Real Exchange Rate Misalignments: Theoretical Modelling and Empirical Evidence

The real exchange rate (RER) misalignment is a key variable in academic and policy circles. Among policy circles, sustained RER overvaluations are observed by authorities for future exchange rate adjustments. Some countries, on the other hand, have pursued very active exchange rate policies in order to undervalue their currencies to foster growth through export promotion (e.g. China). Our goal is to assess whether these policies can sustain RER undervaluation. In this context, this paper complements and improves upon the existing literature by formulating a theoretical based model to compute equilibrium real exchange rate and its misalignment and to estimate and calculate RER misalignments. One of the novelties is to derive and solve for what we call intertemporal BOP equilibrium and equilibrium in the tradable and non-tradable goods market based on the current account dynamics and Harrod-Balassa-Samuelson (HBS) productivities. With our novelty of modeling RER misalignments we estimate fundamental RER equation using cointegration techniques for time series –i.e. Johansen's (1988,1991) multivariate analysis and the error correction model (ECM) by Bewley (1979) and Wickens and Breusch (1987)– and for heterogeneous panel data –i.e. the pooled mean group estimator (PMGE) by Pesaran, Shin and Smith (1999).

Assessing the Real Exchange Rate Misalignments: Is Real Undervaluation of the Currency Likely and Can It Be Sustained?

There is a renewed debate on the role of exchange rate policies as industrial policy tools in both academic and policy circles. Policy practitioners usually examine real exchange rate (RER) misalignments to monitor the behavior of this key relative price and, if possible, exploit distortions in the traded and non-traded relative price to promote growth. Anecdotal evidence shows that some countries have pursued very active exchange rate policies to promote the export sector and enhance growth (e.g. China) by undervaluing their currencies. The main goal of this paper is to provide a systematic characterization of real exchange rate undervaluations. We first calculate fundamental RER misalignments based on the long run RER equation derived from the theoretical model developed by Kubota (2009). Then, we construct a dataset of real undervaluation episodes. Second, we present some basic evidence on the co-movement of RER undervaluation and (real and nominal) macroeconomic aggregates. We specifically assess the behavior of macro aggregates during undervaluations using an “event analysis” methodology. Finally, we evaluate whether (and if so, to what extent) economic policies can be used to either cause or sustain real undervaluations. In this context we empirically model the likelihood and magnitude of sustaining RER undervaluations by examining their link to policy instruments (e.g. exchange rate regimes, capital controls, among other policies) using Probit and Tobit models, respectively.

Does higher openness cause more real exchange rate volatility ?

The"New Open Economy Macroeconomics"argues that: (a) non-monetary factors have gained importance in explaining exchange rate volatility, and (b) trade and financial openness may have a potential role of mitigating and/or amplifying real and nominal shocks to real exchange rates. The goal of the present paper is to examine the ability of trade and financial openness to exacerbate or mitigate real exchange rate volatility. The authors collected information on the real effective exchange rate, its fundamentals, and (outcome and policy measures of) trade and financial openness for a sample of industrial and developing countries for the period 1975-2005. Using instrumental variables techniques, the analysis finds that: (a) High real exchange rate volatility is the result of highly volatile productivity shocks, and sharp oscillations in monetary and fiscal policy shocks. (b) Countries more integrated with international markets of goods and services tend to display more stable real exchange rate fluctuations. (c) Financial openness seems to amplify the fluctuations in real exchange rates. (d) The composition of trade and capital flows plays a role in explaining the smoothing properties of trade and financial openness. Although the former is mainly driven by manufacturing trade, the latter depends on the share of debt (and equity) in total foreign liabilities. (e) Financial openness would attenuate (magnify) real exchange rate volatility, the greater the share of equity (debt) in foreign liabilities. (f) The composition of flows also matters for explaining the smoothing properties of trade and financial openness in periods of currency crisis.Emerging Markets,Debt Markets,Currencies and Exchange Rates,Economic Theory&Research,Economic Conditions and Volatility

Sudden stops : are global and local investors alike ?

