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The exchange rate channel and its role within the monetary policy transmission mechanism.

1. Introduction

The monetary policy transmission mechanism is defined in several ways, which we hold as being complementary in offering a detailed picture of the mechanism's functions and structure. According to Taylor, the monetary policy transmission mechanism is defined as the process through which monetary policy decisions are transmitted, with effects on the real gross domestic product and inflation. (1) Ireland provides with a more detailed definition. In his paper, he regards the transmission mechanism as describing "how policy-induced changes in the nominal money stock or the short-term nominal interest rate impact real variables such as aggregate output and employment". He also notes that "specific channels of monetary transmission operate through the effects that monetary policy has on interest rates, exchange rates, equity and real estate prices, bank lending, and firm balance sheets". (2) The European Central Bank's insight completes the picture: "The transmission mechanism is characterized by long, variable and uncertain time lags. Thus it is difficult to predict the precise effect of monetary policy actions on the economy and price level". (3)

The monetary policy transmission mechanism is comprised by a series of five channels, each governing a specific cause-effect structure: the expectations channel, the interest rate channel, the asset price channel, the credit channel and the exchange rate channel. (4) This paper will focus on analyzing the processes that take place within the exchange rate channel, which describes how the exchange rate influences key economic variables such as the output level, employment or inflation. The channel becomes more important in the context of the high degree of economic and financial globalization, as well as that of the stronger interdependencies that are being established between the world's economies. This dynamics sheds a new light on the exchange rate channel and its role within the monetary policy transmission mechanism, as its effects are without doubt augmented by the socio-economic evolution of the new millennium.

2. The Exchange Rate Channel and the Interest Rates: the Interest Rate Parity

As a first consideration in our analysis regarding the exchange rate channel, we need to underline the strong connection between the exchange rate and the interest rates.

Changes in interest rates for pair currencies influence the value of exchange, both in the spot and in the forward market. Although the way in which these values are altered constitutes, if not a veritable controversy among economists, at least a lack of consensus regarding the correct answer, we consider that this debate generates valid solutions to the question, which we will present in the following paragraphs. Also, we consider that these answers, although not able to provide with generally valid certainties, which would without any doubt be preferable, can successfully be used in outlining the way in which key economic mechanisms operate and for this reason we will employ them in our study of the functioning of the exchange rate channel.

One of the traditional economic theories in this field, known as the interest rate parity, states that the currency with a risen interest rate will depreciate with regard with its pair and vice versa, the currency which has a relatively smaller interest rate is prone to appreciate (5). Although it's an affect that might seem counter-intuitive at the first glance, this process takes place, as the theory states, because otherwise market players will benefit ad infinitum from arbitrage by borrowing in the cheaper currency and investing in the one which just experienced a rise in the interest rate, seeking to enter in a reverse transaction at a future moment in time, pay the debt and record a risk free profit due to the difference in interest rates. The theory presents two subcomponents, thus referring to both possible situations, more precisely the one in which market players enter into forward contracts in an attempt to lock their profits and the one they don't. The two situations are described by:

* the covered interest rate parity for the case in which a futures contract is entered into;

and

* the uncovered interest rate parity, for the situations where futures contracts are not used, in which case expectations come into play and predict a future spot value that will allow for profit to arise.

Both these subcomponents of the interest rate parity theory state that, in a context characterized by a free flow of capital, it's impossible to make profits by following the above mentioned strategies, as the offer and demand mechanism will ensure that the forward or future spot quotations will imply an appreciation of the currency with a relatively smaller interest rate, appreciation that, ceteris paribus, will be equal to the difference between the initial and the modified levels of the interest rate (6), thus annulling any potential profits and delivering an equivalence between investments made in one currency or another. At the same time, the capital flows that migrate away from investments denominated in the more expensive currency will affect the balance between offer and demand, thus putting pressure on interest rates for both currencies by raising the interest rate for the initially cheaper currency and lowering them for the initially more expensive one. These to processes will continue until parity is reached again.

