Hu,W. (2024) “Inflation Targeting and Exchange Rate Predictability in Low-income Economies” (Working paper)
Abstract:
Previous research on the nominal exchange rate (NER) out-of-sample predictability suggests that the current real exchange rate (RER) provides significant evidence in the inflation targeting (IT) adopted advanced economies (AEs) and emerging economies (EMEs). This research fills a gap in the
literature by investigating 11 low-income countries (LICs) that adopted IT beginning in the late 2000s. For most LICs, 1- to 48-months ahead out-of-sample exchange rate predictability significantly increases after IT adoption. The results are robust after considering various bootstrapped out-of-sample
statistics (e.g. bootstrapped Diebold–Mariano–West(DMW) statistic), forecasting schemes, and impacts from the zero lower bound (ZLB) and COVID-
19 pandemic.
Hu,W. (2024) "How do exchange rates co-move with international currencies and what determines it in the last decade?" ( Working paper)
Abstract:
This paper examines the factors driving the co-movement between the five international currencies (USD, EUR, CNY, GBP, and JPY) and other currencies, with a particular focus on the impact of the Brexit, the Covid-19 and the Russia-Ukraine war on international currency co-movements. Using data covering 25 countries from 2015 to 2024, the study finds a substitutive relationship between the USD and RMB. Peaks(Troughs) of the Dollar(RMB) zone are synchronous with the recent turbulent events. Each event plays a role in amplifying or dampening the impact of trade linkage on USD/EUR/RMB weights. Brexit can enhance the USD’s weight through trade linkages, while Covid-19 dampens the RMB’s weight through the same channel. In non-euro European countries, the Russia-Ukraine War has amplifying effect on EUR’s weight. Through bilateral trade relationship, the international currency’s global role as an anchor currency is significantly influenced by the crisis events in the last decade.
Hu,W. (2024) “Exchange rate reconnect? Central bank independence and the GBP/USD exchange rate” (Working Paper)
Abstract:
This paper proposes the degree of central bank independence (CBI) as an explanation for the long-standing exchange rate disconnect puzzle in international macroeconomics, which is, the failure of macroeconomic fundamentals to predict exchange rates. To explore how changes in CBI influences the connection between exchange rates and macroeconomic variables, I first identify historical changes in CBI levels in the United Kingdom and compare them with structural changes in monetary responses to inflationary pressure. Considering CBI improvements in empirical models of the USD/GBP nominal exchange rate substantially improves their predictive power. In particular, over the whole sample period (October 1986-September 2008) the exchange rate disconnect puzzle remains dominant. However, sub- periods following CBI increases implies that use of the Taylor rule model with U.K. forecasted variables, which offers a better prediction of exchange rate than the random walk model. Both in-sample and out-of-sample tests reject the no-predictability null hypothesis. These results support the hypothesis that CBI ”reconnects” the exchange rate with macroeconomic variables through shifts of monetary policy regimes.