Foreign Exchange Rate Risk In A Small Open Economy
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Foreign Exchange Rate Risk In A Small Open Economy
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Author : Bianca De Paoli
language : en
Publisher:
Release Date : 2009
Foreign Exchange Rate Risk In A Small Open Economy written by Bianca De Paoli and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
Resolving the forward premium puzzle requires a volatile foreign exchange rate risk premium that covaries negatively with the expected depreciation rate. Earlier work has shown how models featuring consumption habits can generate such premia when either trade costs or 'deep habits' are assumed. We show that as long as consumption habits are slow-moving and shocks are highly persistent, a standard small open endowment economy - without any additional features - can address the puzzle. Moreover endogenising the labour supply decision in the small open economy can improve the model's ability to match risk premia observations so long as it makes business cycles less synchronised.
Exchange Rate Risk In A Small Open Economy
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Author : Ville Talasmäki
language : en
Publisher:
Release Date : 1999
Exchange Rate Risk In A Small Open Economy written by Ville Talasmäki and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1999 with categories.
Stochastic Equilibrium And Exchange Rate Determination In A Small Open Economy With Risk Averse Optimizing Agents
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Author : Earl L. Grinols
language : en
Publisher:
Release Date : 1991
Stochastic Equilibrium And Exchange Rate Determination In A Small Open Economy With Risk Averse Optimizing Agents written by Earl L. Grinols and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1991 with Foreign exchange categories.
This paper constructs a stochastic general equilibrium model of a small open economy consisting of risk averse optimizing agents. The stochastic processes describing the rate of monetary growth, government expenditure, private production, and the foreign price level are taken to be exogenous, determining all asset risks and returns, and the equilibrium stochastic processes describing the domestic inflation rate and the exchange rate. The model is used to examine a number of issues. These include: (i) the effects of the means and variances of policy shocks on the equilibrium; (ii) the determinants of the foreign exchange risk premium; (iii) the relationship between net export instability and economic growth.
Monetary Policy And Exchange Rate Volatility In A Small Open Economy
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Author : Jonas Böhmer
language : en
Publisher: GRIN Verlag
Release Date : 2009-10-02
Monetary Policy And Exchange Rate Volatility In A Small Open Economy written by Jonas Böhmer and has been published by GRIN Verlag this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009-10-02 with Political Science categories.
Seminar paper from the year 2008 in the subject Business economics - Economic Policy, grade: 1,3, University of Bonn (Wirtschaftspolitische Abteilung der Rechts- und Staatswissenschaftlichen Fakultät), course: Geldtheorie- und politik, language: English, abstract: Does inflation reduce welfare? What is worse, a volatile exchange rate or a high inflation rate? And is the central bank able to drive these variables? These questions are the topic of a paper by Jordi Gali and Tommaso Monacelli, published in 2005 and titled “Monetary Policy and Exchange Rate Volatility in a Small Open Economy”. As apparent by the title Gali and Monacelli (G+M) analyze the influence of monetary policy on the volatility of the exchange rate, more precisely the nominal exchange rate and the terms of trade. For this purpose they create a small open economy with sticky prices of Calvo-type. Due to its minor size this economy does not influence the world economy. However, depending on the degree of openness this economy is affected by the rest of the world. Having specified this framework, G+M introduce three different monetary regimes and evaluate the resulting exchange rate volatilities . Using a central bank loss function G+M rank these three rules according to the implied welfare which shows a positive correlation between welfare and exchange rate volatility. Thence G+M prefer Taylor rules over an exchange rate pegging. To get a general idea of Gali and Monacelli`s argumentation this expose will start in chapter 2 with an abbreviated overlook over G+M’s model of a small open economy. In the following chapter there will be the introduction of the three central bank rules, necessary to close the model, as well as an analysis of the underlying welfare levels. Since the welfare evaluation is based on some special assumptions, chapter 4 will give an overview of recent literature which discusses possible extensions as well as their implications for G+M’s ranking of implied welfare. Concluding chapter 5 will summarize G+M’s most important results as well as evaluate if the possible extensions render G+M’s analysis, respectively their results, worthless.
Foreign Exchange Risk Premia And Welfare In A Stochastic Small Open Economy Model
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Author : Lynne Evans
language : en
Publisher:
Release Date : 2001
Foreign Exchange Risk Premia And Welfare In A Stochastic Small Open Economy Model written by Lynne Evans and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2001 with categories.
