Browsing by Subject "F42"

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  • Korhonen, Iikka; Wachtel, Paul (2005)
    BOFIT Discussion Papers 2/2005
    Published in Research in International Business and Finance Vol. 20, No. 2 (2006), pp. 215-226
    We assess the extent and speed of exchange rate pass-through in the countries of the Commonwealth of Independent States (CIS).We do this in the framework of vector autoregressive regressions, utilising impulse functions and variance decompositions with monthly data that starts in 1999 in order to avoid periods of very high inflation and the Russian crisis.We find that exchange rate movements have a clear impact on price developments in the CIS countries.The speed of the pass-through is also fairly high: in most cases the full effect is transmitted into domestic prices in less than 12 months.Unlike in many other emerging market economies, an additional effect from US prices on to domestic prices is not significant.The extent of the exchange rate pass-through is usually much higher than in our benchmark group of emerging market countries.Variance decomposition shows that the relative share of exchange rates in explaining changes in domestic prices is higher in the CIS countries than in the benchmark group. Our results indicate that policy-makers in the CIS countries need to pay more attention to exchange rate movements than in many other emerging market countries.Key words: exchange rate pass-through, inflation, exchange rate regime, transition countries JEL: E31, E42, F31, F42
  • Song, Ke; Xia, Le (2019)
    BOFIT Discussion Papers 19/2019
    This research empirically examines the impact of China’s Renminbi (RMB) bilateral swap agree-ments (BSAs) on the usage of the currency in cross-border trade transactions. By using a unique dataset from SWIFT including cross-border settlement messages of 91 countries/regions between October 2010 and November 2015, we confirm that the signing of a RMB BSA helps to increase the number, the value and the proportion of RMB settlement in cross-border trade. Our results are robust with respect to the choice of different models, including multi-level mixed model, two-stage regression model, and difference-in-difference model. In addition to justifying the effectiveness of China’s BSA-signing strategy to promote the RMB usage in trade settlement, our results clarify that the signing of those RMB BSAs is not purely for China’s political ends as some scholars claim.
  • Campos, Nauro F.; Fidrmuc, Jarko; Korhonen, Iikka (2019)
    International Review of Financial Analysis January
    Published in Bank of Finland Research Discussion Papers 28/2017
    This paper offers a systematic evaluation of the evidence on the effects of currency unions on the synchronisation of economic activity. Focusing on Europe, we construct a database of about 3000 business cycles synchronisation coefficients including their design and estimation characteristics. We find that: (1) synchronisation increased from about 0.4 before the introduction of the euro in 1999 to 0.6 afterwards; (2) this increase occurred in both euro and non-euro countries (larger in former); and (3) there is evidence of country-specific publication bias.
  • Campos, Nauro F.; Fidrmuc, Jarko; Korhonen, Iikka (2017)
    Bank of Finland Research Discussion Papers 28/2017
    Published in International Review of Financial Analysis 61 ; January ; 2019 https://doi.org/10.1016/j.irfa.2018.11.012
    This paper offers a first systematic evaluation of the evidence on the effects of currency unions on the synchronisation of economic activity. Focusing on Europe, we construct a database of about 3,000 business cycle synchronisation coefficients as well as their design and estimation characteristics. We find that: (1) synchronisation increased from about 0.4 before the introduction of the euro in 1999 to 0.6 afterwards; (2) this increase occurred in both euro and non-euro countries (larger in former); (3) there is evidence of country-specific publication bias; (4) our difference-in-differences estimates suggest the euro accounted for approximately half of the observed increase in synchronisation.
  • Garcia-Herrero, Alicia; Xia, Le (2013)
    BOFIT Discussion Papers 12/2013
    Published in Asia-Pacific Journal of Accounting & Economics, Volume 22, Issue 4, 2015 p. 368-383 as RMB Bilateral Swap Agreements: how China chooses its partners?
    This paper analyzes empirically what determines the choice of countries signing an RMB-denominated Bilateral Swap Agreement (BSA) with China. The gravity motif is predominant (both in terms of country size and distance from China) but so is the trade motif, in terms of both exports to China and the existence of an FTA with China. Institutional soundness also matters since countries with better government and less corruption are more likely to sign an RMB-denominated BSA. This contravenes the view that China has used RMB BSAs as a soft power tool in more corrupted countries. However, the fact that China has a preference for countries with a default history and a closed capital account calls for caution. Keywords: RMB internationalization, bilateral swap agreements. JEL: F33, F36, F42
  • Mehrotra, Aaron; Moessner, Richhild; Shu, Chang (2019)
    BOFIT Discussion Papers 20/2019
    We analyse how movements in the components of sovereign bond yields in the United States affect long-term rates in 10 advanced and 21 emerging economies. The paper documents significant global spillovers from both the expectations and term premia components of long-term rates in the United States. We find that spillovers to domestic long-term rates in emerging economies from the US expectations components tend to be more sizeable than those from the US term premia. Finally, spillovers from US term premia are larger when an emerging economy displays greater macro-financial vulnerabilities.
