Change In Exchange Rate Regime Research Articles

Inflation and unemployment, new insights during the EMU accession

In the process of EU integration, toward the EA accession, we try to understand, how changes in exchange rate regime, attributed to the switch through the ERM-II and to the EA accession, influence the dynamic between inflation and unemployment, that is, swings on the Phillips curve coefficient. We look at a panel of EA countries, before and after their EA entry, over the last twenty years, using a recent work from McLeay and Tenreyro (2020) , to clarify the impact of losing the monetary autonomy. Accession to the Eurozone leads to a non-significant inflation/unemployment relationship. Accession to the Eurozone induces a non-significant inflation/unemployment relationship. We link this result to the fact that the small economies of the Eurozone do not have sufficient weight to influence the single monetary policy. This is corroborated by the fact that within the Eurozone, what we call the “economic leaders” maintain a significant trade-off between inflation and unemployment.

Changes in Exchange Rate Regimes and Some Macro Factors: Their Impacts on the Valuation of Bangladeshi Taka

Bangladesh, an emerging economy in South Asia, has gone through several regimes of exchange rate systems in the course of its 50 years of independence. A broad-based study to determine the exchange rate of the Bangladeshi taka (BDT) is missing in the existing literature. Using the annual data from 1972–1973 to 2017–2018, the study has measured the changes in exchange rates of BDT during three regimes: a fixed exchange rate, a semi-fixed system and a purely floating system or managed floating system that Bangladesh has followed in successive order. It has also described the factors that need to be affected by any change in the exchange rate. By using a desk research method, this article has investigated the roles of several macroeconomic variables such as the currency denomination of foreign exchange rate reserve components, money supply components, return on financial instruments or interest rates, gross domestic product, trade policy, asset holding strategy and interbank intervention strategy in BDT’s exchange rate fluctuations during those regimes. Among others, we found that Bangladesh’s volume of US dollars (USD) as a foreign reserve significantly outruns the sum of all other currencies and assets combined. However, an extreme dependency on USD might expose BDT to ‘currency risk’, which may be avoided by adopting a better nominal anchor and including some other major currencies in its basket.

Macroeconomic determinants of the demand for international reserves in Bangladesh

Recent financial crises have heightened the demand from emerging markets' and developing countries’ central banks for international reserves that can meet their emergency foreign currency liquidity needs at times of halts in capital flow. The necessity of reserves for weathering external shocks is well documented in the literature. Likewise, macroeconomic factors to determine the level of reserves have been central to many empirical studies. Motivated by Bangladesh’s stance in regard to reserve accumulation, we aim to investigate the macroeconomic determinants of the demand for international reserves in the country using quarterly data ranging from 1994Q2 to 2016Q4. We also examine the role of disequilibrium in the national money market in reserve movements during the same period. In addition, we check for a structural break associated with the exchange rate regime change in the reserves demand function. The Johansen cointegration test of reserve demand function reveals that the current account vulnerability and exchange rate flexibility play a crucial role in Bangladesh’s long-term reserve demand policies. However, reserves appear to be insensitive to economic size and opportunity cost. A single equation error correction estimate suggests that the monetary disequilibrium does not play a significant role in the short-term reserve movements. More importantly, a dynamic ordinary least-squares estimate suggests that switching to the flexible exchange rate regime in 2003 contributes to a structural change in the long-term reserve demand policies of Bangladesh. Since the empirical results suggest that Bangladesh’s reserve holding behavior is primarily driven by the precautionary motive, we propose that the country should continue to focus on increasing its reserve stock in relation to the current account vulnerability.

Exchange rate regimes and market integration: evidence from the dynamic relations between renminbi onshore and offshore markets

The Chinese renminbi (RMB) has been on the way of becoming a major international currency. This paper examines the impact of the RMB exchange rate regime and policy on the integration and information flows between RMB onshore and offshore markets. We employ a long sample of daily data encompassing multiple times of RMB exchange rate regime change (peg to managed float in 2005, re-peg in 2008, re-float in 2010, and the central parity reform in 2015), and study the dynamic conditional correlations and spillovers between RMB onshore spot market and offshore non-deliverable forward (NDF) market. It is found that the switch from exchange rate peg to managed float and a widening of the floating band strengthen cross-market correlation and information flows (especially offshore-to-onshore spillovers). A market-learning explanation is offered for the observation that the correlation collapse in the re-peg period was not as prompt as the correlation take-off in the 2005 reform period. These findings have important implications for China’s monetary and foreign exchange policies and shed light on the integration of China’s financial markets with the rest of the world.

