http://repub.eur.nl/res/concept/jel-F33/ Recent publications classified by JEL Code F33 en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/22283/ 2011-02-01T00:00:00Z Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of mean reversion across real exchange rates. In contrast to several other severe restrictions of panel models and tests of PPP, the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. This paper analyzes the properties of homogeneous and heterogeneous panel unit root testing methodologies. Using Monte Carlo simulation, we uncover important adverse properties of the panel approach that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. These properties can lead to misleading inferences on the validity of PPP. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates. Koedijk, C.G. Tims, B. Dijk, M.A. van http://repub.eur.nl/res/pub/21024/ 2010-10-01T00:00:00Z Abstract Recent studies of purchasing power parity (PPP) use panel tests that fail to take into account heterogeneity in the speed of mean reversion across real exchange rates. In contrast to several other severe restrictions of panel models and tests of PPP, the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. This paper analyzes the properties of homogeneous and heterogeneous panel unit root testing methodologies. Using Monte Carlo simulation, we uncover important adverse properties of the panel approach that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. These properties can lead to misleading inferences on the validity of PPP. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates. Koedijk, C.G. Tims, B. Dijk, M.A. van http://repub.eur.nl/res/pub/18032/ 2010-02-08T00:00:00Z In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented. Sato, K. Zhang, Z. McAleer, M.J. http://repub.eur.nl/res/pub/12962/ 2008-03-01T00:00:00Z This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the 10 countries that obtained EU membership in 2004. One-way and two-way error component gravity models are estimated using a data set of unbalanced panel data that combine bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries. The results reveal a complementarity between trade and investment and a relationship between trade and exchange rate volatility that depend on the sign of bilateral trade balances. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5% for Poland and 30% for Hungary. Brouwer, J. Paap, R. Viaene, J.M.A. http://repub.eur.nl/res/pub/10743/ 2007-09-23T00:00:00Z This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the ten countries that obtained EU membership in 2004. Intuitively, the implementation of a single currency for these countries means replacing several fluctuating currencies by a common currency. This gives rise to both “level” and “risk” effects of reduced currency movements on trade and investment. Another factor is the nature of the link between trade and FDI. This is also important not only because cross-border factor flows are becoming increasingly important, but also the international trade literature has long recognized that cross-border factor flows and trade in goods and services can be substitutes or complements. Given this background, one-way and two-way error component gravity models are estimated to examine for these theoretical expectations within a dataset of unbalanced panel data that combines bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries (including the 10 new EU members). The data generally cover the period from 1990 to 2004. Our empirical results convincingly support: (i) a complementarity between trade and investment, (ii) a relationship between trade and exchange rate volatility that depends on the sign of bilateral trade balances, (iii) a positive effect of EU on trade and investment, and (iv) a positive effect of EMU on foreign investment. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5 percent for Poland and 30 percent for Hungary. Paap, R. Viaene, J.M.A. Brouwer, J. http://repub.eur.nl/res/pub/7173/ 2005-12-19T00:00:00Z This paper analyzes the properties of multivariate tests of purchasing power parity (PPP) that fail to take heterogeneity in the speed of mean reversion across real exchange rates into account. We compare the performance of homogeneous and heterogeneous unit root testing methodologies. The recent literature has successfully contested several severe restrictions on the structure of the model, but the assumption of homogeneous mean reversion is still widely used and its consequences are virtually unexplored. Using Monte Carlo simulation, we uncover important adverse properties of the methodology that relies on homogeneous estimation and testing. More specifically, power functions are low and assume irregular shapes. Furthermore, homogeneous estimates of the mean reversion parameters exhibit potentially large biases. This can have a dramatic impact on inferences made on the validity of the PPP