Equilibrium Exchange Rate Determination and Multiple Structural Changes

The large appreciation and depreciation of the US dollar in the 1980s stimulated an important debate on the usefulness of unit root tests in the presence of structural breaks. In this paper, we propose a simple model to describe the evolution of the real exchange rate. We then propose a more general smooth transition (STR) function than has hitherto been employed, which is able to capture structural changes along the (long-run) equilibrium path, and show that this is consistent with our economic model. Our framework allows for a gradual adjustment between regimes and allows for under- and/or over-valued exchange rate adjustments. Using monthly and quarterly data for up to twenty OECD countries, we apply our methodology to investigate the univariate time series properties of CPI-based real exchange rates with both the U.S. dollar and German mark as the numeraire currencies. The empirical results show that, for more than half of the quarterly series, the evidence in favour of the stationarity of the real exchange rate was clearer in the sub-sample period post-1980.

Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models

We propose an alternative approach to obtaining a permanent equilibrium exchange rate (PEER), based on an unobserved components (UC) model. This approach offers a number of advantages over the conventional cointegration-based PEER. Firstly, we do not rely on the prerequisite that cointegration has to be found between the real exchange rate and macroeconomic fundamentals to obtain non-spurious long-run relationships and the PEER. Secondly, the impact that the permanent and transitory components of the macroeconomic fundamentals have on the real exchange rate can be modelled separately in the UC model. This is important for variables where the long and short-run effects may drive the real exchange rate in opposite directions, such as the relative government expenditure ratio. We also demonstrate that our proposed exchange rate models have good out-of sample forecasting properties. Our approach would be a useful technique for central banks to estimate the equilibrium exchange rate and to forecast the long-run movements of the exchange rate.

Inflation Uncertainty, Exchange Rate Depreciation and Volatility: Evidence from Ghana, Mozambique and Tanzania

While flexible exchange rates facilitate stabilisation, exchange rate fluctuations can cause real volatility. This gives policy importance to the causal relationship between exchange rate depreciation and its volatility. An exchange rate may be expected to become more volatile when the underlying currency loses value. We conjecture that a reverse causation, which further weakens the currency, may be mitigated by price stability. Data from Ghana, Mozambique and Tanzania support this: depreciation makes exchange rate more volatile for all but volatility does not causes depreciation in Tanzania which has enjoyed a more stable inflation despite all countries adopting similar macro-policies since early 1990s.

Measuring the Economic Significance of Structural Exchange Rate Models

This paper examines both the in-sample and out-of-sample performance of three monetary fundamental models of exchange rates and compares their out-of-sample performance to that of a simple Random Walk model. Using a data-set consisting of five currencies at monthly frequency over the period January 1980 to December 2009 and a battery of newly developed performance measures, the paper shows that monetary models do better (in-sample and out-of-sample forecasting) than a simple Random Walk model.

The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate

This paper presents a theoretical framework analysing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of central bank. The model is used to analyse the impact of Japanese FX interventions during the period 1999 -2011 on the yen/US dollar dynamics.

An adapted model of ex vivo vein perfusion: the key to understand vessel wall remodeling

Objective: Saphenous vein graft bypass remains the salvage option when¦endovascular procedure has failed or was contraindicated due to extensive¦occlusive lesions. However, pathological wall remodeling leading leading to¦graft failure is one of the most limiting factors of this therapy. Therefore, the¦understanding of this remodeling process of human vein is essential to the design¦of future effective therapeutics and it requires an adapted model of ex-vivo vein¦perfusion.¦Methods: We have developed an ex vivo vein support system (EVVSS), which¦uses standardized and controlled hemodynamic parameters for the pulsatile¦perfusion of saphenous vein segments. The morphological and molecular¦parameters involved in the remodeling process under an arterial shear stress¦associated to low (7 mm Hg) or high (70 mm Hg) pressure conditions can be¦analyzed.¦Results: Histomorphometric analysis showed that the vein segments perfused¦during 7 days under high pressure undergo a significant neointima development¦compared to veins exposed to low pressure conditions. The application of an¦arterial shear stress in the vein under low pressure induced an elevation of the¦MMP-2 and MMP-9 expression, activity and transcription. The application of¦higher pressure is associated to increased MMP2 expression and transcription¦and MMP9 transcription. TIMP1 expression and transcription were initiated by¦the application of an arterial shear stress but not modified by the modification¦of the pressure. However, TIMP2 expression was increased under high¦pressure conditions but its transcription was inhibited by arterial shear stress,¦independently of the pressure. The values of transcription and expression of¦PAI-1 were not modified by high pressure. Eph-B4 transcription and expression¦were significantly decreased under arterial shear stress.¦Conclusion: These data show that our EVVSS is a valuable setting to study¦ex vivo remodeling of human saphenous veins submitted to arterial conditions.¦The intimal hyperplasia as well as MMP 2, 9 and TIMP 2 seem to be influenced¦by the pressure.

