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81. Predicting Sharp Depreciations in Industrial Country Exchange Rates

Author:
Jonathan H. Wright and Joseph E. Gagnon
Publication Date:
11-2006
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper considers the prediction of large depreciations (both nominal and real) in a panel of industrialized countries using a probit methodology. The current account balance/GDP ratio has a modest but statistically significant effect on the estimated probability of a large depreciation, and gives slight predictive power in an outof- sample forecasting exercise. The CPI inflation rate also has a modest but statistically significant effect in predicting nominal depreciations and has slight predictive power, but this effect is not present for real exchange rates. The GDP growth rate occasionally has a significant effect. A higher current account balance (surplus) tends to reduce the probability of a sharp depreciation; a higher inflation rate tends to increase the probability of a sharp depreciation; and a higher GDP growth rate perhaps tends to reduce the probability of a sharp depreciation.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Markets

82. Real-Time Price Discovery in Global Stock, Bond and Foreign Exchange Markets

Author:
Torben G. Andersen, Tim Bollerslev, Francis X. Diebold, and Clara Vega
Publication Date:
09-2006
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Markets
Political Geography:
United States

83. The U.S. Current Account Deficit and the Expected Share of World Output

Author:
John H. Rogers and Charles Engel
Publication Date:
04-2006
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which a country's current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries – more modest than the growth over the past 20 years – the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. Two empirical analyses of current account sustainability using actual data suggest that the U.S. is not keeping on a long-run sustainable path. One is a direct test of our model, which finds that the dynamics of the U.S. current account – the increasing deficits over the past decade – are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender – though not the only legitimate contender – for explaining the U.S. current account deficit.
Topic:
Economics, Foreign Exchange, International Trade and Finance, and Markets
Political Geography:
United States

84. Monetary Power and Political Autonomy: Exchange Rate Policymaking in Follower States

Author:
Louis W. Pauly
Publication Date:
03-2005
Content Type:
Working Paper
Institution:
Institute on Globalization and the Human Condition, McMaster University
Abstract:
Common sense suggests that successful leaders need willing followers. Coercion can sometimes be effective, but even the most inexperienced parent soon learns the lesson that results achieved through unforced acquiescence tend to be better and more enduring than those achieved through the application of brute force. Political theorists typically focus on the concept of legitimacy when they evoke the quality that transforms raw power into something more acceptable to its target. Clearly implicated by that concept is another one, even more difficult to measure: respect for the ultimate autonomy of the target. In an era of rapid global transformation, when the exercise of great power is readily observable, research nevertheless proliferates on the meaning and nature of independence, of sovereignty, and of political autonomy (for an overview see Grande and Pauly 2005).
Topic:
Economics, Foreign Exchange, and Globalization