Kenneth Rogoff

Empirical exchange rate models of the seventies: Do they fit out of sample?

Abstract This study compares the out-of-sample forecasting accuracy of various structural and time series exchange rate models. We find that a random walk model performs as well as any estimated model at one to twelve month horizons for the dollar/pound, dollar/mark, dollar/yen and trade-weighted dollar exchange rates. The candidate structural models include the flexible-price (Frenkel-Bilson) and sticky-price (Dornbusch-Frankel) monetary models, and a sticky-price model which incorporates the current account (Hooper-Morton). The structural models perform poorly despite the fact that we base their forecasts on actual realized values of future explanatory variables.

The Optimal Degree of Commitment to an Intermediate Monetary Target

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Elections and Macroeconomic Policy Cycles

There is an extensive empirical literature on political business cycles, but its theoretical foundations are grounded in pre-rational expectations macroeconomic theory. Here we show that electoral cycles in taxes, government spending and money growth can be modeled as an equilibrium signaling process. The cycleis driven by temporary information asymmetries which can arise if, for example,the government has more current information on its performance in providing for national defense. Incumbents cheat least when their private informationis either extremely favorable or extremely unfavorable. An exogenous increase in the incumbent partyts popularity does not necessarily imply a damped policy cycle.

Perspectives on PPP and Long-Run Real Exchange Rates

Publisher Summary This chapter presents an overview of the long-run determinants of purchasing power parity (PPP). It reviews the huge time series literature testing simple PPP. This area has proven fruitful ground for applying modern methods for dealing with nonstationary and near-nonstationary time series. The chapter traces out the evolution of the literature from naive static tests of PPP to modern unit-root approaches for testing whether real exchange rates are stationary and to cointegration techniques—the most recent phase of PPP testing. The research on more disaggregated price data is discussed in the chapter, including a nearly two-hundred year data set on commodity prices in England and France during the seventeenth and eighteenth centuries. Aside from providing an extremely long data set, this historical data offers some perspective on the behavior of cross-country relative prices in more modern times. The chapter looks at some possible medium- and long-run determinants of the real exchange rate, particularly the supply-side determinants emphasized in the popular Balassa–Samuelson model. It also considers some evidence that positive demand shocks, such as unexpected increases in government spending, lead to medium-run appreciations of the real exchange rate.

Can international monetary policy cooperation be counterproductive

This paper demonstrates that increased international monetary cooperation may actually be counterproductive. The potential problem is that cooperation between central banks may exacerbate the credibility problem of central banks vis-a-vis the private sector. Coordinated monetary expansion yields a better output/inflation trade-off than unilateral expansion because it does not induce exchange rate depreciation. Wage setters realize that the incentives to inflate are greater in a cooperative regime, and thus time-consistent nominal wage rates are higher. Cooperation does improve responses to disturbances. Thus, a cooperative regime which contains institutional constraints on systematic inflation is definitely superior.

Global Current Account Imbalances and Exchange Rate Adjustments

We develop a three-region economic model to assess how a significant reduction in global current account imbalances might impact dollar, euro, and Asian real exchange rates under alternative scenarios. Sizable exchange rate shifts appear to be a necessary corollary of adjustment even under otherwise relatively benign scenarios where appropriate policy actions are taken (for example, to raise U.S. national saving or to make Asian exchange rates more flexible). Our baseline estimate suggests that a halving of the U.S. current account deficit would entail nearly a 20 percent appreciation of Asian real exchange rates versus the dollar and a slightly smaller rise in European currencies. Although an adverse scenario is not the most likely outcome, the risks appear to be significantly higher than they were five years ago.

Global Versus Country-Specific Productivity Shocks and the Current Account

The intertemporal approach to the current account is often regarded as theoretically elegant but of limited empirical significance. This paper derives highly tractable current account and investment specifications that we estimate without resorting to calibration or simulation methods. In time-series data for eight industrialized countries, we find that country-specific productivity shocks tend to worsen the current account, whereas global shocks have little effect. Both types of shock raise investment. It is a puzzle, however, for the intertemporal model that long-lasting local productivity shocks have a larger impact effect on investment than on current account.

North-South lending and endogenous domestic capital market inefficiencies☆

Abstract We develop an open-economy model of intertemporal trade under asymmetric information. Capital market imperfections are endogenous and depend on a countrys stage of economic development. Relative to the perfect-information benchmark, North-South capital flows are dampened (and possibly reversed) and world interest rates are lower. Whereas riskless rates are equalized across borders, the domestic loan rate is higher in poorer countries. The model can be applied to a number of policy issues including the debt-overhang problem, the indexation of foreign public debts, and the effect of income distribution on growth.

Evolution and Performance of Exchange Rate Regimes

Using recent advances in the classification of exchange rate regimes, this paper finds no support for the popular bipolar view that countries will tend over time to move to the polar extremes of free float or rigid peg. Rather, intermediate regimes have shown remarkable durability. The analysis suggests that as economies mature, the value of exchange rate flexibility rises. For countries at a relatively early stage of financial development and integration, fixed or relatively rigid regimes appear to offer some anti-inflation credibility gain without compromising growth objectives. As countries develop economically and institutionally, there appear to be considerable benefits to more flexible regimes. For developed countries that are not in a currency union, relatively flexible exchange rate regimes appear to offer higher growth without any cost in credibility.

The Forgotten History of Domestic Debt

The literature on domestic debt default is sparse, as are the data. We compile a database on public debt that spans the nineteenth century to 2010. Our findings are as follows. First, domestic debt accounts for almost two-thirds of public debt. Second, the data help to explain the puzzle of why countries default on external debts at seemingly low debt thresholds. Third, domestic debt (which is often larger than the monetary base in the run-up to high inflation) has largely been ignored in the inflation literature. Last, the view that domestic residents are junior to external creditors does not find broad support.