Fractional Integration and the Persistence of UK Inflation, 1210–2016

This note examines the degree of persistence of UK inflation by applying fractional integration methods to historical data spanning the period 1210–2016; the chosen approach is more general than the popular ARMA models based on the classical I(0) vs. I(1) dichotomy. The full‐sample results do not suggest that UK inflation is a persistent process; however, the recursive analysis indicates an increase in the degree of persistence in the 16th century and more recently after WWI and in the last quarter of the 20th century. On the whole, monetary and exchange rate regime changes do not appear to have had a significant impact on the stochastic behaviour of inflation if one takes a long‐run, historical perspective.

Портфельные инвестиции в странах АСЕАН: влияние режимов регулирования валютных курсов

Портфельные инвестиции в странах АСЕАН: влияние режимов регулирования валютных курсов

Evolving Efficiency of Exchange Rate Movement: An Evidence from Indian Foreign Exchange Market

This study empirically verifies the evolving and time-varying efficiency of Indian foreign exchange market using the framework of adaptive market hypothesis (AMH). Whether market efficiency is time varying or static, and if time varying, identification of possible events causing such time-varying efficiency are the two major agenda of this study. We employ a set of recent methods which are robust and possess stronger power properties. Moreover, we follow a fixed-length rolling window approach to explore time-varying nature of market efficiency and to avoid data-snooping bias. Our overall findings suggest that market efficiency is not an all-or-nothing condition; it varies over time. We also find that episodes of efficiency coincide with emergence of major events and market microstructure issues. Particularly, changes in exchange rate regime, financial turbulence, major central bank interventions and trade volume are the prominent causes for time-varying efficiency in INR–USD exchange rate. The evidence of swing between efficiency and inefficiency can prompt currency traders to exploit arbitrage opportunities that emerge with different market conditions.

The Euro and the CFA Franc: Evidence of Sectoral Trade Effects

This paper estimates a gravity model of trade to evaluate the trade effects of the Euro on sectoral trade within the Eurozone (EZ), the CFA Franc Zone (CFA) and between the EZ and the CFA, when CFA countries acquired fixed rates against the non-francophone EZ members. The formation of the EZ provides a quasi-natural experiment to estimate the effects on trade of fixed exchange rates, since the change in exchange rate regime for CFA countries with all EZ countries but France was not trade related. This is tested using sectoral trade data for 175 countries over the period 1995–2016 and validated using a longer time period starting in the seventies. The main departure from Frankel (2008), is the estimation of a structural gravity model using sectoral trade and bilateral-sectoral fixed effects as well as controls for multilateral resistance, namely time varying country-sector fixed-effects for exporters and importers, in a PPML framework. The main results indicate that the introduction of the Euro does show positive and significant effects for export flows from the CFA to other EZ countries different from France, whereas exports in the opposite direction are negatively affected. Moreover, the results differ by sector and we find that agricultural and homogeneous goods exports from CFA countries to Euro adopters increased by around forty and hundred twenty percent, respectively after the euro adoption.

Трансграничные потоки капитала в Восточной Азии: влияние мероприятий валютной политики

Despite the ASEAN Community Vision 2025 plans to deepen and develop monetary and financial cooperation within member states, regional markets differ significantly from each other in the level of development and overregulation. Among ASEAN-5 countries, Singapore has the most developed and large financial market with the least number of applied restrictions. The remaining countries (Malaysia, the Philippines, Indonesia and Thailand) control virtually all capital account transactions. The examined five countries practice soft peg exchange rate regimes: a stabilized arrangement and a floating. Indonesia and Singapore apply a stabilized arrangement, and Malaysia, Thailand and the Philippines apply a floating. The regression analysis results show that changing exchange rate regimes of ASEAN-5 countries to a hard peg (a single currency basket) will have a significant effect on the volume of issued bonds in four of the five studied countries (all except Thailand). Indonesia will have the greatest effect of the exchange rate regime change. Thus, revaluation of the value of the East Asian currencies basket against USD by 1% will reduce the volume of issued bonds in Indonesia by 3.79%, and devaluation, on the contrary, will increase by the same amount. Consequently, Indonesia and other countries under study will have to continue the competitive devaluation policy against USD in order to have a positive effect of changing exchange rate regime. But in this case it will be a coordinated devaluation of all East Asian currencies and not a currency war. It is worth noting that the correlation between the volumes of bonds issued in national and foreign currencies in all the studied countries and fluctuations of East Asian currencies against each other and to USD is much weaker than the effect of the single currency basket. And in the case of the Philippines this correlation is not at all

Controlled Currency Regime and Pricing of Exchange Rate Risk: Evidence From China