  • Tarkka, Juha; Kortelainen, Mika (2005)
    Bank of Finland Research Discussion Papers 18/2005
    We study the effect of the zero bound constraint of interest rates on international transmission of economic policy and supply shocks. After some preliminary analysis with a simple theoretical model, we apply a rich two-country simulation model to the problem.The model framework consists of EDGE, Bank of Finland's dynamic equilibrium model for the euro area, linked to a similar model calibrated to resemble the US economy.The models have new Keynesian properties because of price rigidities and forward-looking pricing, consumption and investment behaviour.We assume freely floating exchange rates.Monetary policies are modelled with Taylor type policy rules, taking into account the zero bound constraint for interest rates.We find that effects of policy and supply side shocks differ significantly from the 'normal' situation if one of the countries is in the 'liquidity trap', ie if the interest rate is constrained by the zero bound.Being in the liquidity trap amplifies the domestic effects of fiscal policy, but mitigates its spillover to abroad.Changing the long run inflation target, which does not have international spillovers in the normal case, does have effects abroad if the country where the target is changed is in a temporary liquidity trap.The effects of supply shocks are also very different in the liquidity trap case compared to the normal case. Key words: zero bound, liquidity trap, international spillovers, edge JEL classification numbers: F42, F47
  • Isoré, Marlène (2016)
    Bank of Finland Research Discussion Papers 28/2016
    This paper develops a two-country model in which transmission of financial shocks arises despite a flexible exchange rate regime and substitutable financial assets, contrary to the open-economy literature results under these two conditions. The search and matching approach first accounts for the time needed to restore normal functioning of financial markets following a disruption. It also allows dissociating two types of financial shocks: (i) pure liquidity contractions imply negative co-movements of home and foreign outputs, so that the model nests the standard open macroeconomy results as a particular case; (ii) shocks to banks’ capitalization costs in one country do generate international financial contagion.
  • Fidrmuc, Jarko; Korhonen, Iikka (2001)
    BOFIT Discussion Papers 14/2001
    Published in Economic Systems vol 27, no 3 (2003), pp. 313-334
    We assess the correlation of supply and demand shocks between the euro area, the EU accession countries and also the present EU countries.Shocks are recovered from estimated structural vector autoregressive models.We find that some advanced accession countries have quite high correlation with the euro area.However, even for many high income accession countries the degree of correlation remains low.Also, in the 90s many EU countries seemed to have much higher correlation with the core euro area countries than in previous decades.Continuing integration within the EU seems to have aligned business cycles of the countries as well. Keywords: optimal currency area, monetary union, EU enlargement JEL classification numbers: E32, F42
  • Korhonen, Iikka (2001)
    BOFIT Discussion Papers 9/2001
    Published in Economics of Transition vol 11, no 1 (2003), pp. 177-196
    This note looks at the correlation of short-term business cycles in the euro area and the EU accession countries.The issue is assessed with the help of vector autoregressive models.There are clear differences in the degree of correlation between accession countries.For Hungary and Slovenia, euro area shocks can explain a large share of variation in industrial production, while for some countries this influence is much smaller.For the latter countries, the results imply that joining the monetary union could entail reasonably large costs, unless their business cycles converge closer to the euro area cycle.Generally, for smaller countries the relative influence of the euro area business cycle is larger.Also, it is found that the most advanced accession countries are at least as integrated with the euro area business cycle as some small present member countries of the monetary union.Keywords: optimal currency area, monetary union, EU enlargement JEL classification: E32, F15, F42
  • Lanne, Markku; Vesala, Timo (2006)
    Bank of Finland Research Discussion Papers 11/2006
    We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets.Our argument stems from the decentralised trading practice and the presumable discrepancy between informed and uninformed traders valuations.Since informed traders valuations are likely to be less dispersed, a transaction tax penalises informed trades disproportionately, leading to increased volatility.Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility. Key words: transaction tax, exchange rates, volatility JEL classification numbers: F31, F42, G15, G28
  • Fidrmuc, Jarko; Korhonen, Iikka (2003)
    BOFIT Discussion Papers 6/2003
    Published in Comparative Economic Studies vol. 46 no 1 (2004), pp. 45-62 https://doi.org/10.1057/palgrave.ces.8100040
    We assess the correlation of supply and demand shocks between current countries in the euro area and EU accession candidates from 1993/1995 to 2002.Supply and demand shocks are recovered from estimated structural VAR models of output growth and inflation. Notably, the economic slowdown between 2000 and 2002 increased heterogeneity of business cycles between the euro area and acceding counties.We find that several acceding countries have a quite high correlation of underlying shocks with the euro area and conclude that continuing integration within the EU is likely to align the business cycles of these countries in a manner similar to the synchronisation of supply and demand shocks we document for the EU in the 1990s.JEL numbers E32, F42.Keywords: Optimum currency area, EU enlargement, structural VAR.