However, taking into consideration that there is a single spot valuation and a multitude of forward rates (for different maturities), without entering into any conflicts with the main principle behind the interest rate parity theory, it can be argued that there is another possible outcome of a change in the interest rate. Because of the superior demand for the currency that pays a higher interest, the spot price of the exchange rate will move in the favor of this higher paying currency, while the forward price, regardless of the maturity date, will show a depreciation of the same currency. This depreciation will be equal with the sum of the absolute value of the difference in the spot exchange rate and the extra interest which triggered the adjustment process in the first place.

Also, it is important to mention that the fluctuations in the exchange rate triggered by changes in interest will take place only until the exchange rate and the interest rate reach a new point of equilibrium. Once the new level of the interest rate is reflected in the exchange rate, future fluctuations, in the absence of a new change in interest for one of the two currencies, will represent the consequence of other causes. Similarly, other causes (for example changes in the fundamental structure of the economy) can affect the exchange rate, overlapping their effects with the one generated by the change in the real interest rate.

Once past the border of the strictly theoretical zone, the concept of interest rate parity must confront the observations highlighted by the empirical literature, which, from a certain point, invalidate the theory.

Regarding the covered interest rate parity, the theory holds pretty well, as a cvasi-consensus is present among economists. The majority of the empirical studies, from which we nominate the ones developed by Bahmani-Oskooee and Das, (7) Clinton, (8) and Thornton, (9) is confirming the theory's validity, obtaining results that, even if not unanimous, represent statistic relevance and thus can be interpreted as an empirical proof.

Things are however different when it comes to the uncovered interest rate parity theory, the more important subcomponent as it refers only to spot market values, which have a greater effect on the economy than forward prices, which are nothing more than derivative financial instruments. In this sense, we consider relevant the empirical studies conducted Bilson (10), Fama (11), Froot and Frankel (12), Lewis (13), Engel (14) or Burnside, Eichenbaum, and Rebelo (15,16), which bring conclusive evidence against the theory. However, it's important to underline that such an invalidation is not necessarily the product of an error in reasoning, but can be caused by subtle, yet determinant, differences in the premises that the theory is based on and the aspects of a highly complex reality which cannot be simulated within the model. In this sense, Ranaldo and Sarkar (17) find that responsible for the theory's empiric failure lies in the phenomena of volatility and lack of liquidity, Burnside, Eichenbaum and Rebelo (18) point out the transaction costs, while Ilut considers that the interest rate parity theory fails in practice because economic agents often deviate from the rational behavior implied by the theory, more precisely they exhibit aversion towards the ambiguity of an uncertain situation. (19)

The controversy does not mean that the uncovered interest rate parity should be completely discarded just because it doesn't provide a generally valid prediction model. On the contrary, the rationale behind it, adjusted by taking into consideration a series of factors that are identifiable and quantifiable locally, can prove to be very helpful in evaluating the effects that changes in the real interest rate have on the future evolution of the exchange rate. Such an approach will be useful also for market agents, but mainly for the central bank in its mission to achieve the proposed macroeconomic objectives.

Once these notions are clarified, we can continue by concentrating on key aspects of the impact which relative prices have on exports and imports.

3. Effects on the Current Account and Output

The appreciation of the national currency implies the relative growth in prices of internally produced goods with regard to foreign goods, leading to a decreased international competitiveness of internal goods, correlated with a relative decrease in prices of foreign goods. This dynamics will exert a negative pressure on the current account due to increased imports and lower export levels. Inevitably, this situation will trigger a decrease in the output level, as a direct consequence of the diminished demand.

Similarly, in the scenario of the depreciation of the national currency, internal products become cheaper when compared to foreign ones, a fact that will lead to a decrease in imports and increase in exports, resulting in pressure towards a higher output level due to the superior demand.

However, we need to mention that these affects are partially cancelled in the probable situation in which part of the raw materials used in the output process are imported. In this case, the appreciation or the depreciation of the national currency will make these raw materials of foreign origin, relatively cheaper, respectively relatively more expensive. In such situations, the effects on the production costs are of an opposite sign to the effects induced by the changes in the relative prices of the final internal or foreign products, thus reducing the intensity of exchange rate fluctuations of the national currency. This reduction is determined by the weight that imports of raw materials (denominated in foreign currency) have in the total production costs of internal goods (expressed in national currency).

