Exchange Rate Policy in Europe

251 Pages·1997·18.98 MB·English

by  Pavlos Karadeloglou (eds.)

EXCHANGE RATE POLICY IN EUROPE
APPLIED ECONOMETRICS ASSOCIATION SERIES
General Editors: Jean H. P. Paelinck, Emeritus Professor, Erasmus
University, Rotterdam, and Henri Serbat, Chamber of Commerce,
Paris
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Exchange Rate Policy in
Europe
Edited by
Pav los Karadeloglou
Economist
Bank of Greece
First published in Great Britain 1997 by
MACMILLAN PRESS LTD
Houndmills. Basingstoke. Hampshire RG21 6XS and London
Companies and representatives throughout the world
A catalogue record for this book is available from the British Library.
ISBN 978-1-349-25757-7 ISBN 978-1-349-25755-3 (eBook)
DOI 10.1007/978-1-349-25755-3
First published in the United States of America 1997 by
ST. MARTIN'S PRESS, INC.,
Scholarly and Reference Division,
175 Fifth Avenue. New York. N.Y. 10010
ISBN 978-0-312-17497-2
Library of Congress Cataloging-in-Publication Data
Exchange rate policy in Europe 1 edited by Pavlos Karadeloglou.
p. cm. - (Applied econometrics association series)
Articles presented at the XLV I Applied Econometrics Association
Conference on Exchange rates held in Heigerloch Castle (Germany) in
1995.
Includes bibliographical references and index.
ISBN 978-0-312-17497-2
I. Foreign exchange rates-Europe-Congresses. 2. Foreign
exchange rates-Europe-Econometric models-Congresses. 3. Monetary
policy-Europe-Congresses. I. Karadeloglou, Pavlos V.
II. Series.
HG3942.E99 1997
332.4'56'09~21 97-1302
CIP
© Applied Econometrics Association 1997
Softcover reprint of the hardcover 18t edition 1997
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10987654321
06 05 04 03 02 01 00 99 98 97
Contents
List of Tables vii
List of Figures x
Notes on the Contributors xii
Foreword Pavlos Karadeloglou xix
Introduction: The Evolution towards European Monetary
Union Robert Raymond 1
Part I Econometric Aspects of Excbange Rate
Determination in Europe
1. Are Dollar Exchange Rates Cointegrated After All?
Eric Girardin and Velayoudom Marimoutou 7
2. Modelling Exchange Rates Using MARS
Jan de Gooijer and Horst Krager 24
3. Sterling'S Relationship with the Deutschmark: A
Probabilistic Reduction Approach Guglielmo Maria
Caporale and Nikitas Pittis 45
4. Purchasing Power Parity and Cointegration: The Case
of Greek Exchange Rates George B. Hondroyiannis and
Evangelia Papapetrou 60
Part II EMS and Exchange Rate Policy
5. German Interest Rates and the European Monetary
System Peter J.G. Vlaar 83
6. Currency Substitution and Exchange Rate Policy
within the European Union Eric J. Pentecost 110
7. Budgetary Implications of a European Central Bank -
A Purely Strategic Perspective Bas van Aarle,
A. Lans Bovenberg and Matthias G. Raith 132
v
vi Contents
Part 01 Intervention on European Exchange Rate Markets
8. Target Zones: Testing the Intervention Mechanism for the
European Currencies Pavlos Karadeloglou and Christos
Papazoglou 155
9. Modelling the Behaviour of Exchange Rates in the
EMS Ashok Parikh and Costas Kaifakis 171
10. Intervention Policy in the Foreign Exchange Market:
A Tale of Dissidents and Conformists Andre Cartapanis
and Pierre Laurent 203
Index 229
List of Tables
Table 1.1 Unit Root Tests: DF, ADF and Phillips-Perron 9
a
Table 1.2 Test of the Degree of Differentiation La Geweke
and Porter-Hudak 10
Table 1.3 Hurst's Exponent and Lo's Statistic 12
Table 1.4 Optimum Lag 14
Table 1.5 Cointegration Tests for Seven Dollar Exchange
Rates (DM, FF, lira, yen, SwF, CanS) 14
Table 1.6 Cointegration Tests for Six Dollar Exchange
Rates (trace statistic) 14
Table 1.7 Cointegration Tests for Five Dollar Exchange
Rates (trace statistic) 15
Table 1.8 Cointegration Tests for Four Dollar Exchange
Rates (trace statistic) 16
Table 1.9 Cointegration Tests for Three Dollar Exchange
Rates (trace statistic) 16
Table 1.10 Cointegration Tests for Two Dollar Exchange
