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Current Working Papers

  • 'Is Official Exchange Rate Intervention Effective?', January 2002. Abstract: I examine the effectiveness of exchange rate intervention within the context of a Markov-switching model for the real exchange rate. The probability of switching between stable and unstable regimes depends nonlinearly upon intervention, the degree of misalignment and the duration of the regime. Applying this to dollar-mark data for the period 1985-1998, we find that intervention increases the probability of stability when the rate is misaligned, and that its influence grows with the degree of misalignment. However, intervention within a small neighbourhood of equilibrium will result in a greater probability of instability. JEL classification: F31, F41, C1. Keywords: Real exchange rate; official intervention; real exchange rate; mean reversion; Markov switching.


  • 'International Capital Crunches: The Time-Varying Role of Informational Asymmetries', with Ashoka Mody, November 2001. Abstract: We examine the determinants of capital flows to four developing countries during the 1990s using an explicitly disequilibrium econometric framework in which the supply and demand for capital are not necessarily equal and the actual amount of the flow is determined by the 'short side' of the market. We are thus able to detect instances of 'international capital crunch' - where capital flows are curtailed because of supply-side rationing - and to relate these instances to movements in the underlying fundamentals. The analysis highlights the role of asymmetric information - as distinct from the traditional concern with default risk - in conditioning capital flows. JEL Classifications: F320, F340, O190. Keywords:  Capital flows; emerging markets; informational asymmetery; capital crunch; disequilibrium modeling.
  • 'Nonlinear Permanent-Temporary Decompositions', with Richard H. Clarida (Columbia University), November 2001. Abstract: We suggest a method of decomposing univariate and multivariate nonlinear processes into their permanent and temporary components, extending the analysis of Beveridge and Nelson (1981) and Stock and Watson (1987). We provide an application in the univariate nonlinear case to recent work on nonlinearities in the US business cycle, and in the multivariate nonlinear case to recent work on asymmetric nonlinear adjustment in the US term structure of interest rates. JEL Classification: C22, C32, E32, E43. Keywords: nonlinearity, decomposition, business cycle, interest rate term structure.
  • 'On International Real Interest Rate Differentials, Purchasing Power Parity and the Behaviour of Real Exchange Rates: The Resolution of a Conundrum' with Lucio Sarno (Warwick Business School), November 2001. Abstract:  According to one strand of the international finance literature, market efficiency implies that the real exchange rate follows a martingale process, in direct conflict with the long-run absolute purchasing power parity hypothesis, which requires a stationary real exchange rate process. This conflict between market efficiency and long-run PPP appears as something of a conundrum. We resolve this conundrum by relaxing the assumption of a constant real interest rate differential and analyzing the vector equilibrium correction system linking prices and the exchange rate, and draw out the economic intuition of our result. JEL classification:} F31. Keywords: purchasing power parity; real exchange rate; real interest rate differential; random walk.
  • 'Predicting the Term Structure of Interest Rates: The Role of Asymmetries and Regime-Switching' with Richard H. Clarida (Columbia University), Lucio Sarno (Warwick Business School) and Giorgio Valente (Warwick Business School) , February 2002. Abstract: Drawing on the recent theoretical and empirical literature on the term structure of interest rates, we develop empirical models of the term structure of eurodeposit rates for the US, Germany and Japan. Specifically, we develop nonlinear vector error correction models which allow both asymmetry of adjustment and discrete regime switching. The models are then used to provide forecasts of the term structure and are shown to outperform alternative predictors. JEL classification: E43, E47. Keywords: term structure of interest rates; asymmetric adjustment; nonlinear vector autoregression; Markov switching.