A weight-conservative central banker setting policy with discretion and stabilizing the real exchange-rate-adjusted (REX) price level and the output gap can replicate the behavior of the rate of REX inflation and the output gap under policy from a timeless perspective.

There has been mixed evidence regarding the existence of rational bubbles in the foreign exchange markets. This paper introduces recently developed sequential unit root tests into the analysis of exchange rates bubbles. We find strong evidence of explosive behavior in the nominal Sterling-dollar...

This paper examines how much financial development facilitates economic growth by nonparametrically estimating the effect of financial development on reducing the costs of external finance to firms. The data reveal substantial evidence of diminishing returns to improvement in financial development.

We investigate the transmission effects of foreign exchange reserves on price level in China by utilizing a nonparametric model. First of all, we employ VAR co-integration analysis to obtain the number of lagged periods in every stage. And then we estimate the elasticity of foreign exchange...

Exchange rate arrangements and trade are inherently connected. Exchange rate volatility has a significant impact on trade volumes, and trading partners thus could affect each other’s exchange rate regime choice. This spatial effect among trading partners has been overlooked in empirical...

We construct a model of exchange rate target zones that allows the stochastic process, with a closed-form general solution, to include the possibility of lagged response of fundamentals.

Using a unique data set from the Bank of Canada, this paper presents the frequency domain analysis of a causal relationship between the Canada/US dollar exchange rate movements and currency order flows. The evidence shows that the existence as well as the direction of causality depends on the...

We demonstrate that the European Monetary Union (EMU) increases cross-border depositing but not lending among EMU countries by 31%. While being a member of the European Union (EU) increases cross-border loans by 49%, cross-border deposit volumes are unaffected.

The paper puts forward a driver currency hypothesis and assesses the driver currency effect empirically. The results are supportive.

We show that, in general, consistent estimates of cost pass-through are not obtained from reduced-form regressions of price on cost. We derive a formal approximation for the bias that arises even under standard orthogonality conditions. We provide guidance on the conditions under which bias may...