Currency Devaluation Research Articles

Understanding the exchange rate pass-through to consumer prices in Vietnam: the SVAR approach

PurposeThe purpose of this paper is to examine the degree of the exchange rate pass-through (ERPT) to the consumer price index (CPI) at both aggregated and disaggregated levels in Vietnam. Updated data of the nominal effective exchange rate (NEER) and bilateral exchange rate (BiER) have been utilized in this study for the comparison purposes.Design/methodology/approachAdvanced time-series approaches such as a structural vector autoregressive framework, structural impulse response functions (SIRFs), and structural forecast-error variance decomposition (SFEVD) are utilized in this paper.FindingsEmpirical findings from this paper present an incomplete degree of the ERPT to the aggregated CPI. The ERPT based on the BiER is observed to have substantially larger magnitude than the NEER-based pass-through. For the disaggregated level, the degree of the ERPT varies considerably across sub-components of the CPI, with a higher magnitude of the ERPT elasticity being found from the BiER estimations. The index of housing and construction materials has the largest ERPT based on the BiER, followed by the food and foodstuffs (1.00 and 0.56, respectively). The macroeconomic and financial environments as well as an economic integration into the global market may be the main causes of a higher ERPT in Vietnam in comparison with other ASEAN countries.Research limitations/implicationsThe significant and incomplete pass-through of the exchange rate in Vietnam can affect firms’ and households’ budget planning, savings and profits. This finding generally implies that the cost of devaluation of the domestic currency affects the society as the whole in terms of welfare. The State Bank of Vietnam should carefully consider the overall effect of welfares when formulating and implementing strategies of currency devaluation. In addition, the Vietnamese economy becomes more sensitive to external vulnerabilities via changes of the exchange rate during an increasingly economic integration into the global market. In order to maintain inflation stability, it is vitally important to reduce the impact of exchange rate movements on the domestic prices, both aggregated and disaggregated levels, by pursuing either monetary policy credibility or inflation targeting.Originality/valuePrevious studies on the ERPT literature in the Asia region or for emerging countries focus mainly on the aggregated data of the CPI. Previous studies were conducted before the global financial crisis in 2008/2009. The current paper is the first of its kind to examine the pass-through from exchange rates to consumer prices in Vietnam using both aggregated and disaggregated data.

Causes of Loss Competitivenesses of the Company Ford in the Russian Federation

The departure of large foreign car manufacturers from the Russian market negatively affects all partners and interested parties car dealers, suppliers, employees, buyers and fans of brands of departed companies. This departure became even more painful for Ford itself, which leaves the domestic market with a loss of $ 500 million, which is 14% of the total annual profit of Ford Motor Co. in 2018 This sad event was caused by a number of circumstances: the consequences of the global financial crisis, the devaluation of the national currency, the decline in sales in the Russian car market, company errors in pricing, marketing policies and updating the model range, in assessing the prospects for marketing products and creating excess production capacities, as well as refusal to independently manage Russian business and the choice for this Russian partner in a joint venture. A close study of the reasons that forced the recent leader of the Russian car market to Ford to close its car factories and stop selling them in Russia is presented in the article. Particular attention is paid to the development of the domestic car market, the development of effective competition strategies in the face of falling household incomes and rising product prices, state support for the domestic auto industry, as well as the specifics of creating joint ventures in the Russian Federation and assessing the resource capabilities of joint venture partners.

