scholarly journals International Portfolio Allocation under Model Uncertainty

2012 ◽  
Vol 4 (1) ◽  
pp. 144-189 ◽  
Author(s):  
Pierpaolo Benigno ◽  
Salvatore Nisticò
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Model Misspecification ◽  
Home Bias ◽  
Exchange Rate Risk ◽  
Rate Risk ◽  
Long Run ◽  
International Portfolio ◽  
Short Run ◽  
Risk Free Rate

This paper revisits an old argument, hedging real exchange rate risk, as an explanation of the international home bias in equity. In a dynamic model, the relevant risk to be hedged is the long-run risk as opposed to the short-run risk. Domestic equity is indeed a good hedge with respect to long-run real-exchange-rate risk. Two new frameworks are able to explain a large share of the observed US home bias: a model with Hansen-Sargent preferences in which agents fear model misspecification and a model with Epstein-Zin preferences. These two models are also immune to the risk-free rate puzzle. (JEL C58, F31, G11, G15)

scholarly journals Asymmetric effect of real exchange rate risk on foreign direct investment: Empirical evidence in ASEAN-4

2020 ◽  
Vol 2 (3) ◽  
pp. 91-105 ◽  
Author(s):  
Jaratin Lily ◽  
Mori Kogid ◽  
Dullah Mulok ◽  
Rozilee Asid
Keyword(s):  
Foreign Direct Investment ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Direct Investment ◽  
The Philippines ◽  
Exchange Rate Risk ◽  
Asymmetric Effect ◽  
Fdi Inflows ◽  
Rate Risk ◽  
Long Run

This study investigates the asymmetric effect of exchange rate risk (volatility) on the real foreign direct investment (FDI) inflows in Malaysia, the Philippines, Singapore, and Thailand (ASEAN-4) using the Nonlinear Autoregressive Distributed Lag (NARDL) model. The results revealed the occurrence of a long-run asymmetric cointegration between real FDI inflows and real exchange rate risk in the Philippines, Singapore, and Thailand, but not in Malaysia. For the Philippines and Singapore, there is evidence of long-run asymmetry whereas short-run asymmetry exists for the case of Thailand. These findings imply that the asymmetric effects prove to be useful in providing essential information to the related parties on how FDI inflows react to exchange rate risks differently. Therefore, policymakers in ASEAN countries should be concerned about the asymmetric effect of the exchange rate volatility to mitigate the stylized effects of exchange rate movements on FDI inflows.

The Effect of Real Exchange Rate on Trade Balance in a Resource-Rich Economy: The Case of Mongolia

2018 ◽  
Vol 53 (4) ◽  
pp. 211-224 ◽  
Author(s):  
Gan-Ochir Doojav
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Trade Balance ◽  
Developing Economies ◽  
Jel Classification ◽  
Vector Error Correction ◽  
Vector Error ◽  
Long Run ◽  
Short Run ◽  
Exchange Rate Depreciation

For resource-rich developing economies, the effect of real exchange rate depreciation on trade balance may differ from the standard findings depending on country specific characteristics. This article employs vector error correction model to examine the effect of real exchange rate on trade balance in Mongolia, a resource-rich developing country. Empirical results show that exchange rate depreciation improves trade balance in both short and long run. In particular, the well-known Marshall–Lerner condition holds in the long run; however, there is no evidence of the classic J-curve effects in the short run. The results suggest that the exchange rate flexibility may help to deal effectively with current account deficits and exchange rate risk. JEL Classification: C32, C51, F14, F32

scholarly journals Research On Monetary Neutrality: Evidence From Exchange Rate And Trade Balance Of G-7 Countries

2011 ◽  
Vol 24 (2) ◽  
Author(s):  
Doh-Khul Kim
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Trade Balance ◽  
Monetary Shocks ◽  
Font Size ◽  
Long Run ◽  
Short Period ◽  
Short Run ◽  
Monetary Neutrality ◽  
Nominal Shocks

