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The
Commodity Currency Puzzle - - Hilde
C Bjørnland and Håvard Hungnes
This
paper addresses the Purchasing Power Parity (PPP) puzzle
for a commodity currency. In particular, we analyze the
real exchange rate behavior in Norway, which has a primary
commodity (oil) that constitutes the majority of its exports.
A substantial part of the literature on commodity currencies
has found that, despite controlling for the effect of commodity
prices, PPP does not hold in the long run. We show that
once we also control for the effect of the interest rate
differential in the real exchange rate relationship, the
deviations from PPP are fully accounted for. Furthermore,
with the interest rate differential included in the long
run real exchange rate relationship, the real oil price
plays only a minor role. Adjustment to equilibrium (half-lives)
is also substantially reduced, taking no more than one year
on average. Hence, contrary to earlier findings on commodity
currencies, this paper has effectively dealt with the PPP
puzzle.
©
2008 The Icfai University Press. All Rights Reserved.
Does
the Exchange Rate Really Affect Consumer Spending? - - John
J Heim
This
paper examines the extent to which changes in imports or
exports of US consumer goods and services occurs in response
to a change in the exchange rate, 1960-2000. The data used
are taken from the Economic Report of the President, 2002.
The findings indicate that an increase in the trade weighted
exchange rate of about 1% is associated with an increase
in import of consumer goods of approximately $1 bn the year
after the change. The same level increase seems associated
with a decline in consumer goods export of about $0.75 bn.
©
2008 The Icfai University Press. All Rights Reserved.
Bank
Rate and Interest Yield Differentials as Determinants of
Foreign Exchange Rate in India - - Mita
H Suthar
Considering
that foreign exchange rate is the price of domestic currency
in terms of a foreign country's currency, it can be established
that the market price of domestic currency would depend
largely on the demand-side and supply-side factors influencing
the foreign exchange market of a country. This is especially
true in the case of an economy where either free-float or
managed-float exists. The present research tests the validity
of this notion in part, by considering the supply-side factors
influencing the foreign exchange market of India, against
the dollar. These factors include various types of interest
rates and interest rate differentials between India and
the US, money supply and foreign exchange reserves of India.
Considering the impact of money supply, the role of monetary
policy through the management of bank rate policy of the
Reserve Bank of India (RBI) can also be influential. Application
of OLS method on a monthly time series from April 1996 to
January 2006, indicates that bank rate of the RBI, the short-term
and long-term domestic interest differentials and interest
yield differentials, and the growth rate of foreign exchange
reserves determine the rupee-dollar exchange rate to a significant
extent.
©
2008 The Icfai University Press. All Rights Reserved.
Emerging
Asia's Growth and Integration: How Autonomous are Business
Cycles? - - Rasmus
Rüffer, Marcelo Sánchez and Jian-Guang Shen
Against
the background of the rapid integration of emerging Asia
into the global economy, this paper investigates the role
of domestic and external factors in driving individual emerging
economies in Asia. We estimate Vector Autoregressive (VAR)
models for 10 countries over the period 1979Q1 2003Q4, controlling
for external factors, and use sign restrictions to identify
structural domestic shocks. Variance decompositions indicate
that Asian emerging economies are to a large part driven
by external developments, and even more so employing a more
recent sample. We analyze to what extent structural domestic
shocks exhibit a regional dimension by comparing shocks
across countries using correlation and principal component
analysis. The extent of regional co-movement between structural
shocks is relatively limited. While the principal components
analysis indicates a moderate increase in co-movement over
time, the correlation analysis finds a decline. This may
reflect a broadening of regional integration at the expense
of bilateral economic ties.
©
2008 The Icfai University Press. All Rights Reserved.
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