The Impact of Currency Devaluation on The Banking Sector of Azerbaijan

This master thesis aims to examine an empirical investigation of the impact of Azerbaijan national currency devaluation on the banking sector of Azerbaijan. We will identify how currency devaluation affects the performance of the banks in Azerbaijan. In recent decades, several developing countries have confronted volatility in national currency requiring major reforms in the financial sector and economy. Devaluation is considered a tool of central banks to regulate the national currency. The monetary authorities apply for devaluation in terms of enhancing the trade balance of countries. Macroeconomic equilibrium, price stability, financial and banking stability, sustainable economic growth, or sustained economic growth reflect the uppermost targets of monetary policy. On the other hand, this study will determine the profitability of banks in Azerbaijan and analyze the devaluation impact for 2013-2018 years. However, the price shifts of oil-gas resources in 2014 sketched the financial institutions severely in Azerbaijan. In this thesis, the modification of the dependent and independent variables of the regression model will be tested by using the Panel Data Analysis Method. Moreover, I decided to research this topic for my thesis, as my further plans are to continue my PhD degree and improve my career in this area. In this thesis, I will introduce a brief overview of the banking sector in Azerbaijan, and the effects of two devaluations by the Central Bank of Azerbaijan Republic in 2015. This thesis will check the effects of exchange rate fluctuations in Azerbaijan banking sphere by running balanced panel data for the period 2013-2018 years. The empirical findings of this study suggest that the changes in a foreign exchange rate have a statistically significant and adverse impact on the profitability of Azerbaijan banks.

WAGE FLEXIBILITY, EXCHANGE-RATE COMPETITIVENESS AND FULL EMPLOYMENT: THE FIRST HERETICS

ABSTRACT This paper discusses Keynes’ and Kalecki’s rejection of the notion that downward wage flexibility would ensure full employment, recollecting also Steindl’s stagnation theory, which extends to the long-run Kalecki’s ideas. It then considers the association between wage fall and currency depreciation and examines the Latin American contribution to the arguments of why currency devaluation may depress aggregate demand. Afterwards, it briefly reflects on the economic policy consequences that the authors studied here inferred from their analysis. It finally adds a succinct remark on the author’s empirical findings on this issue.

Financial Fragility, Regime Switching and Monetary Policy - With Application to Emerging Markets

The experience of the Asian currency and financial crisis in the years 1997-8 encouraged economists to develop some open economy nonlinear macro models. Such models allow for nonlinearities – studying the effects of contractionary currency devaluation in contrast to the standard model of expansionary currency devaluation. One in particular can distinguish here between slow and fast moving risk premia and exchange rates. As shown currency depreciation and slow moving exchange rates and risk premia may render the economy expansionary whereas fast moving exchange rates (fast depreciation) and fast increase in risk premia may generate macroeconomic instability and contractions. This is of course impacted by monetary policy that recently has moved from conventional (interest setting) to unconventional (asset purchasing) policies. The latter was in particular aiming at asset prices and risk premia, namely to bring risk premia of private assets (stocks and bonds) down and reduce credit spread for private and public bond yields. By doing this central banks are de-risking assets to stimulate aggregate demand (Caballero et al. 2020). But the latter policy has produced also international tensions due to spillover and volatility effects to other countries. In a generic nonlinear dynamic model of the finance-macro link we include the dynamics of the inflation rates, output gap and financial variable such as credit flows, risk premia and exchange rates. In the empirical part of the paper we examine then the interaction between the real and financial sectors of emerging market economies in particular post the financial crisis 2008-9. Though the dynamic model is operating with both the output gap and credit gap in our empirical analysis we work with the output gap only, since credit flows are hard to obtain for the large number of EM countries we study. Looking at a two-regime output gap and some financial indicators – such as risk premia, banking beta, and exchange rates – we then adopt the non-linear logistic vector smooth transition autoregressive (LVSTAR) approach of Schleer and Semmler (2015) with a logistic type transition function governing the LVSTAR system. Our study reveals that financial indicators of emerging economies show different responses to external shocks. With a positive shock in risk premia, the exchange rate depreciations occur in most emerging economies, and more so if the country faces a negative output gap.