As it results also from our previous remarks regarding the exchange rate channel and its way of functioning, the weight it has in the entire monetary policy transmission process for a certain economic zone is given by the exchange rate sensitivity to a series of factors. These factors are exogenous to the exchange rate channel and among them we can identify:

* the way in which the interest rate channel functions, as the intensity of the relationship that is being established between the exchange rate and the interest rate is dependent on the real value of the latter, a value that is not being directly controlled by the central bank, but is formed in the market. It is true that the starting point in this formation process is the nominal interest rate (which is directly and completely under central bank control), but the real interest rates available in the market are being formed by term structure mechanism specific to the interest rate channel

and

* the local validity or invalidity of the uncovered interest rate parity theory.

Another exchange rate channel related tool which the central bank can use in order to influence the macroeconomic climate is represented by the direct participation to the foreign exchange market. In this way, the monetary authority has the possibility to correct what it considers to be a deficit in either offer or demand for the national currency, aiming either at smoothing the market volatility or at altering the long-term level of the exchange rate.

The first strategy has obvious advantages due to the elimination of negative effects which a high degree of short-term volatility induces in financial markets, thus preventing a loss of efficiency in the functioning of the asset price and expectations channels.

The second strategy poses somewhat more complex problems. It is true that the level of economic competitiveness, with positive effects on output and employment, exhibits a component linked to the exchange rate. However, the important distinction which has to be made is weather the altering of the freely formed market exchange rate is being performed as a response to weaken an objectively strong currency or it's a move aiming at canceling a disadvantage generated by an overvalued national currency. In the first case (the one of manipulating the exchange rate in order to obtain an artificially weaker currency and the advantages on external markets that this brings), the strategy can prove to be wasteful, as the transfer of competitiveness deficit, and implicitly of the cost that it generates, from producers towards the national bank, means that the latter uses its foreign currency reserves by selling at an undervalued rate, thus most probably generating costs which are superior to the gains reported by the producing companies. In this context, Porter sustains that the artificial weakening of the national currency does not generate real competitiveness, capable to bring economic benefits. More, it can be argued that such a policy will only encourage the lack of competitiveness, delaying microeconomic adjustments and thus constituting a competitive disadvantage in the moment the exchange rate will no longer be sustained by the central bank (20). Isarescu shares this view: "It is true that the exchange rate depreciation offers a bubble of oxygen to producers who are uncompetitive in a fundamental sense. However, it is also true that the oxygen bubble will be in place only on the short-term. The excesses of depreciation aimed at maintaining or increasing international competitiveness are as harmful as excesses of appreciation aiming at controlling inflation. With regards to both international competitiveness and inflation, the exchange rate cannot substitute structural reforms." (21)

Having cleared these aspects, we still need to evaluate the situation in which the central bank does not target its market intervention towards creating a competitive advantage which, as we have seen, is a fragile one, but aims at eliminating a commercial disadvantage generated by the overvaluation of the national currency. Such an overvaluation can arise due to the way in which market participants form their perception on risk and the occurrence probability of future events. These kind of perceptions and the resulting predictions often prove to be false, (22) which does not mean that they don't alter the demand/offer balance point for a given bundle of exchange rate pairs. However, for a central bank intervention to be justifiable, it's important that the overvaluation is a real one, a fact that can be verified only if over time the appreciation pressures present in the market disappear and the central bank can withdraw its participation without consequences on the exchange rate.

A concrete case in this sense is the one of the Swiss Central Bank, who in September 2011 decided to introduce a threshold beyond which not to permit the appreciation of the Swiss Franc versus the Euro. The Swiss Central Bank governor motivated the decision in a press release dedicated to this event by stating that international events have determined the strong appreciation of the Swiss Franc over a short period of time, bringing it to an overvalued level which threatens the Swiss economy with recession and the appearance of a deflation. (23) While this paper is being written, at less than a year and a half after the Swiss Central Bank decision to intervene in the market and limit the Swiss Franc's appreciation, the exchange rate is 1.24 EUR/CHF, revealing a Swiss Franc which is weaker than the level of 1.20 EUR/CHF that the central bank pledged to defend. All this while Switzerland's economy has kept growing, proving that the central bank's actions were correct, representing an example of good practice for any monetary authority dealing with a similar situation.

