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This paper analyses the role of the real exchange rate in a structural vector autoregression framework for the United Kingdom, Euro area, Japan, and Canada vis-á-vis the United States. A new identification strategy is proposed building on sign restrictions. The results are compared to the benchmark conventional approach of Clarida and Gali (1994) based on long-run zero restrictions. Although the restrictions are derived from the same theoretical model, the results are strikingly different. In contrast to the benchmark model, an important role for nominal shocks in explaining real exchange rate fluctuations is found. Hence, the exchange rate can rather be considered as a source of shocks instead of a shock absorber. [ABSTRACT FROM AUTHOR]

In this paper a panel of vector error-correction models based on a common long-run relationship is utilized to test whether the Euro exchange rates of Canada, Japan, and the United States have a long-run link with monetary fundamentals. We use both exchange relationships relative to the full EMU area (with synthetic aggregates for the pre-EMU period) and relative to Germany solely. Compared to existing cointegration frameworks our approach provides more evidence that the aforementioned exchange rates are consistent with a rational expectations-based monetary exchange rate model based on a common long-run relationship, albeit with a long-run impact of relative income that is higher than predicted by the theory. As a next step we analyze the out-of-sample fit of this common long-run exchange rate model relative to naive random walk-based forecasts. These forecasting evaluations indicate that the monetary fundamentals-based common long-run model is superior to both random walk-based forecasts and standard cointegrated VAR model-based forecasts, especially at horizons of 2 to 4 years. [ABSTRACT FROM AUTHOR]

Abstract: The goal of this paper is to examine the importance of permanent and transitory shocks using a more efficient trend-cycle decomposition of the real exchange rate series. Our main contribution is that in measuring the impact of shocks, we not only impose common trend restrictions but also common cycle restrictions. We later confirm, through a post sample forecasting exercise, the efficiency gains from imposing common cycle restrictions. Our results indicate that permanent shocks are responsible for the bulk of the real exchange rate variations for Japan, Italy, Germany, France, and the UK vis-à-vis the US dollar over short horizons. For Canada, however, transitory shocks are dominant over the short horizon. In sum, while for Japan, France, and Italy, around 15% of the variation in real exchange rate is due to transitory shocks, for Canada, Germany and the UK, over 25% of the variations over the short horizon are due to transitory shocks. Thus, we claim that the role of transitory shocks should not be ignored. [Copyright &y& Elsevier]

This paper proposes a simple vector autoregressions (VAR) model with (real) output and exchange rate shock on interest rates. Rather than assuming non-recursive identification schemes, we test the identifying assumption of the error term decompositions. Applying the model to quarterly data on major currencies against the U.S. dollar (USD) from 1974 to 1997, interest rate shocks explain--after 3 years--16% of Canadian dollar/USD (CAD) real exchange rate variations and less than 2% for the mark/USD and yen/USD. Positive innovations of interest rates bring about (transitory) CAD real appreciations in differences and (permanent) appreciations in levels. Canadian real output is more explained by domestic interest rate shocks (19%) than Germany's (5) or Japan's (0.2%). Canada is smaller than the other economies and CAD has been shown to suffer from "fear of floating". Our findings support the proposition that domestic output variance under fixed exchange rates. They are also consistent with structural interpretations of the VAR. [ABSTRACT FROM AUTHOR]

We revisit a significant research topic on exchange rate behavior by restating the test procedures with an appropriate econometric methodology to re-examine three aspects. (i) Does the inflation (price) factor affect nominal exchange rate? (ii) Do relative interest rates affect a country's exchange rate? (iii) Do the price and interest rate effects hold if controls for non-parity factors are embedded in tests? The quarterly data series for this study are taken over 55 years. The traditional parity condition model with price and interest rate as criterion variables is extended to take into account recently-verified non-parity factors, namely trade, productivity and foreign reserves. The results affirm that both parity factors and also the non-parity factors significantly affect the exchange rates of Canada, Japan, the United Kingdom and the United States. In our view, these findings relating to four free-floating currencies help extend our knowledge on how currency behavior is consistent with parity and non-parity theorems using a relevant methodological approach in this study. [ABSTRACT FROM AUTHOR]

This study examines the impact of shocks to exchange rate uncertainty (volatility) on foreign direct investment (FDI) in Canada, Japan, the United Kingdom, and the United States. The analysis is conducted using vector autoregressive models that contain the price level, real output, the real exchange rate, the volatility of the real exchange rate, the interest rate, and FDI. The results from variance decompositions yield public policy implications. In Canada, Japan, and the United States, innovations to exchange rate uncertainty explain significant portions of the forecast error variance in FDI at longer time horizons. The impulse response functions indicate that, to the extent that shocks to exchange rate volatility have an impact on FDI, the impact is positive and takes place with a lag. [ABSTRACT FROM AUTHOR]

This article investigates the interdependence of stock returns and exchange rate changes within the same economy. Six countries were tested for volatility spillovers, namely the U.S., Great Britain, Japan, Germany, Canada and France. Evidence of spillovers from stock returns to exchange rate changes is found for all countries except Germany. These results suggest that the asset approach to exchange rate determination is valid when formulated in terms of the second moments of the exchange rate distribution for these countries. The spillovers from stock returns to exchange rate changes are symmetric in nature. Volatility spillovers from exchange rate changes to stock returns are insignificant for all countries.

This paper has tested a variant of purchasing power parity to determine if exchange rate adjusted price levels between the United States and Japan, the United Kingdom and Canada form a cointegrated system. Tests for cointegration were performed over a time period that spanned both fixed and flexible exchange rates, and for fixed and flexible rate subperiods.
Evidence favorable to PPP is marginal with a number of test statistics bordering on significance at the 0.10 level. What evidence there is comes primarily from the wholesale price index, thus supporting the arbitrage view of PPP over the alternative which stresses the overall purchasing power of money. Comparing periods, the strongest support for cointegration comes from the fixed rate subperiod, when the Japanese and possibly the Canadian WPIs form cointegrated systems with the US WPI. With the possible exception of Canada (WPI), cointegration is rejected for the recent period of flexible exchange rates. [ABSTRACT FROM AUTHOR]

The impact of lags in the production and marketing of agricultural products on the degree of exchange rate pass-through in export prices is investigated. The predictions of the theoretical model are tested by investigating Canadian pork export prices in the United States and Japan. The empirical methodology accounts for unit root and cointegration using the dynamic seemingly unrelated regression framework and a minimum distance estimator. Predetermined hog supplies have a statistically significant impact on export prices of two out of three Canadian provinces. The degree of misspecification involved with standard pass-through models that do not account for production lags is also illustrated. [ABSTRACT FROM AUTHOR]