, equilibrium exchange rates, cointegration, gonzalo- granger decomposition, fundamental analysis, BEER, PEER
Searching for purchasing power parity : a methodological and empirical analysis of equilibrium real exchange rate determination
Defence date: 15 December 2003Examining board: Prof. Anindya Banerjee (EUI) ; Prof. Giampiero Gallo (UniversitĂ di Firenze) ; Prof. Ronald MacDonald (University of Strathclyde) ; Prof. Grayham Mizon (University of Southampton), supervisorPDF of thesis uploaded from the Library digitised archive of EUI PhD theses completed between 2013 and 201
Exchange rate pass-through in the euro area and EU countries
La traslación del tipo de cambio (ERPT, por sus siglas en inglés) a los precios de
importación y consumo en la Unión Europea es, en términos agregados, menor que en los
años 90 y tiene un comportamiento no lineal. Estimaciones agregadas de una traslación
pequeña a los precios al consumo no significan que los movimientos del tipo de cambio
no tengan impacto sobre la inflaciĂłn, pues estas estimaciones agregadas ocultan una
gran heterogeneidad entre paĂses, sectores productivos y periodos de tiempo que se
deben a distintos factores estructurales, cĂclicos y de polĂticas. Utilizando nueva evidencia
microeconĂłmica, se encuentran cuatro caracterĂsticas estructurales clave que explican el
ERPT en las diversas ramas de actividad: (i) el contenido importado del consumo, (ii) la
proporciĂłn de importaciones facturadas en la propia moneda o en una tercera moneda
dominante, (iii) el grado de integraciĂłn del paĂs y sus socios comerciales en las cadenas
globales de valor, y (iv) el poder de mercado. Además, en lĂnea con la literatura existente, se
muestra evidencia robusta, utilizando distintos modelos, de que cada tipo de perturbaciĂłn
que mueve el tipo de cambio tiene una respuesta distinta en los precios: la combinaciĂłn
de perturbaciones que sustenta la posiciĂłn cĂclica de la economĂa tiene un impacto sobre
el ERPT a precios.
Finalmente, la propia polĂtica monetaria tambiĂ©n afecta al ERPT. Un comportamiento creĂble
y sistemático de la polĂtica monetaria reduce la traslaciĂłn a precios del tipo de cambio a
posteriori, pues los agentes esperan que la polĂtica monetaria contrarreste desviaciones
de la inflaciĂłn respecto de su objetivo, incluidas aquellas relacionadas con fluctuaciones
del tipo de cambio. Además, bajo la cota efectiva de los tipos de interés, medidas no
convencionales creĂbles de polĂtica monetaria resultan en un mayor ERPT a los precios
al consumo. Este documento recomienda no descansar en estimaciones agregadas sino
utilizar modelos estructurales a la hora de evaluar el impacto del tipo de cambio sobre las
predicciones de inflaciĂłn: modelos que cuenten con suficientes interrelaciones entre los
agentes y donde la formaciĂłn de expectativas y la reacciĂłn de la polĂtica monetaria jueguen
un papel importante.Aggregate exchange rate pass-through (ERPT) to import and consumer prices in the EU is
currently lower than it was in the 1990s and is non-linear. Low estimated aggregate ERPT to
consumer prices does not at all mean that exchange rate movements do not have an impact
on inflation, as aggregate rules of thumb mask substantial heterogeneities across countries,
industries and time periods owing to structural, cyclical and policy factors. Looking also at
new micro evidence, four key structural characteristics explain ERPT across industries or
sectors: (i) import content of consumption, (ii) share of imports invoiced in own currency
or in a third dominant currency, (iii) integration of a country and its trading partners in global
value chains, and (iv) market power. In the existing literature there is also a robust evidence
across models showing that each shock which causes the exchange rate to move has a
different price response, meaning that the combination of shocks that lies behind the cycle
at any point in time has an impact on ERPT.
Finally, monetary policy itself affects ERPT. Credible and aggressive monetary policy reduces
the observed ex post ERPT, as agents expect monetary policy to counteract deviations of
inflation from target, including those relating to exchange rate fluctuations. Moreover, under
the effective lower bound, credible non-standard monetary policy actions result in greater
ERPT to consumer prices. This paper recommends moving away from rule-of-thumb
estimates and instead using structural models with sufficient feedback loops, taking into
account the role of expectations and monetary policy reactions, to assess the impact of
exchange rate changes when forecasting inflation