4. Effects on Inflation

After having discussed the relationship between exchange rates and output, the next step is to explore the processes within the monetary policy transmission mechanisms through which exchange rates influence inflation.

The first type of interaction between exchange rates and inflation is being carried out in connection with the output level and the influences which exchange rates exhibit, as we have just seen, over it. From here there is only one step left, provided by the way in which the market adapts to the output deficit or surplus. The subject is of interest even if the change in output that we are referring to is derived from the change in demand (which means that the level of the offer of goods and services is the one that adapts to the new demand). The reason is that, especially in the presence of strong shocks induced by changes in exchange rates, this adaptation of offer to demand could not be a perfect one, leaving space for a further adjustment in price, with consequences on the inflation level.

The second type of interaction is materialized through the commercial balance, as the induced changes in the exchange rate by the levels of imports and exports transcend the quantitative aspect. A stronger currency will induce lower import real prices, while a weaker currency will determine these goods to become more expensive. However, at this stage the key factor represented by the structure of the national output steps in, as competitiveness of exports is in an opposite relationship with the attractiveness of imported goods. For this reason, a pressure made by the national output on domestic prices of an opposite sign as that exerted by imports will be in place. More precisely, in the presence of rigidities in adapting the output level, national producers will shift the sale of a part of the available quantity of goods towards the market (foreign or domestic) where they can obtain a higher price, thus influencing domestic prices by either diminishing or boosting domestic offer. The result of these antagonistic pressures on the output level is given by the structure of the national aggregate output, more precisely the level of substitutability between imports and internally produced goods.

5. The Exchange Rate Channel and the Openness of the Economy

The importance of the exchange rate channel depends highly on the degree of openness of the economy and on the economic interactions (mainly of commercial and of investment capital nature) between the economy (or the monetary zone) and the exterior. This is because of the relationship between these interactions and key economic indicators linked to the output level, product competitiveness, investment level and, indirectly, the unemployment rate.

Rodriguez (24) draws the conclusion that the optimum degree of economic openness is in an inverse relationship with the size of that economy, so that the bigger the economy, the less open does it need to be and vice versa. The argument is sustained by empirical data also. The 2013 KOF Economic Globalization Index is more than relevant in this sense, exhibiting a strong link between the openness and size of the economy (25). The explanation lies in the fact that a smaller economy is more dependent on external markets for both imports/exports and the capital needed for its development. In such a relationship, the exchange rate constitutes a crucial factor, which leads to a higher functionality level of the exchange rate channel and, in consequence, to the central bank's need to grant it extra attention.

Relevant in this sense is the concrete case of Romania, an economy which is small, relatively open (situated in the first third of the ranking provided by the index referred to earlier) and highly dependent on its economic relationships with the exterior. In this context, a particularity of the National Bank's of Romania mission is represented by the distinct enunciation of its attribution regarding the elaboration and application of the exchange rate policy, (26) the goal being the underlining of the importance of the exchange rate's transmission channel for the good functioning of the national economy. The effectiveness of the channel is confirmed by Cocris and Nucu, who see it as growing. (27)

The discussion over differences in openness between large and small economies is however not intended to avert us from the general trend of the world economy, which is clearly heading towards a higher degree of openness, with commerce and flows of capital playing the lead roles. However, the fact that smaller economies have a greater need for openness does not mean that larger economies don't benefit from this process. In this context, it becomes clear that the sustained tendency for openness that characterizes most of the world's economies strengthens the role played by the exchange rate channel within the monetary policy transmission mechanism. A relevant example is that of the Euro Zone. The July 2000 European Central Bank Monthly Bulletin highlights a relatively economically closed Euro Zone and its consequences regarding the poor functioning of the exchange rate channel. (28) Twelve years later, statistic data provided by the same institution point out that the trade activity between the Euro Zone and the exterior has reached in 2011 at 37% of the Euro Zone gross domestic product (comparing to just 25% in 1999), shedding a new light on the exchange rate channel. (29) Beyond particular examples and cases, the figures provided by the World Trade Organization are more than clear: if in 1999 world aggregate trade was worth 5.712.000 Million USD, in 2011 it has reached the level of 18.255.000 Million USD. (30)

