Dooyeon Cho

When Carry Trades in Currency Markets are Not Profitable

The success of the carry trade in international currency and money markets is related to the extent of the forward premium anomaly. We present evidence that the anomaly is a very time dependent phenomenon. We also formulate a model where the ex post returns from the carry trade are functionally related to the relative difference between the interest rate on the funding currency and the interest rate associated with the target currency; i.e. the relative interest rate opportunity (RIRO). We estimate a nonlinear smooth transition regime model that relates the RIRO to the returns on the carry trade, and the estimated transition function then represents the time periods when the carry trade was profitable and when it was not. The analysis indicates that the desirability of carry trading has declined and for many currencies has actually become unprofitable since the financial crisis of 2008.

Trend shifts in the forward premium and the predictability of excess returns in currency markets

ABSTRACT This article provides evidence that the forward premium involves structural changes in the trend function, which might affect the predictability of currency excess returns to be dependent on the choice of the sample period. Accounting for the shifts in trend for the forward premium reveals that currency excess returns for the Canadian dollar, Swiss franc, euro and pound against the US dollar are significantly predictable irrespective of the sample period selected. Another advantage of detrending the forward premium is that we can obtain more consistent slope coefficient estimates in the predictive regression, which enables us to make more consistent, dependable inferences about the excess return predictability.

An assessment of inflation targeting in a quantitative monetary business cycle framework: evidence from four early adopters

This article examines the effectiveness of inflation targeting (IT) to stabilize the real economy in advanced countries where IT was adopted in the early 1990s. To quantitatively assess IT, this article employs the monetary business cycle accounting methodology recently developed by Šustek (2011), which is an extended version of Chari, Kehoe, and McGrattan (2007), to monetary models. Our main finding is that the monetary policy wedge that captures economic fluctuations caused by monetary policy has significantly declined since the implementation of IT in the early 1990s. The results suggest that advanced economies, such as Australia, Canada, Sweden and the United Kingdom, that adopted IT in the early 1990s have been successful in stabilizing business cycle fluctuations.

Inequality and Growth: Nonlinear Evidence from Heterogeneous Panel Data

This paper investigates the nonlinear relationship between income inequality and economic growth using a heterogeneous panel data set of 77 countries. The estimated nonlinear function exhibits relatively smooth regime switching, as regards the income inequality level in the previous period. The point above which the time-varying coefficient estimate on inequality turns from positive to negative is found to be the Gini index of 24.5. The results suggest that while inequality hinders economic growth in most of the countries, it accelerates economic growth only in a country where the level of inequality is very low. Furthermore, the results reveal that the negative effects of income inequality on economic growth become more serious in developing countries whose level of inequality is relatively higher. The supplementary linear regressions with various specifications generally confirm the results obtained from the nonlinear model.

Non-linear adjustments on the excess sensitivity of consumption with liquidity constraints

ABSTRACT This article investigates the role of domestic credit markets in explaining the excess sensitivity of private consumption to disposable income using heterogeneous panel data of 19 OECD countries over the last two decades. We find that the degree of the excess sensitivity has decreased as the liquidity constraints of households have been alleviated: the estimated time-varying coefficients for the marginal propensity to consume vary between 0.16 for the countries with low liquidity constraints and 0.38 for those with high liquidity constraints. We also provide evidence that the excess sensitivity has been more prominent after the global financial crisis in some advanced countries, such as Japan, Spain, and the United States, where sharp deleveraging of households has been ongoing.

Nonlinear Effects of Government Debt on Private Consumption in OECD Countries

This paper investigates nonlinear effects of government debt on private consumption in 16 OECD countries. The estimated consumption function shows smooth regime switching depending on the debt-to-GDP ratio, and the threshold level of regime switching is found to be the ratio of 83.7 percent. The results reveal that a higher level of government debt crowds out private consumption to a greater extent, and that the degree of the crowding out effect has deteriorated since the global financial crisis.

An Assessment of Inflation Targeting in a Quantitative Monetary Business Cycle Framework

This paper examines the effectiveness of inflation targeting to stabilize the real economy of the advanced countries where inflation targeting was adopted in the early 1990s. This paper employs the monetary business cycle accounting methodology recently developed by Sustek (2011) which is an extended version of Chari, Kehoe, and McGrattan (2007) to monetary models in order to quantitatively assess inflation targeting. Our main finding is that the monetary policy wedge, which captures economic fluctuations caused by monetary policy, has significantly declined since the implementation of inflation targeting in the early 1990s. The results suggest that advanced economies such as Australia, Canada, Sweden, and the UK, that adopted inflation targeting in the early 1990s have been successful in stabilizing business cycle fluctuations.