Extant research finds that exchange rate pegs do little to reduce firms’ exposure to exchange rate risk in emerging markets. We study whether exchange rate risk exposures under a pegged/controlled floating currency regime can be priced in asset returns using unique data on exchange rate regime changes in China. As the only currency in the basket of International Monetary Fund’s (IMF) Special Drawing Rights that is not fully market-driven for its exchange rate formation, the Chinese RMB (renminbi) offers an ideal case to study the pricing of exchange rate risk in pegged and controlled floating regimes. We find a negative stock market reaction to the announcement of changes from a pegged exchange rate to a controlled floating regime, suggesting a negative stock valuation effect of expectation of increased exchange rate exposure to currency appreciation. Under the managed floating exchange rate regime, the volatilities of accounting performance measures are significantly greater for the companies with stronger exposure to foreign-exchange rate risk. More importantly, foreign-exchange rate risk is priced in equity returns under the controlled floating regime but not under the strictly pegged regime. Furthermore, the pricing is stronger for firms with higher sensitivity to economic channels transmitting the exchange rate risk exposure to risk premiums. Overall, our results suggest that currency hedging for a multinational corporation with foreign-exchange exposure is warranted under a controlled floating currency regime.

Testing for nonlinear unit roots in the presence of a structural break with an application to the qualified PPP during the 1997 Asian financial crisis

AbstractThis paper applies Monte Carlo simulations to evaluate the size and power properties in the presence of a structural break, for the standard Augmented Dickey‐Fuller (ADF) test versus nonlinear exponential smooth transition autoregressive unit root tests. The break causes the tests to be undersized, and the statistical power considerably decreases. Moreover, the effect is intensified in small samples and very much increased for more persistent nonlinear series. As a remedy, we modify the standard ADF and exponential smooth transition autoregressive unit root tests in order to adjust for a structural break. This improves both the power and the size considerably, even though the empirical size still is lower than the nominal one. More persistent series are more affected by structural breaks, and the new tests are most powerful under the existence of a rather persistent nonlinear data generating process (which is an empirically relevant and common type of data generating process). The proposed tests are applied to investigate mean reversion in the real effective exchange rates of 5 East and Southeast Asian countries, taking into account the structural change in exchange rate regime brought about by the 1997 Asian financial crisis. The empirical findings corroborate our simulation results; the modified more powerful tests are able to reject the unit root in all 5 countries, whereas the tests that do not consider the structural break could only reject in one of these cases.

The Euro and the CFA Franc: Evidence of Sectoral Trade Effects

This paper estimates a gravity model of trade to evaluate the trade effects of the Euro on sectoral trade within the Euro Zone, the CFA Franc Zone and between the Eurozone and the CFA Franc Zone, when CFA countries acquired fixed rates against the non-francophone Eurozone members. The formation of the Eurozone provides a quasi-natural experiment to estimate the effects on trade of fixed exchange rates, since the change in exchange rate regime for CFA countries with all Eurozone countries but France was not trade related. This is tested using sectoral trade data for 128 countries over the period 1995-2009 and validated using a larger sample of 180 countries over the period 1973-2013. The main departure from Frankel (2008), is the use of sectoral trade and the inclusion of bilateral-sectoral fixed effects as well as controls for multilateral resistance, namely time varying country-fixed-effects for exporters and importers, in the gravity model specification. The main results indicate that the introduction of the Euro is generally not associated with positive effects for average trade flows between the CFA Franc Zone and other Eurozone countries. However, the results differ by sector and we find that agricultural (homogeneous products) exports from CFA countries to Euro adopters increased by almost fifty (thirty) percent after the euro adoption.

The imported price, inflation and exchange rate pass-through in China

AbstractThis paper considers the effect of exchange rate (ER) level on China’s domestic prices during the period of 2003–2012. We examine China’s consumer price index (CPI), import price index (IPI) and producer price index (PPI) by using time series vector error correction analysis. The main finding of the paper is that ER pass-through has had a limited but growing effect on domestic prices and will continue to do so. ER regime change that was announced by Chinese government in 2005 led to an increased sensitivity of ER pass-through to domestic prices.

Exploring the Long-run and Short-run Relationship between Macroeconomic Variables and Stock Prices during the Restructuring Period: Does it Matter in Turkish Market?

This paper empirically investigated the dynamic relationship between Turkish stock market and macroeconomic variables, for the period span from January 2002 to December 2013. Specifically, we examined the effect of monetary policy changes during the tested period. Dummy variables were added to the model in order to overcome the effect of inflation rate targeting and exchange rate regime change in Turkey. Using VAR model, the result revealed that long-run relationship between share price index and the tested macroeconomic variables index of industrial production (IIP) Short-term interest rate (SINT), money supply (M2), and exchange rate (EXC), was maintained. Moreover, the findings from error correction term coefficient indicated that Turkish stock market adjusted its previous disequilibrium (due to positive or negative shocks) in one period at an adjustment speed of 4.449 percent monthly.

