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Title: Essays on exchange rate determination and international capital flows in emerging economies
Author: Estrada, Fredy A. G.
ISNI:       0000 0004 5357 6521
Awarding Body: University of Warwick
Current Institution: University of Warwick
Date of Award: 2015
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This thesis consists of three self-contained chapters. The first two chapters are concerned with the same overall topic though, namely exchange rate determination in Emerging Economies (EMEs), while the third chapter is related to the dynamics of capital flows in EMEs. The first chapter studies the impact of monetary policy announcements on the exchange rate behaviour in EMEs under Inflation Targeting (IT), focusing on the case of Colombia, Chile and Brazil. I address two specific issues. First, I analyze if the pattern of exchange rate returns and its volatility behave differently on days when the Central Bank makes interest rate announcements. Second, I investigate whether the adoption of IT has produced a systematic change in the effect of these announcements on the exchange rate. Using daily data, the results provide evidence that there are significant differences in the conditional volatility of exchange rate returns on days when interest rate announcements surprise the market. The results indicate that the effects of surprise announcements on the exchange rate volatility have been diminished due to the adoption of IT and is related to the systematic change in market expectations. The second chapter studies the effectiveness of foreign exchange intervention in Brazil, Chile, Colombia, Mexico, and Peru. I use the coordination channel approach of exchange rate behaviour where exchange rates are determined in an environment of order flow from informed and uninformed traders. The empirical approach of this theoretical model is based on a Smooth Transition Regression GARCH-M (STRGARCH-M) model where the confidence of traders in the fundamentals depends on exchange rate misalignments and central bank intervention that increases traders’ confidence and strengthen the degree of exchange rate mean reversion. Unlike the existent literature on this channel of intervention, I include a measure of risk premium in the conditional mean equation of exchange rate returns that is consistent with the idea that the rejection of the risk-neutral efficient market hypothesis may be the result of a time-varying risk premia. Using daily data from 2000 to 2013, the results suggest that foreign exchange intervention has been effective via the coordination channel, and the risk premia decreases the pace of depreciation as risk averse investors demand a higher rate of return from holding the domestic currency. The recent literature on capital flows has tried to find evidence regarding the post-crisis increase of capital inflows in EMEs due to Fed Unconventional Monetary Policies (UMP). In the third chapter, I address this open question analyzing if the effect of these policies on capital flows in EMEs depends on the degree of financial exposure of each country to the US. This approach could be the smoking gun in this debate as I attempt to find evidence of a specific mechanism by which these policies could affect the pattern of capital flows. I estimate a dynamic panel data model with country fixed effects using quarterly data on gross private capital inflows for 46 EMEs from 2000:Q1 to 2013:Q2. The results suggest that UMP have a significant effect on capital flows that depends on the type of unconventional measure examined and it is bigger if countries have a higher financial exposure to the US.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available
Keywords: HG Finance