hypothesis. Our findings highlight the importance of allowing for heterogeneous estimation when testing for a unit root in panels of real exchange rates. Koedijk, C.G. Tims, B. Dijk, M.A. van http://repub.eur.nl/res/pub/16942/ 2004-11-01T00:00:00Z This paper analyzes purchasing power parity (PPP) for the euro area. We study the impact of the introduction of the euro in 1999 on the behavior of real exchange rates. We test the PPP hypothesis for a panel of real exchange rates within the euro area over the period 1973–2003. Our methodology exploits the cross-sectional dependence across real exchange rates and allows for heterogeneity in the rates of mean reversion. We present evidence in favor of PPP for the full panel of real exchange rates, but we show that accounting for cross-country differences within the euro area is essential. The unit root hypothesis can be rejected for some real exchange rates, but evidence for PPP is weak for others. We also investigate PPP between the ‘‘synthetic’’ euro against several other major currencies over the period 1979–2003. We find support for the PPP hypothesis for the full panel of real exchange rates. When the restriction of a common mean reversion coefficient is relaxed, we reject the unit root hypothesis for the euro-Swiss franc rate only. We conclude that the process of economic integration in Europe has accelerated convergence toward PPP within the euro area. Koedijk, C.G. Tims, B. Dijk, M.A. van http://repub.eur.nl/res/pub/816/ 2003-09-03T00:00:00Z This paper develops a monetary-fiscal game which stresses the importance of international spillovers and introduces a double (monetary and fiscal) credibility problem. Models that neglect the inability of fiscal policymakers to commit will tend to underestimate the welfare cost of structural distortions. Due to international spillovers, stochastic shocks may be relatively costly in welfare terms, despite the contribution of policy surprises to finance such shocks. The second part of the paper studies the welfare consequences of the monetary union. It is shown that the welfare impact of EMU for Europe is ambiguous, but that EMU is welfare-improving for the US. Cavelaars, P.A.D. http://repub.eur.nl/res/pub/12380/ 2003-01-01T00:00:00Z This paper provides evidence that the choice of the foreign exchange regime is not of first order importance for achieving high output growth. It is argued that due to the forward looking nature of the foreign exchange market, exchange rate stability hinges on the current and anticipated coherency of monetary and fiscal policies. We demonstrate this empirically on a panel including potential EMU accession countries. By means of rank regression analysis we uncover the partial links across the regime specifics of the representative country versus the German regime during the 1990s. Foreest, P.W. van Vries, C.G. de http://repub.eur.nl/res/pub/6824/ 2002-02-06T00:00:00Z This paper provides empirical evidence that, irrespective of the foreign exchange rate regime, countries with high monetary volatility have lower relative output growth rates. It is argued that due to the forward looking nature of the foreign exchange market, exchange rate stability hinges on the stability of the institutional structure within which monetary and fiscal policies are formulated. Subsequently, the likely endogenous response in the accession countries upon entry into EU and EMU is examined. This provides arguments for a rapid transition phase, possibly complemented by a one sided euroisation as a commitment device Foreest, P.W. van Vries, C.G. de http://repub.eur.nl/res/pub/12411/ 1995-01-01T00:00:00Z This paper compares foreign exchange market intervention in case there is no uncertainty about the extent of an imperfectly sustainable target zone and where there is uncertainty. A well-known example of the first case was the European Monetary System between 1979 and 1992. An example of the latter is the dirty floating of the dollar against the Dmark and yen after the so-called Louvre Accord in 1987. The analysis shows that the instantaneous effectiveness of intervention tends to be larger the more implicit the band policy is. Our empirical results which use Belgian and US intervention data support this claim. Koedijk, C.G. Mizrach, B. Stork, Ph.A. Vries, C.G. de http://repub.eur.nl/res/pub/12423/ 1992-01-01T00:00:00Z In the literature on the empirical unconditional distribution of foreign exchange rate returns there is indication that the type of distribution function is related to the form of exchange rate regime. The analysis has been hampered by the nonnestedness of alternative distribution models. The paper investigates the issue by means of extremal analysis which allows for a unified treatment. In particular, we try to sort out whether apparent distributional differences are due to differences in techniques or in regimes. Koedijk, C.G. Stork, Ph.A. Vries, C.G. de