Rates (trace statistic) 16
Table 1.11 Cointegration Tests for the Sample Period:
January 1986-July 1993 (trace statistic) 17
(P
Table 1.12 Cointegrating Vectors coefficients normalized
on French franc) 17
Table 1.13 Order of Differentiation Test of the
Error-correction Terms 19
Table 1.14 Hurst's Exponent and Lo's Statistic for the
Error-correction Terms 19
Table 2.1 Summary of the ASTAR Model Fitted to the
Four Exchange Rate Series y, Using GCV as
a Model Selection Criterion 32
Table 2.2 Common Outliers in Exchange Rate Series y, 33
Table 2.3 Summary of the ASTAR Model Fitted to the
Four Exchange Rate Series y, in Terms of the
Number of Non-zero Contributions (Entries) in
each Series to the Value of y" with (0) indicating
the time Lag of the Variable y, and '-' Referring
to the Fact that a Lagged Variable is Smaller
than a Threshold Value 38
vii
viii List of Tables
Table 2.4 Test Results on the Residuals of SMASTAR
Models Fitted to the Exchange Rate Changes 39
Table 2.5 Summary Statistics on the Out-of-sample
Forecasting Performance of the SMASTAR Models
as Opposed to the Random Walk (RW) Model 42
Table 3.1 STAR Estimation Results 55
Table 3.2 P-values for Misspecification Tests 56
Table 4.1 Exchange Rates, Price Indices and Empirical
Findings of the Purchasing Power Parity
Theory (PPP) 63
Table 4.2 HEGY Tests for Testing the Hypothesis of
Seasonal Unit Roots for the Exchange Rates 70
Table 4.3 HEGY Tests for Testing the Hypothesis of
Seasonal Unit Roots for the Relative Prices 71
Table 4.4 Osborn Tests of the 1(1,1) Hypothesis of the
Exchange Rates 72
Table 4.5 Osborn Tests for the 1(1,1) Hypothesis for
the Relative Price Indices 72
Table 4.6 Tests for Autoregressive Unit Roots and
Deterministic Trend for the Exchange Rates 74
Table 4.7 Tests for Autoregressive Unit Roots and
Deterministic Trend for the Relative Price Index 75
Table 4.8 Johansen Maximum Likelihood Procedure
(max. lag in the VAR = 4) 76
Table 5.1 Augmented Dickey-Fuller Test Statistics 89
Table 5.2 Cointegration Rank Tests 90
Table 5.3 Single-equation Models for the German Call
Money Rate 92
Table 5.4 Maximum Likelihood Results for the Exchange
Rate Models 102
Table 8.1 Estimation Results 164
Table A9.1 EMS and Different Exchange Rate Regimes for
Various Currencies 172
Table A9.2 Definitions of Dummies Used in Regressions 181
Table A9.3 Means and Standard Deviations of Exchange
Rates and Interest Differentials (IFS Data) 181
Table A9.4 Regression Coefficients of Interest Differentials
(IFS Data) 182
Table A9.5 Means and Standard Deviations of F, Zt and Z2
Using Euro-Currency Interest Rates (1981-90) 183
List of Tables IX
Table A9.6 Tobit Estimation of Exchange Rate Equation
with Portfolio Approach (regression coefficients,
t-ratios and SEE) 184
Table 9.1 Perron's Unit Root Tests: 1979(4)-1990(6) 185
Table 9.2 10hansen-luselius Maximum Likelihood
Cointegration Tests 188
Table 9.3 Tests for Linear Trends 190
Table 9.4 Belgium: Dependent Variable: log of Belgian
Francs Per DM 79.05-90.05 191
Table 9.5 France: Dependent Variable: log of French
Francs Per DM 1979.06-1990.06 192
Table 9.6 Italy: Dependent Variable: log of Liras Per DM
1979.06-1990.06 193
Table 9.7 Netherlands: Dependent Variable: log of
Dutch Guilders Per DM 1979.07-1990.06 194
Table 9.8 Predictions of Exchange Rates: France
89M7-90M6 195
Table 9.9 Predictions of Exchange Rates: Italy 195
Table 9.10 Predictions of Exchange Rates 89M6-90M4
as logs of BFs per DM 196
Table 10.1 Sale and Purchase Probabilities According to
the Context C for Dissident Agents 215
j,
Table 10.2 Probabilities of Purchase and Sale According
to the context C for the Conformist Agents
j,
if the Confidence Threshold is not Exceeded
(E < 1') 216
t
Table 10.3 Equilibrium Values for a Homogeneous
Population of Dissidents or Conformists 220
Table 10.4 Equilibrium Values for a Population Composed
of 30% Dissidents and 70% Conformists
(,4 > 0,5) 221