The Impact of Workers’ remittances on Economic Growth: Evidence From Kenya

Over the past decades, the levels of workers' remittances have grown to become one of the largest sources of foreign income to developing countries. It is an important source of income for households in the developing countries. Economists do agree that workers' remittances are crucial in the long run growth of a country. Empirical studies have been done for various countries and although most results show a positive relationship between workers' remittances and economic growth, other studies reveal negative and neutral relationships. In many of these studies, majority of which have been done from a regional or global perspective panel data has been used to estimate the impact of workers' remittances on economic growth with a few studies done using time series to cover a specific country. This study employs time series econometric techniques to investigate the impact of workers' remittances on economic growth in Kenya using annual time series data for the periods 1970 to 2010.Time series regressions results show a positive and highly significant impact of workers' remittances on economic growth, indicating that higher economic growth in Kenya is related with higher flow of workers' remittances in to the country. In addition the results indicate that gross capital formation and change of exchange rate regime from fixed to floating has a positive and significant impact on economic growth in Kenya. However, exports, private capital flows, final government consumption and elections appear not to have meaningful impact on the economic growth in Kenya. The government should therefore formulate policies which create incentives for Kenyans in the diaspora to continue investing in the country and also a conducive macroeconomic environment to support investment and growth.

U.S. Dollar and Determination of the Renminbi Value: Short-Run and Long-Run Approaches

This article examines the importance of the U.S. dollar relative to other currencies in determining the renminbi value before and after an announcement of the exchange rate regime change by the People’s Bank of China. Test results reveal a discernible change in the exchange rate regime after the announcement and varying, yet dominant, weights of the U.S. dollar in the specified currency basket during postannouncement periods. Additionally, the presence and magnitude of the U.S. dollar weight in the long run appear to be related to the extent to which the renminbi fluctuates in the short run against the U.S. dollar.

EXTENT OF EXCHANGE RATE COORDINATION IN ASIA

High level of intra-regional trade and negative spillovers from competitive devaluation make exchange rate coordination extremely desirable in Asia. Employing a hypothetical Asian Currency Unit we evaluate the degree of coordination among Asian currencies. Traditional empirical tests yield little evidence of coordination among real and nominal exchange rates. However, introducing endogenously determined structural breaks to account for changes in exchange rate regimes provides more mixed evidence. While there is still little evidence for coordination in nominal terms, some degree of coordination among real rates emerges. The limited evidence for exchange rate coordination can be explained by the diverse exchange rate regimes prevailing in these economies, signaling differences in policy objectives.

Growth dynamics, financial crises and exchange rate regimes

We empirically investigate the impact of financial crises and nominal exchange rate regime changes on growth dynamics. To that end, we estimate autoregressive models using panel data for 163 countries classified into four income groups during the period 1970–2011. Results suggest that financial crises significantly reduce short-run and long-run growth for high-income and lower-middle-income countries. In the case of the upper-middle-income countries, financial crises inflict a negative and statistically significant impact on short-run growth but only a marginally significant effect on long-run growth, while for lower-income countries they only have a short-run influence. As for the exchange rate regimes, we find that they only positively affect the short-run growth rate for lower-middle-income and low-income countries, not showing any significant impact on long-run growth rates.

Real exchange rate volatility, financial crises and exchange rate regimes

This article examines real exchange rate (RER) volatility in 80 countries around the world, during the period 1970 to 2011. Two main questions are raised: are structural breaks in RER volatility related to changes in exchange rate regimes or financial crises? And do these two events affect the permanent and transitory components of RER volatility? To answer these, we employ two complementary procedures that consist in detecting structural breaks in the RER series and decomposing volatility into its permanent and transitory components. Our results suggest that structural breaks in RER volatility coincidence with financial crises and certain changes in nominal exchange rate regimes. Moreover, our findings confirm that RER volatility does increase with the global financial crises and detect that the more flexible the exchange rate regime, the higher the volatility of the RER using a de facto exchange rate classification.

The Response of the Johannesburg Stock Exchange to Changes in Exchange Rate Regimes

This paper used Granger Causality test and descriptive statistics analysis to examine the response of the South African stock market to different exchange rate regimes from 1978 to 2008. The analysis of the history of the exchange rate regimes in South Africa showed that the flexibility was introduced in 1979 but the exchange rate shocks of great magnitude appeared during the period of the free-floating exchange rate system (1995-2008). Results reported in this paper revealed that the response of Johannesburg Stock Exchange to changes in the exchange rate was not consistent throughout different exchange rate regimes. A significant correlation between the variables during the sub-periods characterised by capital controls was observed. Granger causality test revealed that the direction of causality changed with exchange rate regimes. This paper concluded that changes in exchange rate regimes have a significant impact on the relationship between the stock market index and the exchange rate. DOI: 10.5901/mjss.2013.v4n6p413