The Effect of Domestic Currency Devaluation on Trade Balance in Ethiopia

The prime objective of the study was to investigate the effect of domestic currency devaluation on trade balance in Ethiopian over the period 1974-2016. To address the objective, ARDL and Error Correction Model were applied. The ARDL bound test result shown that There is a long run relationship between real effective exchange rate, real domestic income and lending interest rate .Specifically, real effective exchange rate, real domestic income and lending interest rate have a significant and positive effect on trade balance; whereas money supply and government expenditure deteriorated trade balance while deposit interest rate was insignificant in the long run. This clearly shows that both elasticity and absorption approaches improved the trade balance but monetary measures have deteriorated it. Hence; the government should take follow contractionary monetary policy and absorption approach through productivity improvement, diversification of export sectors and expansion of import computing industries to overcome trade deficit. Keywords: Ethiopia, Trade Balance, Currency Devaluation, ARDL Bound test. DOI : 10.7176/RJFA/11-1-03 Publication date: January 31 st 2020

Реальні та гіпотетичні ризики майбутнього накопичувального рівня пенсійного страхування в Україні

No decisive steps have been taken in Ukraine to introduce a cumulative level of pension provision. The significant number of risks is one of the reasons for this. The purpose of the article is to study the theoretical foundations of hypothetical and real risks of the cumulative level of the pension system in Ukraine, which is expected to be introduced. A number of methods were used in the study, including abstract-logical, methods of analysis and synthesis and comparative analysis. It is argued that the cumulative level of pension provision will be characterized by a number of real risks: organizational and managerial risk, risk of high administrative costs, risk of depreciation of pension savings, selective risk, and risk of insufficient contributions. Hypothetical risks include market volatility risk and criminal risk. The cumulative level of pension provision is significantly affected by the risk of depreciation of pension savings, because given the high inflation rate and devaluation of the national currency, one should not expect a decent level of pensions in the long term, even taking into account the investment component of the cumulative level. It has been established that the domestic legal framework does not specify a mechanism for protection against such a risk, which undermines credibility to the functioning of the entire cumulative component of the pension system. Selective risk and the risk of financial market volatility are closely related to financial market trends and, under adverse conditions, may manifest themselves in the investment component of pension savings. It has been determined that the mechanism for overcoming such risks has not been defined in regulatory legal acts yet. Jointly, these risks determine the lack of principal steps in the process of reforming the modern pension system. In the case of the introduction of the cumulative level of pension provision, a system should be provided to prevent the risks of depreciation of pension savings and selective risks. Further studies will address the mechanisms that can prevent or reduce selective risks and risks of depreciation of pension savings.

Tail Risk Network Effects in the Cryptocurrency Market during the COVID-19 Crisis

Cryptocurrencies are gaining momentum in investor attention, are about to become a new asset class, and may provide a hedging alternative against the risk of devaluation of fiat currencies following the COVID-19 crisis. In order to provide a thorough understanding of this new asset class, risk indicators need to consider tail risk behaviour and the interdependencies between the cryptocurrencies not only for risk management but also for portfolio optimization. The tail risk network analysis framework proposed in the paper is able to identify individual risk characteristics and capture spillover effect in a network topology. Finally we construct tail event sensitive portfolios and consequently test the performance during an unforeseen COVID-19 pandemic.

Teaching Organic Chemistry at the American University of Beirut Through the COVID-19 Pandemic

The COVID-19 pandemic has single-handedly overturned a traditional lecture-based educational system at universities on a global scale. The required abrupt move to an online platform for education has caused tremendous challenges for educational systems in general and specifically also in the chemical sciences. In Lebanon particularly, the COVID-19 pandemic raked havoc on a country entrenched in popular uprising and riddled by an economic collapse observing unprecedented devaluation of the national currency. In this situation, the move to online education had caused tremendous stress and burden for faculty and students raising the need to develop mitigation strategies by embracing reduction in material and a careful consideration of students’ mental health. This commentary presents the author’s experience of delivering undergraduate Organic Chemistry courses at the American University of Beirut (AUB) through the COVID-19 pandemic, during the spring and summer 2020 semesters. While the author’s pre-recorded lectures of Organic Chemistry I were vital to the online delivery of course material, this commentary particularly highlights the inclusion of supplementary online assignments that include: videos to illustrate a covered organic chemistry concept, instructional videos to explain a multiple choice question (MCQ) of their creation, a cartoon to exemplify an organic chemistry concept, a cartoon to reflect on studying organic chemistry during the COVID-19 pandemic and a group assignment that allowed students to assume social responsibility.