6. Conclusion

The exchange rate channel is a key component of the monetary policy transmission mechanism as it governs the processes that involve interaction with factors that are external to the national economy. In the context of intense economic globalization, exchange rates play a crucial role in designing the internal economic environment by having strong effects on the output level (with consequences on employment) and on the inflation rate due to rigidities in offer and the potential shifts of offer between the domestic and the external market. Also, we identify that the strength of the exchange rate channel is dependent on the openness of the economy, due to its influences on traded volumes and capital flows.

Having this in mind, central banks need to take a close look at the exchange rate channel, as issues like the economic openness, the validity of the interest rate parity theory or the structure of the domestic demand and output represent local variables that greatly influence the processes that take place within the exchange rate channel. In these circumstances, the deep understanding of the exchange rate channel's functioning and role within the transmission mechanism is essential for conducting an efficient and effective monetary policy.

References:

[1.] Bahmani-Oskooee, Mohsen and Das, Satya (1985), "Transaction Costs and the Interest Parity Theorem", in Journal of Political Economy, August 1985, 793-99

[2.] Bilson, John (1981) The Speculative Efficiency Hypothesis, in Journal of Business, vol. 54, no. 3, pp. 435-451

[3.] Breedon, Francis; Rime, Dagfinn; Vitale, Paolo (2010) A Transaction Data Study of the Forward Bias Puzzle, Discussion Paper 7791, CEPR

[4.] Burnside, Craig; Eichenbaum, Martin; Rebelo, Sergio (2007), "The Returns to Currency Speculation in Emerging Markets", in American Economic Review Papers and Proceedings, vol. 97, no. 2, 333-338

[5.] Burnside, Craig; Eichenbaum, Martin; Rebelo, Sergio (2009), Understanding the Forward Premium Puzzle: A Microstructure Approach, in American Economic Journal: Macroeconomics, vol. 1, no. 2, pp. 127154

[6.] Clinton, Kevin (1988) Transactions Costs and Covered Interest Arbitrage: Theory and Evidence, in Journal of Political Economy, April 1988, pp. 358-370

[7.] Cocris, Vasile and Nucu, Anca Elena (2013) "Interest rate channel in Romania: assessing the effectiveness transmission of monetary policy impulses to inflation and economic growth", in Theoretical and Applied Economics, vol. 20, no. 2, pp. 37-50

[8.] Engel, Charles (1996) The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence, in Journal of Empirical Finance, vol. 3, no. 2, pp. 123-191

[9.] European Central Bank (2000), Monthly Bulletin July 2000, [http://www.ecb.int/pub/pdf/mobu/mb200007en.pdf ], 12 April 2013

[10.] European Central Bank, Transmission Mechanism of Monetary Policy, [http://www.ecb.europa.eu/mopo/intro/transmission/html/index.en. html], 15 February 2013

[11.] Fama, Eugene (1984) Forward and Spot Exchange Rates, in Journal of Monetary Economics, vol. 14, pp. 319-338

[12.] Feenstra, Robert; Taylor, Alan (2008), International Macroeconomics, New York: Worth Publishers

[13.] Froot, Kenneth; Frankel, Jeffrey (1989) Forward Discount Bias: Is it an Exchange Risk Premium?, in Quarterly Journal of Economics, pp.139161

[14.] Hildebrand, Phillip (2011), Short statement by Philipp Hildebrand on 6 September 2011 with regard to the introduction of a minimum Swiss franc exchange rate against the euro, [http://www.snb.ch/en/mmr/speeches/id/ref_20110906_pmh/source/ ref_20110906_pmh.en.pdf], accessed 25 March 2013

[15.] Ilut, Cosmin (2009), Ambiguity aversion: implications for the uncovered interest rate parity puzzle, [http://www.stanford.edu/group/SITE/archive/SITE_2009/segment_3/ segment_3_papers/ilut.pdf], accessed 19 March 2013

