Exchange rate policies, patterns of specialization and economic development: theory and evidence in developing countries

The objectives of this paper are twofold. First, it intends to provide theoretical elements to analyze the relation between real exchange rates and economic development. Our main hypothesis is very much in line with the Dutch disease literature, and states that competitive currencies contribute to the existence and maintenance of the anufacturing sector in the economy. This, in turn, brings about higher growth rates in the long run, given the existence of increasing returns in the industrial sector, and its importance in generating echnological change and increasing productivity in the overall economy. The second objective of this paper is empirical. It intends to analyze examples of successful exchange rate policies, such as Chile and Indonesia in the eighties, as a benchmark for comparison with countries where currency overvaluation has taken place, such as Brazil. In the latter case, the local currency is being inflated by large capital inflows, due to high domestic interest rates and to a boom in demand and prices of commodities in the international markets. It will be argued that the industrial sector bears most of the burden when the currency appreciates, and that Brazil risks at deindustrialization if there are no changes in the exchange rate regime

Growth and exchange rate volatility: a panel data analysis

The aim of this article is to assess the role of real effective exchange rate volatility on long-run economic growth for a set of 82 advanced and emerging economies using a panel data set ranging from 1970 to 2009. With an accurate measure for exchange rate volatility, the results for the two-step system GMM panel growth models show that a more (less) volatile RER has significant negative (positive) impact on economic growth and the results are robust for different model specifications. In addition to that, exchange rate stability seems to be more important to foster long-run economic growth than exchange rate misalignment

Estimating Relative Risk Aversion, Risk-Neutral and Real-World Densities using Brazilian Real Currency Options

Building Risk-Neutral Densities (RND) from options data can provide market-implied expectations about the future behavior of a financial variable. And market expectations on financial variables may influence macroeconomic policy decisions. It can be useful also for corporate and financial institutions decision making. This paper uses the Liu et all (2007) approach to estimate the option-implied Risk-neutral densities from the Brazilian Real/US Dollar exchange rate distribution. We then compare the RND with actual exchange rates, on a monthly basis, in order to estimate the relative risk-aversion of investors and also obtain a Real-world density for the exchange rate. We are the first to calculate relative risk-aversion and the option-implied Real World Density for an emerging market currency. Our empirical application uses a sample of Brazilian Real/US Dollar options traded at BM&F-Bovespa from 1999 to 2011. The RND is estimated using a Mixture of Two Log-Normals distribution and then the real-world density is obtained by means of the Liu et al. (2007) parametric risktransformations. The relative risk aversion is calculated for the full sample. Our estimated value of the relative risk aversion parameter is around 2.7, which is in line with other articles that have estimated this parameter for the Brazilian Economy, such as Araújo (2005) and Issler and Piqueira (2000). Our out-of-sample evaluation results showed that the RND has some ability to forecast the Brazilian Real exchange rate. Abe et all (2007) found also mixed results in the out-of-sample analysis of the RND forecast ability for exchange rate options. However, when we incorporate the risk aversion into RND in order to obtain a Real-world density, the out-of-sample performance improves substantially, with satisfactory results in both Kolmogorov and Berkowitz tests. Therefore, we would suggest not using the “pure” RND, but rather taking into account risk aversion in order to forecast the Brazilian Real exchange rate.

Exchange rate misalignments, interdependence, crises, and currency wars: an empirical assessment

Este trabalho tem por objetivo comparar metodologias distintas para cálculo de desalinhamento cambial além de testar a hipótese se as taxas de câmbio dos diversos países sofrem influencia apenas dos seus próprios fundamentos ou também da taxa de câmbio e dos fundamentos de outros países. Estas hipóteses consistem, respectivamente, na ausência ou na existência de interdependência entre os diversos países. Para realizar tal tarefa utilizam-se duas estratégias empíricas. A primeira baseia-se em avaliar se um modelo multivariado de séries de tempo usualmente utilizada na literatura de desalinhamento cambial com dados apenas do próprio país em análise pode ser melhorado através da adição de variáveis relacionadas a outros países usando o algoritmo proposto por David Hendry e co-autores. A segunda estratégia consiste em estimar um panel longo com as variáveis utilizadas para estimar desalinhamento cambial e testar formalmente a hipótese de ausência de interdependências. Os resultados sugerem que em ambas estratégias existe evidência de existência de interdependência. Esta ocorreria mais por conta de fatores ligados ao curto prazo, ou seja, o que explicaria o valor da taxa de câmbio de um país no longo prazo seriam seus próprios fundamentos enquanto no curto prazo fatores externos poderiam causar desvios

Sovereignty, exchange rate and the Euro crisis

This paper presents an interpretation of the European crisis based on the balance of payments imbalances within the Eurozone and highlighting the role of the “internal” real exchange rates as a primary cause of the crisis. It explores the structural contradictions that turn the Euro into a “foreign currency” for each individual Eurozone country. These contradictions imply the inability of national central banks to monetize the public and private debts, which makes the Euro crisis a sovereign crisis similar to those typical of emerging countries, but whose solution presents additional obstacles.