The Impact of Public Debt on Economic Growth in Ukraine

<p><strong>Theoretical background:</strong> The growth in government borrowing, carried out in connection with the banks’ capitalisation, significantly increased the state budget expenditures aimed at servicing the capitalisation domestic public debt, which reinforces the general tendency regarding the exacerbation of the budget risk in the debt sphere in Ukraine. A weighty debt-creating factor was the budget deficit, which was covered by borrowing. Proceeding ahead of the rate of increase in debt volumes in comparison with gross domestic product (GDP) growth rates under the influence of internal and external destabilising factors contributed to the excess of the debt levels security indicators and increased the insolvency risk of the state. The increase of the obligations share denominated in foreign currency or linked to the exchange rate in the overall debt structure as an important indicator of the financial system’s vulnerability to exchange rate fluctuations creates additional threats to debt sustainability regarding the increasing currency risk and the national currency devaluation.</p><p><strong>Purpose of the article:</strong> The article is focused on studying the dynamics and structure of Ukraine’s public debt, its ratio to GDP, and an empirical analysis of the relationship between public debt (external and domestic) and economic growth in Ukraine.</p><p><strong>Research methods:</strong> To empirically test the relationship between public debt and economic growth in Ukraine over the 1992 to 2018 period, multiple regression models were conducted. A real GDP per capita was used as an indicator for economic growth and the debt-to-GDP ratio was used as an index of public debt. Research hypotheses were the following: H1: The public external debt-to-GDP ratio and GDP per capita have a strong negative and statistically relevant correlation; H2: The public domestic debt-to-GDP ratio and GDP per capita have a strong negative and statistically relevant correlation.</p><p><strong>Main findings:</strong> Examining the dynamics and structure of Ukraine’s public debt by borrowing market (external and domestic), it is concluded that there is no strong negative or positive statistically relevant correlation between the public debt-to-GDP ratio and GDP per capita for Ukraine. The impact of this factor is so insignificant that it encourages further research to verify that low GDP growth rate causes the increase in Ukraine’s public debt.</p>

Empirical Relationship of Exchange Rate with Inflation, International Trade and Gross Domestic Product (GDP) in Pakistan’s Economy

In the modern world, the exchange rate plays an important role in measuring the strength of country’s economy in global economic conditions. An exchange rate is an important tool for controlling various macro-economic variables, and it is itself affected by different macro-economic variables. Pakistan is a developing country of the world and its unstable economy faces high variability in the exchange rate or devaluation of the domestic currency. Therefore, this study investigates the relationship of an exchange rate with selected macro-economic variables (i.e. import, GDP, Inflation & export), with a special focus on Pakistan’s economy. It also aims at finding out the degree of strength at which selected independent variables to leave a significant impact on the exchange rate in the economy of Pakistan (i.e. during the period of 1992 to 2017). For this secondary database study, data extracted from official website of World Bank, State Bank of Pakistan and Economic Surveys of Pakistan. Multiple regression models were used to measure the empirical impact of selected independent variables on exchange rate. Findings show that the Import and Gross Domestic Product (GDP) have a significant negative impact on exchange rate whereas, export and inflation have a significant positive impact on the exchange rate in the economy of Pakistan. The study recommends that the Government of Pakistan should adapt to make its exchange rate policy more effective through high production, more export with a reduction of import and price stability.

