Cluster analysis of multiple planetary flow regimes

A modified cluster analysis method was developed to identify spatial patterns of planetary flow regimes, and to study transitions between them. This method was applied first to a simple deterministic model and second to Northern Hemisphere (NH) 500 mb data. The dynamical model is governed by the fully-nonlinear, equivalent-barotropic vorticity equation on the sphere. Clusters of point in the model's phase space are associated with either a few persistent or with many transient events. Two stationary clusters have patterns similar to unstable stationary model solutions, zonal, or blocked. Transient clusters of wave trains serve as way stations between the stationary ones. For the NH data, cluster analysis was performed in the subspace of the first seven empirical orthogonal functions (EOFs). Stationary clusters are found in the low-frequency band of more than 10 days, and transient clusters in the bandpass frequency window between 2.5 and 6 days. In the low-frequency band three pairs of clusters determine, respectively, EOFs 1, 2, and 3. They exhibit well-known regional features, such as blocking, the Pacific/North American (PNA) pattern and wave trains. Both model and low-pass data show strong bimodality. Clusters in the bandpass window show wave-train patterns in the two jet exit regions. They are related, as in the model, to transitions between stationary clusters

Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar

We investigate monthly bilateral exchange rate volatility for a large sample of currency pairs over the period 1999-2006. Pegs (particularly to the US dollar) and managed floats tend to have lower volatility than independent floats. A deeper investigation shows that the peg effect operates almost entirely through currency networks (i.e. where two currencies are pegged to the same anchor currency), and the lower volatility of US dollar pegs reflects the size of the US dollar network. Managed floats show clear evidence of tracking the US dollar, further increasing the effective size of the US dollar network. Inflation undermines the currency-stabilizing effect of peg networks. Currencies in smaller peg networks have higher unweighted but not trade-weighted exchange rate volatility, which is consistent with anchors being chosen to minimize trade-weighted volatility. The size of the effective US dollar network revealed here is a plausible explanation of the rarity of basket pegs. Volatility also reflects a range of structural factors such as country size, level of development, population density, inflation differentials and business cycle asymmetry.exchange rate volatility; currency peg; inflation

Net foreign assets, real exchange rates and net exports revisited

Theory suggests a significant positive relationship in long-run equilibrium between net foreign assets (NFA) as a proportion of GDP and real exchange rates. Empirical tests have ignored two issues: the large variation in cross-country trade/GDP ratios, which is likely to induce substantial cross-country differences in coefficients, and the reverse causality associated with valuation effects. A real exchange rate appreciation reduces the absolute value of NFA denominated in foreign currency relative to domestic GDP, because of the sizeable component of non-tradable goods in domestic GDP. This endogeneity biases the test results. New tests are implemented that address these issues. The valuation effect bias is found to be significant. The new tests support the existence of a long-run positive relationship between NFA and real exchange rates. The long-run negative relationship between NFA and net exports that existed before 1992 has broken down in the period of persistent global imbalances

Exchange rates and trade balance adjustment: A multi-country empirical analysis

This study assesses the response of the trade balance to exchange rate fluctuations across a large number of countries. Fixed-effects regressions are estimated for 87 countries on annual data from 1994 to 2010. The trade balance improves significantly after a real depreciation, and to a similar degree, in the long run for all countries, but the adjustment is significantly slower for industrial countries. Emerging markets and developing countries display relatively fast adjustment. Disaggregation into exports and imports shows that the delayed adjustment in industrial countries is almost entirely on the export side. The rate of adjustment in emerging markets is slowing over time, consistent with their eventual graduation to high-income status. The ratio of trade to GDP is also highly sensitive to the real effective exchange rate, with a real depreciation of 10% raising the trade/GDP ratio across the sample by approximately 4%. This result, which presumably reflects movements in the prices of tradables relative to non-tradables, raises questions about the widespread use of the trade/GDP ratio as a trade policy indicator, without adjustment for real exchange rate effects

The effects of fiscal policy in a neoclassical growth model

This paper studies the effects of fiscal policies--depicted as stochastic changes in government spending and distortionary tax rates--when the government is constrained from using lump sum taxes for achieving intertemporal budget balance. The ratio of debt to gnp, therefore, has consequences for the future choices of government spending and distortionary taxation and hence affects real economic activity. Further modeling fiscal policy in this way generates results that differ substantially from those in standard stochastic models where lump sum taxes are used for budget balance. The modeling of fiscal policy presented here is also consistent with empirical evidence on U.S. fiscal policy.Fiscal policy

Global imbalances and the external solvency of nations

Global current account imbalances were a major subject of concern in the years before the recent financial crisis. It is shown that the expected (negative) equilibrium relationship between net foreign assets and the trade balance that had held in the previous twenty years appeared to break down in this period. The explosion of the magnitude and equity component of cross-border assets and liabilities has made net foreign assets much harder to track, and may have introduced significant measurement errors and/or bubble effects into the series. The structural break is not evident if net property income flows are used in place of net foreign assets. This suggests that net exports do indeed adjust so as to maintain external solvency in the long run

Measuring exchange rate flexibility by regression methods

A new and easily implemented regression method is proposed for generating an index of exchange rate flexibility, whilst simultaneously identifying anchors of pegged currencies. The method can distinguish floats from pegs, including those with occasional devaluations. An annual index is calculated that can be compared with other regime classification schemes, or used directly in empirical research as a measure of exchange rate flexibility. Different categories in the IMF’s de facto classification, and also in the Reinhart-Rogoff classification, are associated with significantly different average values of the index. Further analysis of managed floats shows that they have a strong tendency to track the US dollar