  • Kozluk, Tomasz; Mehrotra, Aaron (2008)
    BOFIT Discussion Papers 5/2008
    Published in Economics of Transition, Vol. 17, Issue 1, 2009, pp. 121-145
    We study the effects of Chinese monetary policy shocks on China s major trading partners in East Asia by estimating structural vector autoregressive (SVAR) models for six economies in the region. We find that a monetary expansion in Mainland China leads to an increase in real GDP (temporary) and the price level (permanent) in a number of economies in our sample, most notably in Hong Kong and the Philippines. The impact could result from intertemporal substitution present in a general equilibrium framework which allows for positive domestic impacts of foreign monetary expansions. Our results emphasize the growing importance of China for its neighboring economies and the significance of Chinese shocks for the design of monetary policy in Asian economies. Keywords: monetary policy shocks, Asian production chain, SVAR, East Asia, China, JEL: E52, F42
  • Tervala, Juha (2007)
    Bank of Finland Research Discussion Papers 29/2007
    This paper analyses the international transmission of monetary policy in a case where all export prices are set in US dollars. 'Dollar pricing' implies that the international effects of US monetary shocks are different to those of European shocks because of asymmetric exchange rate pass-through to import prices. A dollar pricing model can explain the observed asymmetry in the transmission of monetary policy: US monetary policy affects US output more than European monetary policy affects European output. I also show that the dollar pricing model reintroduces the current account as an important channel through which monetary policy affects welfare in the short run. The paper concludes that under dollar pricing monetary expansion is a beggar-thy-neighbour policy. Keywords: open economy macroeconomics, monetary policy, international policy transmission JEL classification numbers: F41, F42, F30
  • Faryna, Oleksandr; Simola, Heli (2018)
    BOFIT Discussion Papers 17/2018
    Published in Economic Systems, Volume 45, Issue 2, June 2021, 100769
    This paper employs a Global Vector Auto Regressive (GVAR) model to study the evolution of the response of the Commonwealth of Independent States (CIS) to foreign output and oil price shocks. During a two-decade observation period, cross-country trade and financial linkages experience no-table changes. We find CIS countries highly sensitive to global and regional shocks, with that sensitivity increasing after the global financial crisis. CIS countries show strongest responses to output shocks originating in the US, Russia and within the region itself, but their sensitivity to euro area shocks also increases substantially. Despite growing trade relations with China, the responses of CIS countries to output shocks originating in China are still relatively moderate.
  • Faryna, Oleksandr; Simola, Heli (2021)
    Economic Systems 2 ; June
    Published in BOFIT DP 17/2018.
    This paper employs a Global Vector Auto Regressive (GVAR) model to study the evolution of the response of the Commonwealth of Independent States (CIS) to foreign output and oil price shocks. During an observation period of two decades, cross-country trade and financial linkages experience notable changes. We find CIS countries to be highly sensitive to global and regional shocks, with that sensitivity increasing after the global financial crisis. CIS countries show the strongest responses to output shocks originating in the US, Russia and within the region itself, but their sensitivity to euro area shocks also increases substantially. Despite growing trade relations with China, the responses of CIS countries to output shocks originating in China are still relatively moderate.
  • Holz, Carsten A.; Mehrotra, Aaron (2014)
    BOFIT Discussion Papers 3/2014
    Published in The World Economy, Vol. 39, Issue 8, Aug. 2016, Pages 1109-1127 as Wage and price dynamics in China
    This study finds that the growth in labour costs in China is not passed through fully to final prices in China, neither in the tradable goods sector nor in the economy as a whole. This probably reflects the strong pressure on profit margins from a highly competitive environment, especially in manufactured goods. The potential implications of labour cost increases in China for global inflation pressures are also discussed. Keywords: labour costs, inflation, China, global economic slack, globalization JEL Classification: E31; F42; J30