This paper constructs a stochastic general equilibrium model of a small open economy consisting of risk-averse optimising agents with unconventional preferences. We use this model (i) to analyze the determinants of the foreign exchange rate risk premium; (ii) to explore the importance of unconventional preferences for the foreign exchange rate risk premium; and (iii) to conduct a numerical analaysis of the forex risk premium. Our model is distinguished from many of those in the literature by a number of features. Firstly, our dynamic general equilibrium model incorporates portfolio choice thereby giving rise to an integrated analysis of exchange rate determination with a risk-adjusted PPP and portfolio equilibrium. Secondly, the model includes a recursive utility function that disentangles risk aversion from intertemporal substitution thereby enabling an analysis of the distinct roles played by agents' attitudes towards risk and intertemporal substitution. Thirdly, in preference to using a two-country model, we specifically model a small open economy which takes the world interest rate as given. Fourthly, we have an exact stochastic model rather than the stochastic approximations (through Markov chains) more commonly adopted in the literature; and, fifthly, the model is constructed in continuous, not discrete, time. We find that the equilibrium forex risk premium is a function of exogenous shocks in the model and is sensitive to assumed attitudes towards risk and intertemporal substitution. Furthermore, taking plausible values for the preference parameters, together with other data-driven parameter values, the model generates a value for the forex risk premium which is close to that found in the data.
An Estimated Small Open Economy Model Of The Financial Accelerator
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Author : Selim Elekdag
language : en
Publisher: International Monetary Fund
Release Date : 2005-03
An Estimated Small Open Economy Model Of The Financial Accelerator written by Selim Elekdag and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2005-03 with Business & Economics categories.
This paper develops a small open economy model where entrepreneurs partially finance investment using foreign currency denominated debt subject to a risk premium above and beyond international interest rates. We use Bayesian estimation techniques to evaluate the importance of balance sheet vulnerabilities combined with the presence of the financial accelerator for emerging market countries. Using Korean data, we obtain an estimate for the external risk premium, indicating the importance of the financial accelerator and potential balance sheet vulnerabilities for macroeconomic fluctuations. Furthermore, our estimates of the Taylor rule imply a strong preference to smooth both exchange rate and interest rate fluctuations.
Balance Sheets Exchange Rate Policy And Welfare
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Author : Selim Elekdag
language : en
Publisher: International Monetary Fund
Release Date : 2004-04
Balance Sheets Exchange Rate Policy And Welfare written by Selim Elekdag and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2004-04 with Business & Economics categories.
The debate about the appropriate choice of exchange rate regime is fundamental in international economics. This paper develops a small open-economy model with balance sheet effects and compares the performance of fixed and flexible exchange rate regimes. The model is solved up to a second-order approximation which allows us to address the issue of risk and welfare rigorously. The paper identifies threshold levels of the debt-to-GDP ratio above which fixed exchange rate regimes are welfare superior to monetary policy rules that imply flexible exchange rate regimes. The results suggest that emerging market economies that suffer from a relatively high level of indebtedness and are constrained in their pursuit of optimal monetary policy, could find it beneficial to opt for a fixed exchange rate regime.
Inflation Targeting And Exchange Rate Management In Less Developed Countries
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Author : Mr.Marco Airaudo
language : en
Publisher: International Monetary Fund
Release Date : 2016-03-08
Inflation Targeting And Exchange Rate Management In Less Developed Countries written by Mr.Marco Airaudo and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2016-03-08 with Business & Economics categories.
We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.
Welfare Effects Of Transparency In Foreign Exchange Markets
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Author : Burkhard Drees
language : en
Publisher: International Monetary Fund
Release Date : 2002-12
Welfare Effects Of Transparency In Foreign Exchange Markets written by Burkhard Drees and has been published by International Monetary Fund this book supported file pdf, txt, epub, kindle and other format this book has been release on 2002-12 with Business & Economics categories.
This paper studies the impact of enhanced transparency on risk sharing opportunities in the foreign exchange market and the associated implications for ex ante welfare. Transparency is measured in this model by the informational content of publicly observable signals about exchange rate developments. We find that in this model more transparency improves welfare in economies that are poorly endowed with capital and/or where investors are not very risk-averse, while welfare is reduced in economies with large capital endowments and/or where investors are highly risk-averse.
Monetary And Fiscal Rules In An Emerging Small Open Economy
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Author : Nicoletta Batini
language : en
Publisher:
Release Date : 2009
Monetary And Fiscal Rules In An Emerging Small Open Economy written by Nicoletta Batini and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with Fiscal policy categories.
We develop a optimal rules-based interpretation of the 'three pillars macroeconomic policy framework': a combination of a freely floating exchange rate, an explicit target for inflation, and a mechanism than ensures a stable government debt-GDP ratio around a specified long run. We show how such monetary-fiscal rules need to be adjusted to accommodate specific features of emerging market economies. The model takes the form of two-blocs, a DSGE emerging small open economy interacting with the rest of the world and features, in particular, financial frictions It is calibrated using Chile and US data. Alongside the optimal Ramsey policy benchmark, we model the three pillars as simple monetary and fiscal rules including and both domestic and CPI inflation targeting interest rate rules alongside a 'Structural Surplus Fiscal Rule' as followed recently in Chile. A comparison with a fixed exchange rate regime is made. We find that domestic inflation targeting is superior to partially or implicitly (through a CPI inflation target) or fully attempting to stabilizing the exchange rate. Financial frictions require fiscal policy to play a bigger role and lead to an increase in the costs associated with simple rules as opposed to the fully optimal policy.