Mohsen Bahmani-Oskooee

Stock prices and the effective exchange rate of the dollar

The literature on the relation between stock prices and exchange rates is very poor and includes few studies that have argued that exchange rate changes do effect stock prices.By relying on the portfolio approach to exchange rate determination, it is argued that a change in stock prices could also have an impact on exchange rates, i.e. there could be a two-way relationship between exchange rates and stock prices. Granger concept of causality as well as cointegration technique are employed to support this conjecture. The empirical results show that there is bidirectional causality between stock prices measured by S&P 500 index and the effective exchange rate of the dollar, at least in the short-run. The cointegration analysis reveals that there is no long-run relationship between two variables.

Determinants of international trade flows : The Case of Developing Countries

Abstract The question of magnitude and the time path of the trade flows to changes in the exchange rates and to changes in the price level is of emitent practical importance. To assess the above proposition, a distributed lag structure is imposed on the relative prices and on the effective exchange rate as the determinants of trade flows. Then, import and export demand functions are estimated for a sample of developing countries, using the Almon procedure. The empirical findings appeared to sustain Orcutts early conjecture that trade flows adjust differently to different price stimuli. More precisely, it was found that imports and exports reactions were quicker and the total response time was shorter when an exchange rate, rather than relative prices, caused a change in international prices.

The J-Curve: a literature review

Due to lag structure, currency devaluation is said to worsen the trade balance first and improve it later resulting in a pattern that resemble the letter J, hence the J-Curve phenomenon. Since its introduction by Magee in 1973 (Brooking Papers on Economic Activity, 1, pp. 303–25), a large number of studies have attempted to test the phenomenon using different techniques and different model specifications. The results are at best ambiguous and deserve to be collected together for the future generation of researchers and graduate students. This paper fills such a vacuum in the literature by reviewing the J-Curve related empirical papers.

Exchange rate volatility and trade flows: a review article

Purpose - Since the last review article by McKenzie, the literature has experienced a surge in the number of empirical articles. These new contributions, coupled with those that were overlooked by McKenzie, set the stage for this review. Many of the recent studies have been empirical in nature and these deserve specific attention. Thus, this paper aims to survey and review all of the studies by paying attention to the attributes outlined in the text. Design/methodology/approach - This paper examines the vast empirical literature, up to 2005, to assess the main trends in modeling and estimating these trade flows at the aggregate, bilateral, and sectoral levels. Findings - The increase in exchange-rate volatility since 1973 has had indeterminate effects on international export and import flows. Although it can be assumed that an increase in risk may lead to a reduction in economic activity, the theoretical literature provides justifications for positive or insignificant effects as well. Similar results have been found in empirical tests. While modeling techniques have evolved over time to incorporate new developments in econometric analysis, no single measure of exchange-rate volatility has dominated the literature. Originality/value - An argument put forward by the opponents of the floating exchange rates is that such rates introduce uncertainty into the foreign exchange market, which could deter trade flows. However, a theoretical argument is put forward by some to show that uncertainty could also boost trade flows if traders increase their trade volume to offset any decrease in future revenue due to exchange rate volatility. The empirical literature reviewed in this paper supports both views.

Long-run price elasticities and the Marshall-Lerner condition revisited

Abstract In estimating trade elasticities most previous researchers employed nonstationary data and OLS or 2SLS method. With new developments in the literature, this paper uses stationary data and Johansens cointegration analysis to provide new trade elasticities for almost 30 countries.

Exports, growth and causality in LDCs: A re-examination

Abstract Using Akaikes optimal lag criterion in a Granger causality test, the causal relationship between export growth and economic growth (and vice versa) is re-examined for 20 countries. It is argued that earlier analyses which ignore optimal lags in Granger or Sims causality tests suffer from certain shortcomings which are overcome by the present approach. The results suggest some support for the export promotion hypothesis, especially in the case of well-known NICs and thus differ from previous applications of Granger test which did not adopt an optimum lag criterion, and which showed no causality from export growth to economic growth in such cases. However, they are inconclusive in evaluating competing hypotheses.

Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs?

Abstract Using quarterly data over 1973–1988 period the cointegration analysis is used and it is shown that the trade balance and the real effective exchange rate of some LDCs are cointegrated in the long-run. This approach is argued to be a close substitute for testing the Marshall-Lerner condition.

Stability of the money demand function in Asian developing countries

Previous studies that estimated the money demand function in Asian developing countries either employed traditional estimation techniques or recently popularized cointegration technique. While the first group suffers from ‘spurious regression’ problems, the second group interpreted their finding of cointegration as a sign of stability of estimated parameters. This study, after incorporating the CUSUM and CUSUMSQ tests into cointegration analysis, shows that in some Asian countries even though real M1 or M2 monetary aggregates are cointegrated with their determinants, the estimated parameters are unstable.

The J- and S-curves: a survey of the recent literature

Purpose - Since the introduction of the concepts of the J- and S-curves, many researchers have tried to verify their validity empirically. This paper aims to review the related papers and to offer direction for future research. Design/methodology/approach - This is a review paper. As such, no method is employed here. Rather, the methodologies used by others to test the J- and S-curves are explained and reviewed. Findings - No new findings are offered since this is a review paper. Practical implications - The J- and S-curves show whether currency depreciation worsens the trade balance first before improving it. Since the majority of studies are country-specific, policymakers could benefit by learning whether currency depreciation will be effective in improving the trade balance. Originality/value - This is a literature review paper and its originality is in terms of collecting the literature together and presenting it in one single paper.

How sensitive are Britain's inpayments and outpayments to the value of the British pound

Purpose – To avoid aggregation bias by using trade data at bilateral level so that we can determine how sensitive are Britains inpayments and outpayments to the value of the British pound. Design/methodology/approach – The method is based on the bounds testing approach to cointegration and error-correction modeling. Findings – The main finding is that while UK inpayments are not sensitive to the exchange rate, her outpayments are. Research limitations/implications – Future research must concentrate on disaggregating data further, perhaps at commodity level. Practical implications – The results could be used to identify Britains trading partners against which Britain can devalue the pound and improve her trade balance. Originality/value – No study has attempted to test the impact of real depreciation of the pound on Britains payments and receipts with her major trading partners.