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Title: International risk-sharing and the transmission of productivity shocks
Abstract
A central puzzle in international finance is that real exchange rates are volatile and, in stark contradiction to effcient risk-sharing, negatively correlated with cross-country consumption ratios. This paper shows that incomplete asset markets and a low price elasticity of tradables can account quantitatively for these properties of real exchange rates. The low price elasticity stems from distribution services, intensive in local inputs, which drive a wedge between producer and consumer prices and lower the impact of terms-of-trade changes on optimal agents' decisions. Two very different patterns of the international transmission of productivity improvements generate the observed degree of risk-sharing: one associated with a strengthening, the other with a deterioration of the terms of trade and real exchange rate. Evidence on the effect of technology shocks to U.S. manufacturing, identified through long-run restrictions, is found in support of the first transmission pattern, questioning the presumption that terms-of-trade movements foster international risk-pooling. [Giancarlo Corsetti, Luca Dedola and Sylvain Leduc]
Author: Corsetti, Giancarlo | Dedola, Luca | Leduc, Sylvain
Series Title: Working paper series / European Central Bank ; 308
Publisher: European Central Bank
Year: 2004
Language: en
Ressource: Einzelne Arbeitspapiere, Preprints
Keyword: International financial marketLaw of one pricePurchasing power parityOECD countriesProductivityShockTerms of tradeUnited States
Subject: Economic and growth policiesInvestment returns. Financial market. Interest ratesInternational investments. Capital movements
Online Ressource: vorübergehend nicht erreichbar!
Bitte beachten Sie die urheberrechtlichen Bedingungen der Dokumentenbenutzung / Please observe the copyright when accessing the document | Quelle / Source: Europäische Zentralbank (http://www.ecb.int)
Title: Fundamentals and joint currency crises
Abstract
In this note we demonstrate that in affine models for bilateral exchange rates, the nature of return interdependence during crises depends on the tail properties of the fundamentals' distributions. We denote crisis linkages as either strong or weak, in the sense that the dependence remains or vanishes asymptotically. We show that if one currency return reaches crisis levels, the probability that the other currency breaks down as well vanishes asymptotically if the fundamentals' distributions exhibit light tails (like e.g. the normal). However, if the marginal distributions exhibit heavy tails, the probability that the other currency breaks down as well remains strictly positive even in the limit. This result implies that linearity and heavy tails are sufficient conditions for joint or contagious currency crises to happen systematically through fundamentals. [Philipp Hartmann, Stefan Straetmans and Casper de Vries]
Author: Hartmann, Philipp | Straetmans, Stefan | Vries, Casper de
Series Title: Working paper series / European Central Bank ; 324
Publisher: European Central Bank
Year: 2004
Language: en
Ressource: Einzelne Arbeitspapiere, Preprints
Keyword: Financial crisisInternational financial marketExchange rateCurrency crisis
Subject: Currency. Monetary policyInvestment returns. Financial market. Interest rates
Online Ressource: vorübergehend nicht erreichbar!
Bitte beachten Sie die urheberrechtlichen Bedingungen der Dokumentenbenutzung / Please observe the copyright when accessing the document | Quelle / Source: Europäische Zentralbank (http://www.ecb.int)
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