The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate

This paper presents a theoretical framework analysing the signalling channel of exchange rate interventions as an informational trigger. We develop an implicit target zone framework with learning in order to model the signalling channel. The theoretical premise of the model is that interventions convey signals that communicate information about the exchange rate objectives of central bank. The model is used to analyse the impact of Japanese FX interventions during the period 1999 -2011 on the yen/US dollar dynamics.

NLRP3 inflammasome plays a key role in the regulation of intestinal homeostasis.

BACKGROUND:: Attenuated innate immune responses to the intestinal microbiota have been linked to the pathogenesis of Crohn's disease (CD). Recent genetic studies have revealed that hypofunctional mutations of NLRP3, a member of the NOD-like receptor (NLR) superfamily, are associated with an increased risk of developing CD. NLRP3 is a key component of the inflammasome, an intracellular danger sensor of the innate immune system. When activated, the inflammasome triggers caspase-1-dependent processing of inflammatory mediators, such as IL-1β and IL-18. METHODS:: In the current study we sought to assess the role of the NLRP3 inflammasome in the maintenance of intestinal homeostasis through its regulation of innate protective processes. To investigate this role, Nlrp3(-/-) and wildtype mice were assessed in the dextran sulfate sodium and 2,4,6-trinitrobenzenesulfonic acid models of experimental colitis. RESULTS:: Nlrp3(-/-) mice were found to be more susceptible to experimental colitis, an observation that was associated with reduced IL-1β, reduced antiinflammatory cytokine IL-10, and reduced protective growth factor TGF-β. Macrophages isolated from Nlrp3(-/-) mice failed to respond to bacterial muramyl dipeptide. Furthermore, Nlrp3-deficient neutrophils exhibited reduced chemotaxis and enhanced spontaneous apoptosis, but no change in oxidative burst. Lastly, Nlrp3(-/-) mice displayed altered colonic β-defensin expression, reduced colonic antimicrobial secretions, and a unique intestinal microbiota. CONCLUSIONS:: Our data confirm an essential role for the NLRP3 inflammasome in the regulation of intestinal homeostasis and provide biological insight into disease mechanisms associated with increased risk of CD in individuals with NLRP3 mutations. (Inflamm Bowel Dis 2010).

Co-movements in Real Effective Exchange Rates: Evidence from the Dynamic Hierarchical Factor Model

We analyze and quantify co-movements in real effective exchange rates while considering the regional location of countries. More specifically, using the dynamic hierarchical factor model (Moench et al. (2011)), we decompose exchange rate movements into several latent components; worldwide and two regional factors as well as country-specific elements. Then, we provide evidence that the worldwide common factor is closely related to monetary policies in large advanced countries while regional common factors tend to be captured by those in the rest of the countries in a region. However, a substantial proportion of the variation in the real exchange rates is reported to be country-specific; even in Europe country-specific movements exceed worldwide and regional common factors.

