Juann H. Hung

Intervention strategies and exchange rate volatility: a noise trading perspective

This paper estimates and explains the impact of U.S. sterilized intervention on exchange rate volatility. We find that U.S. intervention reduced both yen/dollar and DM/dollar exchange rate volatilities during 1985-86, but increased them during 1987-89. These results make sense in a noise trading framework where the effectiveness of sterilized intervention may depend critically on the shrewdness of intervention strategies. Depending on circumstances, central banks may use noise trading channels through covert intervention, or activate signaling channels through overt intervention. The intervention exchange rate volatility relationship may change as intervention strategies adjust to differing circumstances.

An Absorption Approach to Modeling the US Current Account

This paper derives and estimates a current account model based on the absorption approach (which views the current account balance as the difference between domestic saving and investment). This approach provides a framework which allows drivers of cross-border financial flows and other determinants of saving and investment to be included in a current account model, an advantage not offered by the elasticity approach (which views the current account balance as the sum of net exports, net investment income, and net unilateral transfer). We estimate and compare vector error-correction models of the absorption and elasticity approaches, with the absorption model nesting the elasticity model. We find that (1) the restrictions imposed by the elasticity model are rejected; and (2) the mean-squared prediction errors of the absorption model are significantly smaller than those of the elasticity model.

The exchange rate's impact on overseas profits of U.S. multinationals

Abstract This paper argues that a dollar depreciation may raise U.S. overseas profits through three effects: 1) the translation effect: a lower dollar will translate a given level of foreign currency profits to a higher level of dollar profits; 2) the cost/volume effect: a lower dollar may increase an overseas affiliates foreign currency profits by lowering its production costs, or raising its sales volume; 3) the relative price/volume effect: a lower dollar may lower an affiliates foreign currency profits by making its output less price competitive. The empirical results suggest that a 1% dollar depreciation leads to about 0.94% increase in overseas profits. Given the theoretical one-to-one translation effect, this finding suggests that the exchange rates net volume effect on overseas profits of U.S. multinationals is negligible.