The main goal of this paper is to characterize the determinants of sudden stops caused by domestic vis-a-vis foreign residents. Are the decisions of domestic investors to invest abroad or of foreign investors to cut off funds from the domestic economy governed by the same set of determinants? Given the distribution of different types of sudden stop episodes over time and its different macroeconomic consequences, the authors argue that the determinants may not be alike. Using an effective sample of 82 countries with annual information over the period 1970-2007, the analysis finds that global investors are less likely to stop bringing their capital when their economy is growing and the world interest rate is lower. Domestic agents are more willing to invest abroad if the macroeconomic performance of the domestic economy is poor (high inflation), the financial system is weak, and there are high external savings (current account surpluses). Increasing financial openness makes the domestic country more vulnerable to sudden stops caused by either local or global investors. Finally, countries with higher shares of foreign direct investment are less prone to inflow-driven sudden stops, whereas the opposite holds for outflow-driven sudden stops.Debt Markets,Emerging Markets,Currencies and Exchange Rates,Economic Theory&Research,Access to Finance

Assessing real exchange rate misalignments

There is a renewed debate on the role of exchange rate policies as an industrial policy tool in both academic and policy circles. Policy practitioners usually examine real exchange rate misalignments to monitor the behavior of this key relative price and, if possible, exploit distortions in the traded and non-traded relative price to promote growth. Anecdotal evidence shows that some countries have pursued very active exchange rate policies to promote the export sector and enhance growth by undervaluing their currencies. The main goal of this paper is to provide a systematic characterization of real exchange rate undervaluations. The long-run real exchange rate equation is estimated using: (a) Johansen time series cointegration estimates, and (b) pooled mean group estimates for non-stationary panel data. The paper constructs a dataset of real undervaluation episodes. It first evaluates whether (and if so, to what extent) economic policies can be used to either cause or sustain real undervaluations. In this context the paper empirically models the likelihood and magnitude of sustaining real exchange rate undervaluations by examining their link to policy instruments (such as exchange rate regimes and capital controls, among other policies) using probit and Tobit models. Finally, it investigates whether foreign exchange intervention can generate persistent real exchange rate deviations from equilibrium. In general, it finds that intervention can lead to greater persistence in the incidence and magnitude of real exchange rate undervaluations.Currencies and Exchange Rates,Debt Markets,Economic Theory&Research,Economic Stabilization,Emerging Markets

Duration dependence and change-points in the likelihood of credit booms ending

Whether the likelihood of credit booms ending is dependent on its age or not, or whether the respective behaviour is smooth or bumpy are important issues to which the economic literature has not given attention yet. This paper tries to fill that gap in the literature, exploring those issues with a proper duration analysis. Credit booms are identified considering two criteria well established in the literature: (i) the Mendoza-Terrones criteria; (ii) and the Gourinchas-Valdes-Landarretche criteria. A continuous-time Weibull duration model is employed over a group of 71 countries for the period 1975q1-2010q4 to investigate whether credit booms are duration dependent or not. Our findings show that the likelihood of credit booms ending increases over its duration and that these events have become longer over the last decades. Additionally, we extend the baseline Weibull duration model in order to allow for change-points in the duration dependence parameter. The empirical findings support the presence of a change-point: increasing positive duration dependence is observed in booms that last less than eight to ten quarters, but it becomes decreasing or even irrelevant for longer events. Analogous results are found for those credit boom episodes that are followed by systemic banking crisis (bad credit booms). Our findings also show that credit booms are, on average, longer in Industrial than in Developing countries.CEMPRE; QREN; FEDER; Fundação para a Ciência e a Tecnologia (FCT

Insulin regulates Presenilin 1 localization via PI3K/Akt signaling.

Recently, insulin signaling has been highlighted in the pathology of Alzheimer's disease (AD). Although the association between insulin signaling and Tau pathology has been investigated in several studies, the interaction between insulin signaling and Presenilin 1 (PS1), a key molecule of amyloid beta (Abeta) pathology, has not been elucidated so far. In this study, we demonstrated that insulin inhibited PS1 phosphorylation at serine residues (serine 353, 357) via phosphatidylinositol 3-kinase (PI3K)/Akt signal pathway and strengthened the trimeric complex of PS1/N-cadherin/beta-catenin, consequently relocalizing PS1 to the cell surface. Since our recent report suggests that PS1/N-cadherin/beta-catenin complex regulates Abeta production, it is likely that insulin signaling affects Abeta pathology by regulating PS1 localization

Ni@onion-like carbon and Co@amorphous carbon: control of carbon structures by metal ion species in MOFs

We first report the facile synthesis of metal-carbon composites consisting of metal nanoparticles (NPs) and different types of carbon species: onion-like and amorphous carbon, Ni@onion-like carbon and Co@amorphous carbon. By simply changing the metal species in an isostructural metal-organic framework, thermal decompositions of MOF-74 directly afforded different types of metal NPs and carbon composites, which exhibited good electrical conductivity. In particular, the Ni@onion-like carbon, having a well-ordered carbon structure, had high electrical conductivity (sigma = 5.3 omega(-1) cm(-1) at 295 K), explained by a modified model of the Efros-Shklovskii variable range hopping