Currency Forecast Errors at Times of Low Interest Rates: Evidence from Survey Data on the Yen/Dollar Exchange Rate

Using survey expectations data and Markov-switching models, this paper evaluates the characteristics and evolution of investors' forecast errors about the yen/dollar exchange rate. Since our model is derived from the uncovered interest rate parity (UIRP) condition and our data cover a period of low interest rates, this study is also related to the forward premium puzzle and the currency carry trade strategy. We obtain the following results. First, with the same forecast horizon, exchange rate forecasts are homogeneous among different industry types, but within the same industry, exchange rate forecasts differ if the forecast time horizon is different. In particular, investors tend to undervalue the future exchange rate for long term forecast horizons; however, in the short run they tend to overvalue the future exchange rate. Second, while forecast errors are found to be partly driven by interest rate spreads, evidence against the UIRP is provided regardless of the forecasting time horizon; the forward premium puzzle becomes more significant in shorter term forecasting errors. Consistent with this finding, our coefficients on interest rate spreads provide indirect evidence of the yen carry trade over only a short term forecast horizon. Furthermore, the carry trade seems to be active when there is a clear indication that the interest rate will be low in the future.

Price Transmission and Effects of Exchange Rates on Domestic Commodity Prices via Offshore and Currency Hedging

The framework presents how trading in the foreign commodity futures market and the forward exchange market can affect the optimal spot positions of domestic commodity producers and traders. It generalizes the models of Kawai and Zilcha (1986) and Kofman and Viaene (1991) to allow both intermediate and final commodities to be traded in the international and futures markets, and the exporters/importers to face production shock, domestic factor costs and a random price. Applying mean-variance expected utility, we find that a rise in the expected exchange rate can raise both supply and demand for commodities and reduce domestic prices if the exchange rate elasticity of supply is greater than that of demand. Whether higher volatilities of exchange rate and foreign futures price can reduce the optimal spot position of domestic traders depends on the correlation between the exchange rate and the foreign futures price. Even though the forward exchange market is unbiased, and there is no correlation between commodity prices and exchange rates, the exchange rate can still affect domestic trading and prices through offshore hedging and international trade if the traders are interested in their profit in domestic currency. It illustrates how the world prices and foreign futures prices of commodities and their volatility can be transmitted to the domestic market as well as the dynamic relationship between intermediate and final goods prices. The equilibrium prices depends on trader behaviour i.e. who trades or does not trade in the foreign commodity futures and domestic forward currency markets. The empirical result applying a two-stage-least-squares approach to Thai rice and rubber prices supports the theoretical result.

Exchange Rate Predictability in a Changing World

An expanding literature articulates the view that Taylor rules are helpful in predicting exchange rates. In a changing world however, Taylor rule parameters may be subject to structural instabilities, for example during the Global Financial Crisis. This paper forecasts exchange rates using such Taylor rules with Time Varying Parameters (TVP) estimated by Bayesian methods. In core out-of-sample results, we improve upon a random walk benchmark for at least half, and for as many as eight out of ten, of the currencies considered. This contrasts with a constant parameter Taylor rule model that yields a more limited improvement upon the benchmark. In further results, Purchasing Power Parity and Uncovered Interest Rate Parity TVP models beat a random walk benchmark, implying our methods have some generality in exchange rate prediction.

Measuring the Euro-Dollar Permanent Equilibrium Exchange Rate using the Unobserved Components Model

This paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the Euro-Dollar permanent equilibrium exchange rates (PEER) for the period 1975Q1 to 2008Q4. The results show that for most of the sample period, the Euro-Dollar exchange rate closely followed the values implied by the PEER. The only significant deviations from the PEER occurred in the years immediately before and after the introduction of the single European currency. The forecasting exercise shows that incorporating economic fundamentals provides a better long-run exchange rate forecasting performance than a random walk process.

On the Sources of Uncertainty in Exchange Rate Predictability

We analyse the role of time-variation in coefficients and other sources of uncertainty in exchange rate forecasting regressions. Our techniques incorporate the notion that the relevant set of predictors and their corresponding weights, change over time. We find that predictive models which allow for sudden rather than smooth, changes in coefficients significantly beat the random walk benchmark in out-of-sample forecasting exercise. Using innovative variance decomposition scheme, we identify uncertainty in coefficients' estimation and uncertainty about the precise degree of coefficients' variability, as the main factors hindering models' forecasting performance. The uncertainty regarding the choice of the predictor is small.