<p class="MsoBodyText" style="line-height: normal; margin: 0in 0.5in 0pt;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt;">According to a recent paper by Fisher and Huh (200</span><span style="font-size: 10pt; mso-fareast-language: KO;">2</span><span style="font-size: 10pt;">), in contrast to a long-run neutrality hypothesis, nominal shocks have long-run effects on a country&rsquo;s real exchange rate</span><span style="font-size: 10pt; mso-fareast-language: KO;"> and trade balance.</span><span style="font-size: 10pt;"> However employing </span><span style="font-size: 10pt; mso-fareast-language: KO;">a </span><span style="font-size: 10pt;">similar method (VAR) with identical restrictions (</span><span style="font-size: 10pt; mso-fareast-language: KO;">long-run neutrality and </span><span style="font-size: 10pt;">short-run recursive</span><span style="font-size: 10pt; mso-fareast-language: KO;"> hypotheses</span><span style="font-size: 10pt;">), </span><span style="font-size: 10pt; mso-fareast-language: KO;">this paper </span><span style="font-size: 10pt;">show</span><span style="font-size: 10pt; mso-fareast-language: KO;">s</span><span style="font-size: 10pt;"> that the effects on the real exchange rate are much shorter</span><span style="font-size: 10pt; mso-fareast-language: KO;"> in this G-7 country study</span><span style="font-size: 10pt;"> than what </span><span style="font-size: 10pt; mso-fareast-language: KO;">Fisher and Huh (2002) contend.</span><span style="font-size: 10pt;"> Further, the trade balance improves for a short period of time, from which </span><span style="font-size: 10pt; mso-fareast-language: KO;">it can</span><span style="font-size: 10pt;"> conclude there is a shorter existence of the depreciation effect in response to </span><span style="font-size: 10pt; mso-fareast-language: KO;">expansionary</span><span style="font-size: 10pt;"> monetary shocks, which supports the long-run neutrality hypothesis</span><span style="font-size: 10pt; mso-fareast-language: KO;"> in an open macroeconomic framework</span><span style="font-size: 10pt;">.<span style="mso-spacerun: yes;">&nbsp; </span></span></span></p>

Exchange Rate and Economic Growth

2017 ◽  
Vol 12 (1) ◽  
pp. 42-64 ◽  
Author(s):  
Mohammad A. Razzaque ◽  
Sayema Haque Bidisha ◽  
Bazlul Haque Khondker
Keyword(s):  
Economic Growth ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Development Strategy ◽  
Analytical Framework ◽  
Policy Option ◽  
Exchange Rate Policy ◽  
Long Run ◽  
Exchange Rate Movements ◽  
Short Run

This article aims to understand the effects of exchange rate movements on economic growth in Bangladesh. Using a suitable analytical framework to derive an empirical specification, we construct a real exchange rate series and employ cointegration techniques to determine the output response to Bangladeshi currency depreciations. Our results suggest that in the long run, a 10 per cent depreciation of the real exchange rate is associated with, on average, a 3.2 per cent rise in aggregate output. However, a contractionary effect is observed in the short run so that the same magnitude of real depreciation would result in about a half per cent decline in GDP. While the long-run expansionary effect of real depreciations may be appealing for considering exchange rate policy as a development strategy, the likelihood of rising inflationary pressures needs to be kept in mind while pursuing this policy option.

scholarly journals DETERMINANTS OF REAL EXCHANGE RATE IN ETHIOPIA

2016 ◽  
Vol 4 (6) ◽  
pp. 183-210
Author(s):  
Nandeeswara Rao ◽  
TassewDufera Tolcha
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Impulse Response ◽  
Variance Decomposition ◽  
Capital Inflow ◽  
Terms Of Trade ◽  
Nominal Exchange Rate ◽  
The Real ◽  
Long Run ◽  
Short Run

Real exchange rate has direct effects on trade particularly on international trade and has indirect effects on productions and employments, so it is crucial to understand the factors which determine its variations. This study analyses the main determinants of the real exchange rate and the dynamic adjustment of the real exchange rate following shocks to those determinants using yearly Ethiopian time series data covering the period 1971 to 2010. It begins with a review of literatures on Exchange rate, real exchange rate, determinants of the real exchange rate and provides an updated background on the exchange rate system in Ethiopia. An empirical model linking the real exchange rate to its theoretical determinants is then specified. This study had employed the cointegration and vector autoregression (VAR) analysis with impulse response and variance decomposition analyses to provide robust long run effects and short run dynamic effects on the real exchange rate. Share of investment, foreign exchange reserve, capital inflow and government consumption of non-tradable goods were the variable that have been found to have a long run relationship with the real exchange rate. The estimate of the speed of adjustment coefficient found in this study indicates that about a third of the variation in the real exchange rate from its equilibrium level is corrected within a year. The regression result of VECM reveals that terms of trade, nominal exchange rate, and one period lag of capital flow were the variables significantly affects the real exchange rate in the short run. However, the impulse response and variance decomposition analysis shows a better picture of the short run dynamics. The their analysis provided evidence that the Shocks to terms of trade, nominal exchange rate, capital inflow and share of investment have persistent effects on the real exchange rate in the short run. In general the regression results of both long run and short run models mostly suggest that the fluctuations of real exchange rates are predominantly responses to monetary policies shocks rather than fiscal policy shocks.