Current methods of the enterprise’s creditability assessment

The article is devoted to the interpretation, analysis and systematization of the methods of credit assessment of enterprises. Taking into account the current state of the economy of Ukraine, as well as the financial state of most domestic enterprises, a considerable number of non-performing loans, Ukrainian banks are trying to develop, refine and improve the process of lending to customers. The number of non-performing loans in banks' portfolios indicates that banks do not cooperate with enterprises. Today, the issue of loan repayment is very painful: unstable economic situation, declining corporate incomes, devaluation of the national currency are among the main reasons for the large number of non-performing loans. In today's context, loans cannot be provided solely on the basis of trust, the lender must have other guarantees of repayment of own funds. Therefore, any financial institution examines the borrower for creditworthiness (evaluates its ability to repay debt on time). During the writing of the article, the authors noted that the problem is the determination of quantitative standards for comparison in the analysis, because there is no single clear value of the indicators. That is why it is impossible to single out the indicator, which is due to industry affiliation, and the standards given in the economic literature, the desired values of financial ratios, do not contain industry specifics and the specifics of the enterprise. The research problem is determined by the fact that there is no unified regulatory framework for a real assessment of the financial condition of the borrowing enterprise, and accordingly, there are no comparative indicators that are minimally acceptable for a particular industry in question.

Sovereign credit risk and exchange rates: Evidence from CDS quanto spreads

Sovereign credit default swap quanto spreads tell us how financial markets view the interaction between a country’s likelihood of default and associated currency devaluations (the Twin Ds). A no-arbitrage model applied to the term structure of eurozone quanto spreads can isolate the Twin Ds and can gauge the associated risk premiums. Conditional on the occurrence of default, the true and risk-adjusted one-week probabilities of devaluation are 42% (2%) and 90% (55%) for the core (periphery) countries. The weekly risk premium for euro devaluation in case of default for the core (periphery) exceeds the regular currency premium by up to 18 (13) basis points.

Accounting-Analytical and Evaluating Procedures for Defining the Economically Feasible Activities of the Oil Processing Enterprises of Kazakhstan

The issue of economic safety of an enterprise implying the security, control, insurance or modernization of the production is currently rather popular. So, the main objective of the paper is narrowed to the characteristics of the accounting-analytical and evaluating procedures for defining the economically feasible activities of the enterprises. The paper presents an analysis of the work of the oil processing enterprises in the territory of Kazakhstan. The novelty of the research is in the fact that due to the devaluation of the national currencies and the decrease in the cost of the oil barrel, a significant extent of the conducted and implemented operations has lost its economic sense. The paper notes that the feasibility of conducting particular financial-economic procedures should be estimated not by the strategical parameter, but also by the set of rules and tricks of the analytical and evaluating procedures. We defined the basic approaches to the evaluation of the attributes for conducting the economically feasible activities.

Currency devaluation and trade balance: Evidence from the US services trade

This study aims to revisit the effectiveness of using currency devaluation as a policy tool to improve trade balance by estimating the exchange rate elasticities of services trade between the US and rest of the world with quarterly disaggregated services trade data from 1999 to 2015. Empirical results reveal that the impacts of currency devaluation on individual services trade are mixed and largely depend on the nature of services. Using currency devaluation to raise export services trade and reduce import services trade seems to be more effective in the long-run but not in the short-run. It is interesting to note that some individual services trades are insensitive to exchange rate changes. The estimates also reveal that most categories of services trade are income elastic and economic growth plays a key role in determining the imports and exports of services trade.

Напрями забезпечення стійкості економіки в умовах глобальної фінансової нестабільності

The financial instability of the world economic space and the accelerated changes in the structure of its socio-economic environment affect the development of national economies in conditions of shocks that cause economic losses, disrupt the parameters of the economic system and create the threat of financial and economic crises. In order to respond quickly to the emergence of shocks in the face of global financial instability, the article identifies key areas of resilience. On the example of anti-crisis policies of European countries such as Poland and Germany, it was determined that the key directions of ensuring the resilience of their economies were investment privileges and attractive credit conditions.Poland’s attractive investment climate has ensured a stable growth of its economy after the 2008-2009 crisis. The GDP per capita GDP growth rate in 2008-2017 was 37.48%.The introduction of an attractive lending system in Germany has ensured a rapid post-crisis economic recovery. The GDP per capita growth rate of Germany in 2008-2017 was 25.01%. For Ukraine, during the period of the financial and economic crisis of 2008-2009 and the crisis that began in 2014, credit was used to support financial stability. Against the backdrop of falling foreign exchange reserves, devaluation of the national currency, Ukraine was motivated to cooperate with the IMF. For the period from 2008 to 2018, Ukraine was allocated under the IMF lending programs - $ 66 billion, but in fact, $ 27 billion was transferred due to Ukraine’s failure to fulfill its obligations. The GDP per capita growth rate of Ukraine in 2008-2017 was 3.12%. IMF financial assistance is one of the key areas for resilience of economy, as it involves systemic socio-economic reforms. Effective implementation of reforms will ensure economic growth and return investors’ interest in the Ukrainian economy.

