Vahagn Galstyan

Working Papers
Exchange Rates
Department of Economics
Trinity College Dublin
Dublin 2, Ireland
Tel: (353 1) 896 1597
Fax: (353 1) 677 2503
E-mail: v.galstyan (at) tcd (dot) ie


  • Taxation, Debt and Relative Prices in the Long Run: The Irish Experience, (with Adnan Velic), Economic and Social Review, forthcoming.

    Abstract: This paper investigates the effects of public debt and distortionary labour taxation on the long-run behaviour of Irish relative non-traded goods prices. We highlight that higher public debt, acting through higher taxes, has an equivocal impact on the relative supply of non-traded goods and, correspondingly, relative prices. Our empirical analysis for Ireland suggests that taxes and public debt play significant roles in the long run, comoving negatively with the relative price of non-tradables. Accordingly, shifts in public debt and taxation bear implications for the country's international price competitiveness.

  • Debt Thresholds and Real Exchange Rates: An Emerging Markets Perspective, (with Adnan Velic), Journal of International Money and Finance 70, February 2017, pp.452-470.

    Abstract: In this paper we empirically analyze nonlinearities in short-run real exchange rate dynamics. Our findings suggest that real exchange rate misalignments are considerably less persistent and more volatile during times of high debt. Assessing the variance of changes in misalignments, we retrieve evidence indicating that the nominal exchange rate and inflation differentials are more important determinants in states of high debt than in states of low debt. Overall, our results imply that nonlinearities have non-negligible implications for the mechanics of real exchange rate adjustment in emerging markets.

  • The Holders and Issuers of International Portfolio Securities, (with Philip Lane, Caroline Mehigan and Rogelio Mercado), Journal of the Japanese and International Economies 42, December 2016, pp.100-108.

    Abstract: Research on the geographical distribution of international portfolios has mainly focused on data aggregated to the country level. We exploit newly-available data that disaggregates the holders and issuers of international securities along sectoral lines. We find that patterns evident in the aggregate data do not uniformly apply across the various holding and issuing sectors, such that a full understanding of cross-border portfolio positions requires granular-level analysis.

  • Productivity, Trade, and Relative Prices in a Ricardian World, Open Economies Review 26, September 2015, pp.817-838.

    Abstract: In an extended Ricardian model of trade, we study the effects of improving trade deficits on relative prices, and the relation between productivity improvements and real exchange rates. An improvement in the trade balance induces relative wages to overshoot their long-run value, placing downward pressure on the terms of trade of the same order of magnitude found in Armington type models. Once the pattern of specialization changes, some of the decline is reversed with a smaller value of depreciation. We find that persistent productivity differentials do not cause distinct trends in the terms of trade. The result depends on the size of the non-tradable sector and the variability of industry-specific efficiencies. We also find that self-selection into export markets causes the relative price of non-tradable goods to respond to exogenous shift, giving birth to an endogenous Balassa- Samuelson effect. The model also suggests that in the long-run the variation of the real exchange rate is dominated by the volatility of the terms of trade.

  • Country Size and Exchange Rates, Economica 82, April 2015, pp.222-235.

    Abstract: This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a twocountry neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a depreciation of the real exchange rate. Our estimations reveal a systematic pattern in the sensitivity of the real exchange rate to external imbalances: larger countries are characterized by a higher absolute trade elasticity of the exchange rate.

  • Bilateral Portfolio Dynamics During the Global Financial Crisis, (with Philip Lane), European Economic Review 57, January 2013, pp.63-74.

    Abstract: There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries.

  • The Dynamics of Portfolio Holdings in Emerging Europe, (with Philip Lane), European Economy 75, February 2011, pp.66-81.

    Abstract: In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio equity liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions.

  • The Composition of Government Spending and the Real Exchange Rate, (with Philip Lane), Journal of Money, Credit and Banking 41, September 2009, pp.1233-1249.

    Abstract: We show that the composition of government spending influences the long-run behavior of the real exchange rate. We develop a two-sector small open-economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.

  • Fiscal Policy and International Competitiveness: Evidence from Ireland, (with Philip Lane), Economic and Social Review 40, September 2009, pp.299-315.

    Abstract: Our goal in this paper is to investigate the relation between government spending and the long-run behaviour of the Irish real exchange rate. We postulate that an increase in government consumption should be associated with real appreciation, while the impact of government investment is ambiguous. Empirically, we find that an increase in government consumption indeed appreciates the real exchange rate while an increase in government investment is associated with real depreciation. Accordingly, the level and composition of government spending matters for Irish external competitiveness.

  • External Imbalances and the Extensive Margin of Trade, (with Philip Lane), Economic Notes 37, November 2008, pp.241-257.

    Abstract: We quantify the role of the extensive margin in the recent trade dynamics of selected countries that are running large and persistent trade imbalances. We find that the role of the extensive margin is quite substantial, although it varies in significance across the countries in the sample. Finally, we highlight differences in behaviour between the fixed-varieties and varieties-adjusted terms of trade.