Narrow Results

A common view among recent studies on purchasing power parity is that the post-Bretton Woods period is far too short to reveal any significant parity reversion in individual series of real exchange rates. The answer depends on the statistical techniques being used. This study uses alternative econometric time-series technique, which does not require long sample sizes, and reports strong evidence of mean reversion in dollar-based real exchange rates. Further analysis of the estimated impulse responses indicates that the persistence in real exchange rate changes is difficult to detect because the short and long run dynamics interact in such a way that the impulse response weights exhibit a rapid decay.

We offer insights on how distance-related trade costs may best be inferred from price-dispersion measures. Using a simple spatial model of price dispersion, we argue that measures of price dispersion that are not spatially informed can mislead researchers into concluding that distance-related costs are small even when such costs are the major determinant of price dispersion. With intra-United States data on eleven goods, we find that distance-related costs are large and are indeed underestimated when inferred from standard, non-spatial, price dispersion measures. Our empirical findings have implications for studies of market integration policies (such as trade liberalization and currency unions) and the significance of economic geography.

This study analyses financial liberalisation in Trinidad and Tobago within the context of the McKinnon–Shaw model. The broad objective of this article is to empirically investigate the validity of both the McKinnon complementarity hypothesis and the Shaw debt intermediation model in relation to Trinidad and Tobago. These two models purport that persuasive government intervention and involvement in the financial system through the regulatory and supervisory network, particularly in controlling interest rates and allocation of credit, tend to distort financial markets. Therefore, by the removal of administrative controls on the assets portfolio and pricing behaviour of financial institutions, interest rates will rise to levels that will result not only in increased savings and loanable funds but also in a more efficient allocation of these funds, providing, in turn, stimuli for economic growth. Utilising the cointegration approach, the empirical analysis is conducted with annual data from 1970 to 2001. The empirical results support both the McKinnon complementarity hypothesis and the Shaw debt intermediation hypothesis in the long run. That is to say, real interest rates have a significant influence on savings in the long run. However, the results indicate that the real interest rate plays an insignificant role in the Error Correction Model in the short run for both the McKinnon and Shaw theories. Hence, this article provides empirical validity for the McKinnon–Shaw financial liberalisation theory in Trinidad and Tobago over the long run. Thus policy makers should take explicit account of this result in the formulation of financial policy. The sustainability of this policy, however, depends on the appropriateness of other fiscal, monetary incomes and exchange rate policies.

The following sections are included:

• Introduction
• A Simple Non-Linear Exchange Rate Model
• The Model with Transactions Costs
• Solution of the Model
• Sensitivity Analysis
• The Stochastic Version of the Model
• The Effect of Permanent Shocks
• Empirical Relevance of the Model
• Is Chartism Evolutionary Stable?
• Conclusion
• Appendix 1: Diagnosis of GARCH Structure in the Simulated Exchange Rate Returns
• References

The rational expectations efficient market model of the exchange rate has failed empirically. In this paper, we develop a model of the exchange rate in which agents use simple forecasting rules. Based on an ex post evaluation of the relative profitability of these rules they decide whether to switch or not. In addition, transactions costs in the goods market are introduced. We show that this simple model creates great complexity in the market which is characterised by the fact that the exchange rate is disconnected from its fundamental most of the time. Finally, we show that this model mimicks most of the empirical puzzles uncovered in the literature.

In this paper, we analyze the effectiveness of the direct central bank interventions using a new effectiveness criterion. To this aim, we investigate the effects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate toward a fundamental value. Then, we investigate the role of central bank interventions for explaining the switching properties between the two types of agents. We find evidence showing that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.