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Book part
Publication date: 26 April 2014

Panayiotis F. Diamandis, Anastassios A. Drakos and Georgios P. Kouretas

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing…

Abstract

Purpose

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing exchange rate behavior over the last 40 years. Furthermore, we test the flexible price monetarist variant and the sticky price Keynesian variant of the monetary model. We conduct our analysis employing a sample of 14 advanced economies using annual data spanning the period 1880–2012.

Design/methodology/approach

The theoretical background of the paper relies on the monetary model to the exchange rate determination. We provide a thorough econometric analysis using a battery of unit root and cointegration testing techniques. We test the price-flexible monetarist version and the sticky-price version of the model using annual data from 1880 to 2012 for a group of industrialized countries.

Findings

We provide strong evidence of the existence of a nonlinear relationship between exchange rates and fundamentals. Therefore, we model the time-varying nature of this relationship by allowing for Markov regime switches for the exchange rate regimes. Modeling exchange rates within this context can be motivated by the fact that the change in regime should be considered as a random event and not predictable. These results show that linearity is rejected in favor of an MS-VECM specification which forms statistically an adequate representation of the data. Two regimes are implied by the model; the one of the estimated regimes describes the monetary model whereas the other matches in most cases the constant coefficient model with wrong signs. Furthermore it is shown that depending on the nominal exchange rate regime in operation, the adjustment to the long run implied by the monetary model of the exchange rate determination came either from the exchange rate or from the monetary fundamentals. Moreover, based on a Regime Classification Measure, we showed that our chosen Markov-switching specification performed well in distinguishing between the two regimes for all cases. Finally, it is shown that fundamentals are not only significant within each regime but are also significant for the switches between the two regimes.

Practical implications

The results are of interest to practitioners and policy makers since understanding the evolution and determination of exchange rates is of crucial importance. Furthermore, our results are linked to forecasting performance of exchange rate models.

Originality/value

The present analysis extends previous analyses on exchange rate determination and it provides further support in favor of the monetary model as a long-run framework to understand the evolution of exchange rates.

Details

Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Book part
Publication date: 26 April 2014

Abstract

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Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Book part
Publication date: 26 April 2014

Nikolaos Giannellis and Georgios P. Kouretas

The aim of this study is to examine whether China’s exchange rate follows an equilibrium process and consequently to answer the question of whether or not China’s…

Abstract

Purpose

The aim of this study is to examine whether China’s exchange rate follows an equilibrium process and consequently to answer the question of whether or not China’s international competitiveness fluctuates in consistency with equilibrium.

Design/methodology/approach

The theoretical background of the paper relies on the Purchasing Power Parity (PPP) hypothesis, while the econometric methodology is mainly based on a nonlinear two-regime Threshold Autoregressive (TAR) unit root test.

Findings

The main finding is that China’s price competitiveness was not constantly following a disequilibrium process. The two-regime threshold model shows that PPP equilibrium was confirmed in periods of relatively high – compared to the estimated threshold – rate of real yuan appreciation. Moreover, it is implied that the fixed exchange rate regime cannot ensure external balance since it can neither establish equilibrium in the foreign exchange market, nor confirm that China’s international competitiveness adjustment follows an equilibrium process.

Practical implications

The results do not imply that China acts as a currency manipulator. However, a main policy implication of the paper is that China should continue appreciating the yuan to establish external balance.

Originality/value

This paper is the first which accounts for a nonlinear two-regime process toward a threshold, which is defined to be the rate of change in China’s international competitiveness. Consequently, the paper draws attention to the role of China’s international competiveness in accepting the PPP hypothesis.

Details

Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Article
Publication date: 4 February 2014

Georgios P. Kouretas and Christina Tarnanidou

– The purpose of this paper is to focus on the specific “shareholder's” concept of transparency.

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Abstract

Purpose

The purpose of this paper is to focus on the specific “shareholder's” concept of transparency.

Design/methodology/approach

It considers that indirect securities holding systems limit the degree of “post-trading” transparency. The main concern is that an adverse effect of globalized capital markets is that the actual shareholders are not registered in the official registries and registrations are effected in the name of intermediaries acting on their behalf. It further considers that new EU legislative action should be taken to address the legal issues of securities holdings as a key parameter for EU integration.

Findings

A new architecture of the securities holding system is proposed in this paper to be adopted at the EU level on the basis of the analyzed direct registration, i.e. registration of all the actual shareholders in the registries. It is considered that this architecture will promote securities holdings transparency for all systems, either direct or indirect, and hence enhance investors' protection and financial confidence in the markets. Focusing on the financial crisis of the recent years, it is worthy of note that a key parameter in solving this crisis problem could be considered not only the imposition of more possible regulatory requirements on all financial players but also the improvement credibility of the markets by making their operation more transparent. Direct registration could be defined as a method of making the markets more transparent in this regard.

Originality/value

In the light of the financial crisis of 2007-2009, this is one of the first studies, which clearly argues that direct registration could be considered the appropriate method of making the financial markets more transparent. Therefore, it calls for the EU legal intervention should therefore be accelerated. By delaying improvement in the efficiency of the available infrastructures mainly by utilizing all the advantages that technology offers, the markets accept the additional cost of higher risk coverage.

Details

Journal of Financial Regulation and Compliance, vol. 22 no. 1
Type: Research Article
ISSN: 1358-1988

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Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

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Book part
Publication date: 26 April 2014

Abstract

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Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Book part
Publication date: 9 June 2020

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Advanced Issues in the Economics of Emerging Markets
Type: Book
ISBN: 978-1-78973-578-9

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Book part
Publication date: 4 October 2018

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Banking and Finance Issues in Emerging Markets
Type: Book
ISBN: 978-1-78756-453-4

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Book part
Publication date: 1 March 2021

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Recent Developments in Asian Economics International Symposia in Economic Theory and Econometrics
Type: Book
ISBN: 978-1-83867-359-8

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