Steven Husted

Real Exchange Rates under the Gold Standard

Purchasing power parity is one of the most important equilibrium conditions in international macroeconomics. Empirically, it is also one of the most hotly contested. Numerous recent studies, for example, have sought to determine the validity of purchasing power parity using data from the post-Bretton Woods float and have reached different conclusions. We assert that most such studies are flawed for two reasons. First, the post-1973 data contain, by definition, only a very limited amount of the low-frequency information relevant for examination of long-run parity. Second, the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low-frequency dynamics. Both deficiencies are rectified in the present paper, with dramatic results. We construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period, and we study deviations from parity using long-memory models that allow for subtle forms of mean reversion. For each real exchange rate, we find that purchasing power parity holds in the long run.

Monetary-based models of the exchange rate: a panel perspective☆

In this paper we re-examine the monetary model of the exchange rate in a panel context. In particular, we examine three panel data sets constructed for the US dollar, German mark and Japanese yen exchange rates using annual data for the recent floating experience. Amongst our findings are: compelling evidence of cointegrating relationships in all three panels; an ERM effect, in the sence that the mark denominated panel produces point estimates of monetary approach coefficients which are close to their priors; relatively rapid speeds of adjustment to the monetary approach equilibrium (half-lives of between 3 and 6 years).

The Asian currency crash: were badly driven fundamentals to blame?

This paper examines the extent to which a number of currencies central to the Asian currency crisis were misaligned at the end of 1996. A well-known fundamentals-based exchange rate model, the monetary approach to exchange rate behavior, is used to produce estimates of equilibrium exchange rates for a number of Asian currencies. The estimates, calculated using panel methods, are shown to be consistent with the underlying model. Most significantly, very little evidence of misalignment is found to exist in 1996. This suggests that the cause of the Asian crash cannot be attributed to traditional fundamentals.

Linear Rational Expectations Equilibrium Laws of Motion for Selected U.S. Raw Material Imports

In this paper, the authors develop and estimate time-series models of the rational-expectations equilibrium laws of m otion for several U.S. commodity imports: bauxite, cocoa, coffee, and petroleum. The theoretical model is based upon the optimizing behavi or of firms that import in the presence of supply shocks, delivery la gs, and adjustment and inventory holding costs. One of the important features of the empirical model is that the authors are able to estim ate elasticities that distinguish between responses to changes in the environment that importers expect to be relatively temporary versus relatively permanent. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

On measuring the nearness of near moneys revisited

Abstract In this paper we re-examine the theoretical foundations and empirical estimation of models which incorporate a CES utility function to study the nearness of money substitutes. We show that previous studies using these models have been subject to a number of theoretical and empirical flaws. The result of these flaws has been to overestimate the degree of substitutability between money and near money assets. We show that when these errors are corrected, estimates of substitution elasticities are several times smaller than even those of the most recent studies and therefore are more in line with estimates from more traditional demand for money studies.

Distributed lags and intermediate good imports

Abstract In this paper we draw upon some recent developments in the theory of dynamic economics and econometrics to characterize the time series behavior of intermediate good imports. It is shown that adjustment costs, delivery lags, and inventory holding costs considerations lead to distributed lag import demand functions that are not subject to the Nerlove (1972) and Lucas (1976) critiques of ad hoc and fixed distributed lag modelling.

Trade Pattern Persistence

Internationalization of the world economy has made trade a key factor in the growth potential of nearly every nation’s economy. Hence, economists have become increasingly interested in the determinants of international trade and competitiveness. Empirical Methods in International Trade captures the many aspects of this trend in globalization through practical techniques well-founded in economic theory. The authors, comprising some of the most influential applied international economists of their generation, use cutting-edge models to develop empirical approaches to critical aspects of economic interchange. These approaches are developed and explained carefully with the goal of making them accessible to a wide audience.

Towards a Reconciliation of the Empirical Evidence on the Monetary Approach to Exchange Rate Determination

The monetary approach to exchange rate determination has served as a theoretical workhorse in open economy macroeconomics, yet empirical evidence concerning its validity is mixed: tests based on structural forms of the model are typically negative, while cross-equation restrictions tests based on nonstructural representations are typically favorable. The authors s eek a reconciliation of these results by investigating the small-sample performance of cross-equation restrictions tests. Their investigatio n indicates that the tests have surprisingly low power in detecting nontrivial departures from the model, thus the authors conclude that something is amiss with standard versions of the monetary approach t o exchange rate determination. Copyright 1993 by MIT Press.

The Rise of Chinese Exports

The growth of Chinese exports both in volume and in market share over the past two decades is a singular event in the history of world trade. Using data from 1995-2005, we document this growth in a variety of ways. First, we show that the expanded trade is pervasive. Virtually every country in the world has seen China claim a larger share of its import market. Then, we use Constant Market Share (CMS) analysis to try to determine which country or countries have lost market share as China’s trade has grown. Contrary to much discussion in the popular press, we find strong evidence that other developing countries have not seen export shares fall as a result of China’s gains. Rather, our results suggest that China’s share growth has come largely at the expense of exporters based in Japan and the United States. We then turn to an attempt to identify the factor or factors responsible for export growth. Using a large set of data disaggregated at the 5-digit SITC level on trade among 75 countries we look at changes over the period in import unit values. We find that China has maintained a relatively constant price advantage over U.S. and Japanese exports. In addition, we use 3-digit level data to estimate a heterogeneous-firm model that examines the probability of successful entry by a firm into an export market. We find strong evidence that the growth of Chinese exports is due to entry by new firms within any sectors, probably engendered by firm level technological advance or entry of foreign firms that have begun to produce in and export from China.

Nominal Equilibrium Exchange Rate Models: A Panel Perspective

Modeling the determinants of long-run, or equilibrium, exchange rates is currently extremely fashionable.1 In many ways this work has been inspired by recent developments in the time series literature, rather than any new theoretical interest in the determinants of long-run exchange rates. Nevertheless, this work is interesting since, in summary form, it suggests that sensible long-run relationships can be derived, particularly when the span of the data is increased from the recent floating period to a period encompassing around one hundred years of annual data.2 By sensible long-run relationships we mean, for example, when a researcher conditions an exchange rate on relative prices she finds that the exchange rate is homogeneous with respect to relative prices and that the adjustment to equilibrium, following a disturbance, takes around eight years to complete. One key problem, though, in extending the data span on an historical basis is that it may expose the investigated relationship to destabilizing regime changes. Also, for relationships which involve price indices (and indeed non-indexed variables) it is not clear how homogeneous these are over long historical periods in which the underlying basket must have changed dramatically.