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Credit rating agencies (CRAs) are perceived as highly influential in the financial system since their announcements can affect several players in the financial markets, from big private financial and non-financial companies and their financial markets experts to sovereign states. In this sense, this study investigates whether sovereign credit news issued by CRAs (measured by comprehensive credit rating (CCR) variables) affect the uncertainties about the exchange rate in the future (captured by the disagreement about exchange rate expectations). The study is relevant once there is evidence indicating that CRAs' assessments are responsible for affecting international capital flows and, thus, sovereign rating changes can affect the expectations formation process regarding the exchange rate. In addition, there is evidence indicating that the disagreement about exchange rate expectations affects the disagreement about inflation expectations, which brings consequences to policymakers.

The dependent variables are the disagreement in expectations about the Brazilian exchange rate for different forecast horizons, 12, 24 and 36 months ahead and the first principal component of theses series. On the other hand, the CCR variables are built upon the long-term foreign-currency Brazilian bonds ratings, outlooks and credit watches provided by the main CRAs. Estimates are obtained using ordinary least squares (OLS) and generalized method of moments (GMM); a dynamic analysis is performed using vector-autoregressive (VAR) through impulse-response functions.

Negative (positive) sovereign credit news, given by a rating downgrade (upgrade) and/or a negative (positive) outlook/watch status, increase (decrease) the disagreement about exchange rate expectations. This result holds for all disagreement and CCR variables.

The study brings practical implications to both private agents (mainly financial market experts) and policymakers. An important practical implication of the study concerns the ability of CRAs to affect the expectations formation process of financial market experts regarding the future behavior of the exchange rate. When a CRA issues a signal of improvement in a country's sovereign rating, this signal reflects the perception of improvement in macroeconomic fundamentals and reduction of uncertainties about the country's ability to honor its financial obligations, which therefore, facilitates the expectations formation process, causing a reduction in the disagreement about the exchange rate expectations. With respect to the consequences for policymakers, they will have more difficulty in guiding expectations in a country with a worse sovereign risk rating, where agents have difficulties in forming expectations and the disagreement in expectations is greater.

The study is the first to analyze the impact of CRAs' announcements on the disagreement about exchange rate expectations. Moreover, it connects the literature that investigates the effects of sovereign credit news on the economy with the literature that examines the main determinants of disagreement in expectations about macroeconomic variables.

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

It is widely recognized that expectations of future events have significant impact on exchange rates movements. The role of expectations in exchange rate movements can be considered as a source of exchange rate estimation error. In a sense it is a pity that the majority of empirical evidence on the exchange rate fluctuation clearly negates the validity of such models that are more sophisticated and comprehensive.

The purpose of this paper is to develop a model to analyze the role of exchange rate appreciation expectation in trade invoicing from the perspective of importers, then empirically analyze it using Japanese export data.

Constructing a theoretical model of importer behavior by analyzing the importer's utility function under an assumption such as “menu cost”, then using econometric method to justify the theoretical model's finding.

It was found that under the assumption of “menu cost”, risk neutrality and price rigidity, there are three directions of appreciation expectation's effect: increasing, unchanged and decreasing theoretically; but under common condition, only a large appreciation expectation will cause an importer to reduce the use of exporter's currency, and the role is constricted by exporters' bargaining capacity. The empirical results of Yen's use in Japan's exports justifies the model's conclusion and shows that commercial pressure and political events are the most important signals to form large appreciation expectation.

This paper has important policy implications for Renminbi (RMB)'s exchange rate policy under the context of RMB internationalization, in order to promote RMB's use in exports; China should control the large appreciation expectation of RMB and the best way is to rigorously tackle trade deficit with US and European countries, and to eliminate the explicit appreciation signal.

The paper analyzes the role of exchange rate appreciation in trade invoicing theoretically and empirically for the first time; and reasonably explains the development of currency invoicing in Japanese exports and contemporary Chinese exports, as well as having important policy implications for Chinese exchange rate policy.

This study examines the impact of expectations on the market share mechanism. The dynamic strategic pricing behaviors in the short‐run and the long‐run are also explored. The exchange rate expectations are incorporated into a switching cost model via the method of exchange rate pass‐through on product‐specific and country‐specific approach. By using the time series techniques, the results of the system estimations prove that the market share mechanisms are weakened by exchange rate expectations in open economies. Furthermore, not only is the degree of exchange rate pass‐through higher in the short‐run than in the long‐run but also many cases of pair‐wise rivalry are found. An improved understanding of the effects of exchange rate movements on foreign exporters pricing and pass‐through relations from this study may enhance competition in international markets.

This paper aims to explain real exchange rate fluctuations by means of a model including both standard fundamentals and two alternative measures of inflation expectations for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) over the period January 1993–July 2019.

Both a benchmark linear autoregressive distributed lag (ARDL) model and a nonlinear autoregressive distributed lag (NARDL) specification are considered.

The results suggest that the nonlinear framework is more appropriate to capture the behaviour of real exchange rates given the presence of asymmetries both in the long and short run. In particular, the speed of adjustment towards the purchasing power parity (PPP) implied long-run equilibrium is three times faster in a nonlinear framework, which provides much stronger evidence in support of PPP. Moreover, inflation expectations play an important role, with survey-based ones having a more sizable effect than market-based ones.

The focus on linearities and the estimation of a NARDL model, which is shown to outperform the linear ARDL model both within sample and out of sample, is an important contribution to the existing literature which has rarely applied this type of framework; the choice of an appropriate econometric method also makes the policy implications of the analysis more reliable; in particular, monetary authorities should aim to achieve a high degree of credibility to manage them and thus currency fluctuations effectively; the inflation targeting framework might be especially appropriate for this purpose.

This paper shows that the University of Michigan’s ”Survey of Consumers“ can be useful in predicting the direction of change in five U.S. dollar exchange rates. The explanatory power, however, is contingent on the particular survey question employed and the forecast horizon under consideration. The study finds that the survey question regarding car purchases does especially well in predicting the future direction of exchange rate movements. Furthermore, the results generally indicate that the survey is more useful when making distant (i.e., 12‐month ahead) currency forecast than for making near term (i.e., 3‐month and 6‐month ahead) predictions.

This paper examines and dissects eight popular conjectures about exchange rates. The conjectures are: there exists a systematic linkage between economic fundamentals and exchange rates; flexible exchange rates are unstable due to destabilising speculation; flexible exchange rates are excessively volatile; the foreign exchange market is efficient; purchasing power parity holds; volatile exchange rates are harmful to trade; depreciating exchange rates trigger a “vicious” inflationary circle; and countries with current account deficits have depreciating exchange rates. The main message is that there is weak theoretical and empirical support for the majority of the conjectures. Only one proposition, relative PPP has strong empirical support but its policy relevance is weakened by the difficulty of interpreting departures from PPP. The remaining group for which there is inconclusive support presents the greatest challenge to research and policy as it includes the first conjecture.