Separate literatures study violations of uncovered interest parity (UIP) using regression-based and portfolio-based methods. We propose a decomposition of these violations into a cross-currency, a between-time-and-currency, and a cross-time component that allows us to analytically relate regression-based and portfolio-based facts, and to estimate the joint restrictions they place on models of currency returns. Subject to standard assumptions on investors' information sets, we find that the forward premium puzzle (FPP) and the "dollar trade" anomaly are intimately linked: both are driven almost exclusively by the cross-time component. By contrast, the "carry trade" anomaly is driven largely by cross-sectional violations of UIP. The simplest model the data do not reject features a cross-sectional asymmetry that makes some currencies pay permanently higher expected returns than others, and larger time series variation in expected returns on the US dollar than on other currencies. Importantly, conventional estimates of the FPP are not directly informative about expected returns, because they do not correct for uncertainty about future mean interest rates. Once we correct for this uncertainty, we never reject the null that investors expect high-interest-rate currencies to depreciate, not appreciate.Throughout the main text, we use monthly observations of US dollar-based spot and forward exchange rates at the 1-, 6-and 12-month horizon. All rates are from Thomson Reuters Financial Datastream. The data range from October 1983 to June 2010. For robustness checks, we also use all UK pound-based data from the same source as well as forward premia calculated using covered interest parity from interbank interest rate data, which are available for longer time horizons for some currencies. Our dataset nests the data used in recent studies on currency returns, including Lustig et al. (2011) and. In additional robustness checks, we replicate our findings using only the subset of data used in these studies.Many of the decompositions we perform require balanced samples. However, currencies enter and exit the sample frequently, the most important example of which is the euro and the currencies it replaced. We deal with this issue in two ways. In our baseline sample ("1Rebalance"), we use the largest fully balanced sample we can construct from our data by selecting the 15 currencies with the longest coverage (the currencies
We study the effect of foreign exchange intervention on the exchange rate relying on an instrumental-variables panel approach. We find robust evidence that intervention affects the level of the exchange rate in an economically meaningful way. A purchase of foreign currency of 1 percentage point of GDP causes a depreciation of the nominal and real exchange rates in the ranges of [1.7-2.0] percent and [1.4-1.7] percent respectively. The effects are found to be quite persistent. The paper also explores possible asymmetric effects, and whether effectiveness depends on the depth of domestic financial markets. JEL Classification Numbers: E58, F31
China has experienced rapid economic growth over the past two decades and is on the brink of eradicating poverty. However, income inequality increased sharply from the early 1980s and rendered China among the most unequal countries in the world. This trend has started to reverse as China has experienced a modest decline in inequality since 2008. This paper identifies various drivers behind these trends – including structural changes such as urbanization and aging and, more recently, policy initiatives to combat it. It finds that policies will need to play an important role in curbing inequality in the future, as projected structural trends will put further strain on equity considerations. In particular, fiscal policy reforms have the potential to enhance inclusiveness and equity, both on the tax and expenditure side.
After many years of rapid expansion, China's growth is slowing to more sustainable levels and is rebalancing, with consumption becoming the main growth driver. This transition is likely to have negative effects on its trading partners in the near term. This paper studies the potential spillovers to the ASEAN-5 economies through trade, commodity prices, and financial markets. It finds that countries with closer trade linkages with China (Malaysia, Singapore, and Thailand) and net commodity exporters (Indonesia and Malaysia) would suffer the largest impact, with growth falling between 0.2 and 0.5 percentage points in response to a decline in China's growth by 1 percentage point depending on the model used and the nature of the shock. The impact could be larger if China's slowdown and rebalancing coincides with bouts of global financial volatility. There are also opportunities from China's rebalancing, both in merchandise and services trade, and there is preliminary evidence that some ASEAN-5 economies are already benefiting from these trends.
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