scholarly journals An ECM Approach for Long Run Relationship Between Real Exchange Rate and Output Growth: Evidence from Bangladesh

2015 ◽  
Vol 63 (2) ◽  
pp. 105-110 ◽  
Author(s):  
Khnd Md Mostafa Kamal
Keyword(s):  
Time Series ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Time Series Data ◽  
Output Growth ◽  
Series Data ◽  
Data Series ◽  
Currency Exchange ◽  
Long Run ◽  
Short Run

Currency exchange rate is an important aspect in modern economy which indicates the strength of domestic currency with respect to international currency. This study uses 42 years’ (1972 to 2013) time series data for Bangladesh in order to empirically determine whether the real exchange rate has significant impact on output growth for Bangladesh by using error correction model (ECM).The time series econometrics properties of the data series have been thoroughly investigated to apply ECM approach. The empirical evidence suggests mixed results; in the short run low exchange rate has positive significant effect while in the long run output growth is positively affected high exchange rate pass through.Dhaka Univ. J. Sci. 63(2):105-110, 2015 (July)

Exchange rate volatility and exports from India: a commodity-level panel data analysis

2019 ◽  
Vol 12 (1) ◽  
pp. 23-44
Author(s):  
Chandan Sharma
Keyword(s):  
Exchange Rate ◽  
Panel Data ◽  
Exchange Rate Volatility ◽  
Nominal Exchange Rate ◽  
Exchange Rate Risk ◽  
Content Type ◽  
Long Run ◽  
Short Run ◽  
The Relationship

PurposeThis study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case.Design/methodology/approachThe monthly panel data used for analysis are at a disaggregated level, which cover around 100 products, encompassing all merchandize sectors for the period spanning from 2012:12 to 2017:11. To measure the exchange rate volatility, the authors use real as well as nominal exchange rate concepts and predict the volatility of exchange rate using the autoregressive conditional heteroscedastic-based model. They use pooled mean group, mean group and common correlated effects mean group estimator that is suitable for the objectives and data frequency.FindingsThe empirical analysis indicates both short- and long-term negative effects of exchange rate variations on exporting. Specifically, in the long run, real exchange rate as well as nominal exchange rate volatility has significant effects on export performance, yet, the effects of uncertainty of nominal exchange rate is much severe and intense. In the short run, it is the nominal exchange rate uncertainty that hurts exports from India. Nevertheless, the short-run effect is much lesser than the long-run, supporting the argument that the short-term exchange rate risk can be hedged, at least partially, through financial instruments; however, uncertainty of the long-term horizon cannot be hedged easily and cost-effectively.Practical implicationsReducing uncertainty and attaining stability in exchange rate and price level should be an important policy objective in developing countries such as India to achieve higher export growth, both in the short and long run.Originality/valueUnlike previous studies, this paper tests the relationship using micro-level data and uses advanced econometric techniques that are likely to provide more precise information regarding the association between exchange rate volatility and trade flows.

Does exchange rate volatility influence import commodities of India-US? Evidence from ARDL approach

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mohini Gupta ◽  
Sakshi Varshney
Keyword(s):  
Exchange Rate ◽  
Financial Crisis ◽  
Real Exchange Rate ◽  
Global Financial Crisis ◽  
Exchange Rate Volatility ◽  
Content Type ◽  
Long Run ◽  
Short Run ◽  
The Empirical Analysis ◽  
Real Exchange Rate Volatility

PurposeThe aim the study is to explore the impact of real exchange rate volatility and other macroeconomic variable such as price of import, industrial production and real exchange rate on 45 import commodities, considering global financial crisis period on India's import from the US. The empirical analysis at disaggregate level of import indicates the existence of both short-run and long-run effect in one-third importing commodities. The results show both positive and negative effect and causality among variables.Design/methodology/approachThe study uses E-GARCH model to gage the real exchange rate volatility, an autoregressive distributive lag (ARDL) bound test technique to discover the adequate short- and long-run relationships and Toda-Yamamoto causality method to analyze the causality among variables. The study uses the time period from 2002:M09 to 2019:M06.FindingsThe empirical analysis at disaggregate level of import indicates the existence of both short-run and long-run effect in one-third importing commodities. The results show both positive and negative effects and causality among variables.Practical implicationsThe finding of the study suggests that macroeconomic variables have significant role and could be important to undertake the small and medium scale industries in policymaking. Government may need to make decision for micro, small and medium enterprises (MSMEs) as their performance can bring change in the trade to compete globally by increasing and controlling the price of the import and defending the domestic competitiveness.Originality/valueThe study uses additional variable namely price of import and includes the global financial crisis period to measure dampening effect on each commodity by using robust econometric technique in context of emerging nation like India.

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