Assessing interdependence among countries' fundamentals and its implications for exchange rate misalignment estimates: An empirical exercise based on GVAR

Exchange rates are important macroeconomic prices and changes in these rates a ect economic activity, prices, interest rates, and trade ows. Methodologies have been developed in empirical exchange rate misalignment studies to evaluate whether a real e ective exchange is overvalued or undervalued. There is a vast body of literature on the determinants of long-term real exchange rates and on empirical strategies to implement the equilibrium norms obtained from theoretical models. This study seeks to contribute to this literature by showing that the global vector autoregressions model (GVAR) proposed by Pesaran and co-authors can add relevant information to the literature on measuring exchange rate misalignment. Our empirical exercise suggests that the estimate exchange rate misalignment obtained from GVAR can be quite di erent to that using the traditional cointegrated time series techniques, which treat countries as detached entities. The di erences between the two approaches are more pronounced for small and developing countries. Our results also suggest a strong interdependence among eurozone countries, as expected

Tax performance and reform in the Organization of Eastern Caribbean States (OECS)

Includes bibliography

The impact of exchange-rate and trade policy on export performance in the 1980s

Includes bibliography

Nominal anchors and macroeconomic coordination options in MERCOSUR

Includes bibliography

The fiscal impact of trade liberalization and commodity price fluctuation: the case of Dominican Republic, 1980-1998

Includes bibliography

A first approach to the impact of the real exchange rate on industrial sectors in Colombia

Much has been said about possible symptoms of Dutch disease in Colombia in the wake of a marked upsurge in commodity prices and the significant real appreciation of the national currency. This paper examines whether the real effective exchange rate had an impact on industry during the period 2000-2010. Specifically, it evaluates the effect of the appreciation of the real exchange rate on the value added of 63 industrial sectors in Colombia using the Arellano and Bond (1991) generalized method of moments (gmm) estimator. Overall, our results confirm a negative relationship between real exchange rate appreciation and industry. The analysis showed that real exchange rate appreciation had a significant impact on the value added of 21 sectors: a negative effect for 18 sectors and a positive effect for 3 sectors.

The Real Exchange Rate in Small Open Developed Economies: Evidence from Cointegration Analysis

We examine the effects of the terms of trade and the expected real interest rate differential on the real exchange rate in a sample of small open developed economies. We employ cointegration analysis to search for possible long-term linkages. We find that while both the terms of trade and the expected real interest rate differentials affect the real exchange rate in the long run, the role of the terms of trade generally proves more consistent across countries. The speed of adjustment for the expected real interest rate differential in the error-correction model, however, is quantitatively larger than it is for the terms of trade.

Exchange Rate Stabilization and IMF High Interest Rate Policy: A Critical Reconsideration Using a Dynamic Model

This paper examines whether the IMF high interest rate policy was suitable for crisis-ridden East Asian economies. Using an "overshoot" model similar to that of Dornbusch's (1976), it shows that this sort of policy might cause an unnecessary deflationary adjusting process and have no effect on containing the real depreciation of exchange rates in the long run. The study also demonstrates that Thai economic data coincides quite well with the model presented here. Finally, it points out that the high interest policy itself might provoke high risk-premium, the existence of which, in turn, justifies the policy. This means that the policy has a self-fulfilling property. In conclusion, a "one-size-fits-all" adaptation of high interest rate policy in a currency crisis is very dangerous in general, and was inappropriate for East Asia. The desirable policy would have been to let currencies depreciate and keep interest rates stable.

Skilled emigration and exchange rate : theory and empirics

In this paper we build a theoretical model on the wage effect of skilled emigration to the fluctuations in real exchange rate through the relative prices of nontradables. Our theoretical model predicts that skilled emigration is associated with an increase in the prices of nontradable, which in turn appreciates the exchange rate. We provide robust empirical support to a higher skilled emigration associated with higher prices in nontradables and appreciation of the real effective exchange rate. Based on two samples of countries with 51 and 67 observations, in 1990 and 2000 respectively, we find robust empirical support to a higher skilled emigration associated with higher prices in nontradables and appreciation of the REER. In addition, the support for the remittance-channel of the Dutch disease is also significant; overall, our findings corroborate the remittance-based Dutch disease phenomenon by providing an additional channel through which the labor mobility across borders affects the real exchange rate volatility.

Essays on International Asset Allocation and Pricing

Thesis (Ph.D.)--University of Washington, 2016-06