Exchange rates, interest rates and current account news: some evidence from Australia

Karfakis, Costas; Kim, Suk-Joong

doi:10.1016/0261-5606(95)00020-f

Cited by 31 publications

(12 citation statements)

References 7 publications

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“…Using survey data on U.S. dollar-German mark and U.S. dollar-Swiss franc exchange rate expectations in the mid-1980s to construct measures of the risk premium as the deviation from uncovered interest rate parity and also taking account of potential simultaneity bias using appropriate instrumentalvariable estimation, Dominguez and Frankel (1993b) find that intervention variables have statistically significant explanatory power in a regression for the risk premium. Their study provides strong support in favor of a significant portfolio balance effect (with mean-variance optimization) and, therefore, effectiveness of intervention, and 25 Interesting evidence on the relationship between exchange rates, interest rates and current account news is also provided by Costas Karfakis and Suk-Joong Kim (1995), using Australian data for the period from July 1985 to December 1992. The Australian dollar is found to depreciate over the sample examined, while interest rates are found to rise as a result of an announcement of a larger than expected current account deficit.…”

mentioning

confidence: 93%

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

Sarno

Taylor

2001

Journal of Economic Literature

666

527

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Our paper assesses progress made by the profession in understanding whether and how exchange rate intervention works. We review theory and evidence on official intervention, concentrating primarily on work published in the last decade or so. We conclude that, unlike the profession's consensus of the 1980s, official intervention can be effective, especially as a signal of policy intentions and when publicly announced and concerted. We note an apparent empirical puzzle concerning the secrecy of much intervention and suggest another way for intervention to be effective which has received little attention in the literature, namely by remedying a coordination failure in the foreign exchange market.

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mentioning

confidence: 93%

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

Sarno

Taylor

2001

Journal of Economic Literature

666

527

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“…However, pulling up the first two statistical moments of the exchange rates, it is revealed that news effects only last temporarily. Moreover, earlier preliminary findings in announcement studies that show asymmetric reactions arising from good and bad news can be confirmed via finer analyses (see, for example, Karfakis and Kim, 1995; Andersen et al ., 2003). However, one major point of criticism remains: high‐frequency studies only focus on these short‐term exchange rate changes, which follow macroeconomic news.…”

Section: The High‐frequency Modelmentioning

confidence: 56%

“…However, if particular policy acts prove to be creditable, financial markets react very strongly to them. Karfakis and Kim (1995) examine Australian current account news for two periods, one before 1989 and one thereafter. With regard to the first period, they find the exchange rate to appreciate significantly after higher current account deficit news, which they connect to anticipated central bank interventions.…”

Section: Announcement Studiesmentioning

confidence: 99%

“…Therefore, he claims that asymmetric reactions to news can be in line with efficiency of the foreign exchange market. Karfakis and Kim (1995) separate their data into good and bad current account news and show that negative news is followed by significant exchange rate appreciations, i.e. the current account deficit is higher than expected.…”

Section: Announcement Studiesmentioning

confidence: 99%

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The Influence of Fundamentals on Exchange Rates: Findings From Analyses of News Effects

Rebitzky

2010

Journal of Economic Surveys

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As we survey the literature of macroeconomic news in the foreign exchange market, we can by now look back on nearly 30 years of research. The first studies which analysed news effects on exchange rates were established in the early 1990s (see, for example, Dornbusch). Almost at the same time Meese and Rogoff published their influential paper, revealing the forecasting inferiority in exchange rates of structural models against the random walk. This finding has shocked the pillars of exchange rate economics and thus cast general suspicion on research focusing on fundamentals in this field. The eventual rising popularity of event studies can partly be attributed to the re-establishment of the raison d'être of exchange rate economics. This work focuses on systematically surveying this literature with particular respect to its primary goal, i.e. shedding light on the analytical value of fundamental research. Thus, its major findings are, first, fundamental news does matter, whereas non-fundamental news matters to a lesser degree. Second, news influences exchange rates via two separated channels, i.e. incorporating common information into prices directly or indirectly based upon order flow. Third, with a few exceptions the impact of fundamental news on exchange rates is fairly stable over time.

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“…Therefore, these variables should have tremendous impact on exchange rates. 8 Using Australian exchange rate data, Karfakis and Kim (1995) found that unexpected current account deficit is associated with exchange rate depreciation and a rise in interest rates. Current account deficit diminishes domestic wealth, leading to overshooting of exchange rates.…”

Section: Current and Capital Account Deteriorationmentioning

confidence: 99%

Parity and Non-Parity Determinants of Exchange Rates in Latin American Economies

Ho¹,

Ariff²

2014

Taylor's Bus Rev

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This paper reports how non-parity fundamental factors together with parity factors are correlated with exchange rate movements. Seven Latin American countries were included in this study using a selection criterion that for a pair of countries to be included, the pair must have more than 50 per cent of trade with the group chosen. The econometric methods applied are appropriate to this topic and include pooled time series regression and seemingly unrelated regression. The findings show that there is support for short and long-run effects on exchange rates from inflation and interest rates. We entered non-parity factors suggested in recent research reports as likely determinants of the exchange rates, and found four non-parity factors that are significantly correlated with exchange rates and these served as control variables in our test model. Our main result shows that both inflation and interest rates are jointly significant factors in most of the tests. The results appear to suggest that exchange rate research should include both nonparity and parity factors. Only then would the parity factor effects be identifiable as relevant to exchange rate formation.

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Exchange rates, interest rates and current account news: some evidence from Australia

Cited by 31 publications

References 7 publications

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?

The Influence of Fundamentals on Exchange Rates: Findings From Analyses of News Effects

Parity and Non-Parity Determinants of Exchange Rates in Latin American Economies

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