[16.] Ireland, Peter (2005), The Monetary Transmission Mechanism, Federal Reserve Bank of Boston, Working Paper 06-1, [http://www.bos.frb.org/economic/wp/wp2006/wp0601.pdf], accessed 1 May 2013

[17.] Isarescu, Mugur (2006), Reflectii economice: piete, bani, banci, vol. 1, Bucuresti: Academia Romana, Centrul Roman de Economie Comparata si Consens

[18.] Kahneman, Daniel (2012), Gdndire rapida, gdndire lenta, Bucuresti: Publica

[19.] KOF Economic Globalization Index 2013, [http://globalization.kof.ethz.ch/static/pdf/rankings_2013.pdf], 10 April 2013

[20.] Lewis, Karen (1995) Puzzles in International Financial Markets, in Grossman, G.M. and Rogoff, Kenneth, Handbook of International Economics, Amsterdam: North Holland, vol. 3, pp. 1913-1971.

[21.] Loayza, Norman and Schmidt-Hebbel, Klaus (2002) Monetary Policy Functions and Transmission Mechanisms: An Overview, in Loayza, Norman and Schmidt-Hebbel, Klaus (eds.), Monetary Policy: Rules and Transmission Mechanisms, Santiago: Central Bank of Chile

[22.] Porter, Michael (1990), The Competitive Advantage of Nations, New York: Free Press

[23.] Ranaldo, Angelo and Sarkar, Asani (2008) Exchange rate risk, transactions costs and the forward bias puzzle, Swiss National Bank, [http://www.hkimr.org/uploads/conference_detail/521/con_paper_0_510_session-7-3_sarkarranaldo_1sep08. pdf], accessed 12 May 2012

[24.] Rodriguez, Carlos (2000) On the Degree of Openness of an Open Economy, Universidad del CEMA Buenos Aires, Argentina, [http://www.ucema.edu.ar/u/car/Advantage.PDF], accessed 2 April 2013

[25.] Taylor, John (1995), The Monetary Transmission Mechanism: An Empirical Framework, in The Journal of Economic Perspectives, Vol. 9, No. 4., pp. 11-26

[26.] The Romanian Parliament, Law no. 312/2004, art. 2, [http://www.legex.ro/Legea-312-2004-43592.aspx], accessed 4 December 2012

[27.] Thornton, Daniel (1989), "Tests of Covered Interest Rate Parity", in Federal Reserve Bank of St. Louis Review, July/August 1989 , pp. 55-66

[28.] www.ecb.eu

[29.] www.wto.org

Horatiu Dan *

* Horatiu Dan is enrolled as PhD Researcher at the Faculty of Economic Sciences and Business Administration (department of Political Economy) within the Babes-Bolyai University. Contact: dan.horatiu.sorin@gmail.com.

(1) John Taylor, "The Monetary Transmission Mechanism: An Empirical Framework", in The Journal of Economic Perspectives, Vol. 9, No. 4., 1995, pp. 11-26

(2) Peter Ireland, "The Monetary Transmission Mechanism", in Federal Reserve Bank of Boston, Working Paper 06-1, 2005, [http://www.bos.frb.org/economic/wp/wp2006/wp0601.pdf], accessed 1 May 2013

(3) European Central Bank, Transmission Mechanism of Monetary Policy, [http://www.ecb.europa.eu/mopo/intro/transmission/html/index.en.html], accessed 15 February 2013

(4) Norman Loayza, Klaus Schmidt-Hebbel, "Monetary Policy Functions and Transmission Mechanisms: An Overview", in Norman Loayza, Klaus Schmidt-Hebbel (eds.), Monetary Policy: Rules and Transmission Mechanisms, Santiago: Central Bank of Chile, 2002

(5) Francis Breedon, Dagfinn Rime, Paolo Vitale, A Transaction Data Study of the Forward Bias Puzzle, Discussion Paper 7791, CEPR, 2010, p. 3

(6) Robert Feenstra, Alan Taylor, International Macroeconomics, New York: Worth Publishers, 2008.

(7) Mohsen Bahmani-Oskooee, and Satya Das, "Transaction Costs and the Interest Parity Theorem", in Journal of Political Economy, August 1985, pp. 793-99.

