Analysis of the Role of Exchange Rate Volatility in Monetary Policy Conduction in OECD Countries: Empirical Evidence from Panel-VAR Models

Oguzhan Ozcelebi

doi:10.5772/intechopen.74405

Abstract

In this study, panel vector autoregression (PVAR) models are employed to examine the relationships between industrial production growth rate, consumer price inflation, short-term interest rates, stock returns and exchange rate volatility. More specifically, I explored the consequences of the dynamics detected by the models on monetary policy implementation for 10 OECD countries. This study indicates that factors that may cause a rise in short-term interest rates with respect to the USA can lead to volatility in exchange rates and thus macroeconomic instability. It is also implied that sustaining macroeconomic growth and decreasing inflation can result in increased export performance, which in turn provides the amount of US dollars to curb volatility in US dollar quotations. Accordingly, this study reveals that high importance should be given to both monetary and non-monetary factors in the open-economy framework to detect the possible impacts on trade and capital flows by dynamic stochastic general equilibrium (DSGE) models. Due to their exchange rate risk of economic agents, I also suggest that the economic policy makers of these countries had better create a theoretical framework including financial frictions, economic agents' preferences and different shocks to smooth the variations in exchange rates and minimise the negative outcomes of Brexit.

Highlights

After the collapse of the Gold standard system in 1971, the vast majority of countries have abandoned fixed exchange rates for floating systems, which in turn lead to an increased84 Trade and Global Market volatility in exchange rates
I employed the moment and model selection criteria (MMSC), which is analogous to the Akaike Information criterion (AIC), the Bayesian Information Criterion (BIC), and the Hannan-Quinn Information Criterion (HQIC)
The estimations of panel vector autoregression (PVAR) 1 model indicated that contractionary monetary policy implementation in Canada, Czech Republic, Iceland, Israel, Korea, Mexico, Norway, Poland, Sweden and the United Kingdom can lead to volatility in the exchange rates of these countries, which in turn may influence foreign competiveness and, their current accounts negatively

Summary

Introduction

After the collapse of the Gold standard system in 1971, the vast majority of countries have abandoned fixed exchange rates for floating systems, which in turn lead to an increased. 84 Trade and Global Market volatility in exchange rates. In order to curb exchange rate volatility, policy makers and researchers employ quantitative models to determine which macroeconomic and financial factors can be important. According to [1], it can be asserted that exchange rate volatility can both be explained by monetary and non-monetary factors. Financial openness can be regarded as another crucial factor influencing the relationship between exchange rate volatility and macroeconomic variables. It should be noted that macroeconomic and financial variables may have different impacts on nominal and real exchange rate volatility

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Conclusion