Dominant Currency Paradigm: A New Model for Small Open Economies
Dominant Currency Paradigm: A New Model for Small Open Economies

Author: Camila Casas

Publisher: International Monetary Fund

Published: 2017-11-22

Total Pages: 62

ISBN-13: 1484330609

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Most trade is invoiced in very few currencies. Despite this, the Mundell-Fleming benchmark and its variants focus on pricing in the producer’s currency or in local currency. We model instead a ‘dominant currency paradigm’ for small open economies characterized by three features: pricing in a dominant currency; pricing complementarities, and imported input use in production. Under this paradigm: (a) the terms-of-trade is stable; (b) dominant currency exchange rate pass-through into export and import prices is high regardless of destination or origin of goods; (c) exchange rate pass-through of non-dominant currencies is small; (d) expenditure switching occurs mostly via imports, driven by the dollar exchange rate while exports respond weakly, if at all; (e) strengthening of the dominant currency relative to non-dominant ones can negatively impact global trade; (f) optimal monetary policy targets deviations from the law of one price arising from dominant currency fluctuations, in addition to the inflation and output gap. Using data from Colombia we document strong support for the dominant currency paradigm.

Targeting the Real Exchange Rate
Targeting the Real Exchange Rate

Author: Mr.Guillermo Calvo

Publisher: International Monetary Fund

Published: 1994-02-01

Total Pages: 50

ISBN-13: 1451921217

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This paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate. An intertemporal optimizing model suggests that, in the absence of changes in fiscal policy, a more depreciated level of the real exchange can only be attained temporarily. This can be achieved by means of higher inflation and/or higher real interest rates, depending on the degree of capital mobility. Evidence for Brazil, Chile, and Colombia supports the model’s prediction that undervalued real exchange rates are associated with higher inflation.

Noise Trading and Exchange Rate Regimes
Noise Trading and Exchange Rate Regimes

Author: Olivier Jeanne

Publisher:

Published: 1999

Total Pages: 54

ISBN-13:

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Both the literature and new empirical evidence show that exchange rate regimes differ primarily by the noisiness of the exchange rate, not be measurable macroeconomic fundamentals. This motivates a theoretical analysis of exchange rate regimes with noise traders. The presence of noise traders can lead to multiple equilibria in the foreign exchange market. The entry of noise traders both create and share the risk associated with exchange rate volatility. In such circumstances, monetary policy can be used to lower exchange rate volatility without altering macroeconomic fundamentals.

Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework
Foreign Exchange Intervention Rules for Central Banks: A Risk-based Framework

Author: Romain Lafarguette

Publisher: International Monetary Fund

Published: 2021-02-12

Total Pages: 33

ISBN-13: 1513569406

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This paper presents a rule for foreign exchange interventions (FXI), designed to preserve financial stability in floating exchange rate arrangements. The FXI rule addresses a market failure: the absence of hedging solution for tail exchange rate risk in the market (i.e. high volatility). Market impairment or overshoot of exchange rate between two equilibria could generate high volatility and threaten financial stability due to unhedged exposure to exchange rate risk in the economy. The rule uses the concept of Value at Risk (VaR) to define FXI triggers. While it provides to the market a hedge against tail risk, the rule allows the exchange rate to smoothly adjust to new equilibria. In addition, the rule is budget neutral over the medium term, encourages a prudent risk management in the market, and is more resilient to speculative attacks than other rules, such as fixed-volatility rules. The empirical methodology is backtested on Banco Mexico’s FXIs data between 2008 and 2016.

Currency Politics
Currency Politics

Author: Jeffry A. Frieden

Publisher: Princeton University Press

Published: 2014-12-28

Total Pages: 318

ISBN-13: 1400865344

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The politics surrounding exchange rate policies in the global economy The exchange rate is the most important price in any economy, since it affects all other prices. Exchange rates are set, either directly or indirectly, by government policy. Exchange rates are also central to the global economy, for they profoundly influence all international economic activity. Despite the critical role of exchange rate policy, there are few definitive explanations of why governments choose the currency policies they do. Filled with in-depth cases and examples, Currency Politics presents a comprehensive analysis of the politics surrounding exchange rates. Identifying the motivations for currency policy preferences on the part of industries seeking to influence politicians, Jeffry Frieden shows how each industry's characteristics—including its exposure to currency risk and the price effects of exchange rate movements—determine those preferences. Frieden evaluates the accuracy of his theoretical arguments in a variety of historical and geographical settings: he looks at the politics of the gold standard, particularly in the United States, and he examines the political economy of European monetary integration. He also analyzes the politics of Latin American currency policy over the past forty years, and focuses on the daunting currency crises that have frequently debilitated Latin American nations, including Mexico, Argentina, and Brazil. With an ambitious mix of narrative and statistical investigation, Currency Politics clarifies the political and economic determinants of exchange rate policies.

Optimal Monetary Policy under Uncertainty, Second Edition
Optimal Monetary Policy under Uncertainty, Second Edition

Author: Richard T. Froyen

Publisher: Edward Elgar Publishing

Published: 2019

Total Pages: 432

ISBN-13: 1784717193

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This book provides a thorough survey of the model-based literature on optimal monetary in a stochastic setting. The survey begins with the literature of the 1970s which focused on the information problem in policy design and extends to the New Keynesian approach of the 1990s which centered on evaluating alternative targeting strategies. New to the second edition is consideration of research since the world financial crisis on the role of financial markets and institutions in the conduct of monetary policy.

International Dimensions of Monetary Policy
International Dimensions of Monetary Policy

Author: Jordi Galí

Publisher: University of Chicago Press

Published: 2010-03-15

Total Pages: 663

ISBN-13: 0226278875

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United States monetary policy has traditionally been modeled under the assumption that the domestic economy is immune to international factors and exogenous shocks. Such an assumption is increasingly unrealistic in the age of integrated capital markets, tightened links between national economies, and reduced trading costs. International Dimensions of Monetary Policy brings together fresh research to address the repercussions of the continuing evolution toward globalization for the conduct of monetary policy. In this comprehensive book, the authors examine the real and potential effects of increased openness and exposure to international economic dynamics from a variety of perspectives. Their findings reveal that central banks continue to influence decisively domestic economic outcomes—even inflation—suggesting that international factors may have a limited role in national performance. International Dimensions of Monetary Policy will lead the way in analyzing monetary policy measures in complex economies.

Exchange Rate Economics
Exchange Rate Economics

Author: Ronald MacDonald

Publisher: Routledge

Published: 2005

Total Pages: 334

ISBN-13: 1134838220

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''In summary, the book is valuable as a textbook both at the advanced undergraduate level and at the graduate level. It is also very useful for the economist who wants to be brought up-to-date on theoretical and empirical research on exchange rate behaviour.'' ""Journal of International Economics""