(8) Kevin Clinton, "Transactions Costs and Covered Interest Arbitrage: Theory and Evidence", in Journal of Political Economy, April 1988, pp. 358-370

(9) Daniel Thornton, "Tests of Covered Interest Rate Parity", in Federal Reserve Bank of St. Louis Review, July/August 1989 , pp. 55-66

(10) John Bilson, The Speculative Efficiency Hypothesis, in Journal of Business, vol. 54, no. 3, 1981, pp. 435-451

(11) Eugene Fama, "Forward and Spot Exchange Rates", in Journal of Monetary Economics, vol. 14, 1984, pp. 319-338

(12) Kenneth Froot, Jeffrey Frankel, "Forward Discount Bias: Is it an Exchange Risk Premium?", in Quarterly Journal of Economics, 1989, pp.139-161

(13) Lewis, Karen, "Puzzles in International Financial Markets", in G.M. Grossman, Kenneth Rogoff, Handbook of International Economics, Amsterdam: North Holland, vol. 3, 1995, pp. 1913-1971

(14) Charles Engel, "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence", in Journal of Empirical Finance, vol. 3, no. 2, 1996, pp. 123-191

(15) Craig Burnside, Martin Eichenbaum, Sergio Rebelo, "The Returns to Currency Speculation in Emerging Markets", in American Economic Review Papers and Proceedings, vol. 97, no. 2, 2007, pp. 333-338

(16) Craig Burnside, Martin Eichenbaum, Sergio Rebelo, "Understanding the Forward Premium Puzzle: A Microstructure Approach", in American Economic Journal: Macroeconomics, vol. 1, no. 2, 2009, pp. 127-154

(17) Angelo Ranaldo, Asani Sarkar, Exchange rate risk, transactions costs and the forward bias puzzle, Swiss National Bank, 2008, [http://www.hkimr.org/uploads/conference_detail/521/con_paper_0_510_session-7- 3_sarkarranaldo_1sep08.pdf], accessed 12 May 2012

(18) Craig Burnside, Martin Eichenbaum, Sergio Rebelo, Op. cit., 2009

(19) Cosmin Ilut, Ambiguity aversion: implications for the uncovered interest rate parity puzzle, 2009 [http://www.stanford.edu/group/SITE/archive/SITE_2009/segment_3/segment_3_papers/ilut.pdf], accessed 19 March 2013

(20) Michael Porter, The Competitive Advantage of Nations, New York: Free Press, 1990

(21) Mugur Isarescu, Reflectii economice: piete, bani, banci, vol. 1, Bucuresti: Academia Romana, Centrul Roman de Economie Comparata si Consens, 2006, pp. 86

(22) Daniel Kahneman, Gdndire rapida, gdndire lenta, Bucuresti: Publica, 2012

(23) Phillip Hildebrand, Short statement by Philipp Hildebrand on 6 September 2011 with regard to the introduction of a minimum Swiss franc exchange rate against the euro, 2011 [http://www.snb.ch/en/mmr/speeches/id/ref_20110906_pmh/source/ref_20110906_pmh.en.pdf], accessed 25 March 2013

(24) Carlos Rodriguez, On the Degree of Openness of an Open Economy, Universidad del CEMA Buenos Aires, Argentina, 2000, [http://www.ucema.edu.ar/u/car/Advantage.PDF], accessed 2 April 2013

(25) KOF Economic Globalization Index 2013, [http://globalization.kof.ethz.ch/static/pdf/rankings_2013.pdf], accessed 10 April 2013

(26) The Romanian Parliament, Law no. 312/2004, art. 2, [http://www.legex.ro/Legea-312-200443592.aspx], accessed 4 December 2012

(27) Vasile Cocris, Anca Elena Nucu, "Interest rate channel in Romania: assessing the effectiveness transmission of monetary policy impulses to inflation and economic growth", in Theoretical and Applied Economics, vol. 20, no. 2, 2013, pp. 37-50

(28) European Central Bank, Monthly Bulletin July 2000, [http://www.ecb.int/pub/pdf/mobu/mb200007en.pdf ], accessed 12 April 2013

(29) www.ecb.eu

(30) www.wto.org
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