Interest Rate Parity with Credit Risk: Implications for Carry Trades

The incredible profitability of the carry trade over the past six decades constitutes a puzzle for interest rate parity. Contrary to recent behavioral or friction-based approaches that explain deviations from traditional interest rate parity, I derive interest rate parity in a general arbitrage pricing model of foreign exchange with credit-risky sovereign lending and sharp currency devaluations associated with default; in particular, foreign sovereign credit risk makes forward contracts more valuable relative to standard covered interest rate parity. I calibrate the model for Mexico and the United States, and find that credit risk and currency devaluation fully account for the profitability of both the covered and uncovered carry trade. Modest default probabilities are sufficient to explain deviations from covered interest rate parity for G10 countries. I find support for the recent notion that the United States is a global provider of safe assets, via default intensities implied by currency forward contracts.

Austerity versus pragmatism: a comparison of Latvian and Polish economic policies during the great recession and their consequences ten years later

ABSTRACTDespite many initial similarities, Latvia and Poland represent two opposite extremes in terms of practical and theoretical approaches to the economic crisis. The Polish government applied a ‘pragmatic’ approach to fight the recession, based on expansionary fiscal policies and currency devaluation. Conversely, the Latvian administration opted for the Austerity and internal devaluation strategy. Consequently, the objective of this paper is to analyze, from the perspective of political economy, the strategies chosen for the economic crisis management and their effects in Latvia and Poland, in light of the main EU narratives about its causes and responses. The research contends that the economic performance of both countries during the crisis was due to their respective economic structures. On the one hand, Poland is a bigger, more diversified and industrialized economy, with fewer channels of vulnerability and could apply expansionary policies effectively. On the contrary, the economic model established in Latvia generated a high exposure to external shocks, in particular, with a double vulnerability in the banking sector. In this context, due to internal and external motives, the Latvian government decided to apply the austerity and internal devaluation strategy, worsening the economic decline and the subsequent recovery.

Rising mass incomes as a condition of capitalist growth. Preserving capitalism through the empowerment of labor in the past and the present

Capitalism is market-regulated production for profit. Net profit depends on net investment spending. Net investment spending ultimately requires rising mass incomes. Both the transition to capitalism and its continued existence require social embeddedness and labor having negotiating power. Such a configuration is not an inevitable nor automatic result of history. Rather, this configuration is regularly threatened, because capitalists are not interested in preserving labor’s strength. Labor supports said configuration indirectly by the wage struggle. Where negotiating power of labor does not exist, market relations do not lead to capitalism but instead to the shedding of labor, to marginality, and to relations of rent appropriation. Today’s marginality-ridden economies of the Global South have become competitive in lines of production which are important for the leading industrial countries; however, they are competitive not on the basis of low real wages but on the basis of enhanced opportunities for currency devaluation. The tendency of wage restraint, in both the Global South and West, increases the danger of global underconsumption. There are considerable residual difficulties in bringing labor with different historical and cultural backgrounds in the West and in the South together in order to strengthen labor against international big business

Asymmetric Effects of Real Exchange Rate on the Trade between Iran and China

The Exchange rate and policies related to that have long been a subject of interest in Iran and one of the main challenges of the country's economy. The exchange rate determinant, effects of currency depreciation or devaluation on a country's trade balance and economic variables are usually critical issue in Iran. So, this paper examines the effect of the real exchange rate on the trade balance between Iran and China which is one of its largest current trade partners. For this purpose, a nonlinear symmetric method is used over the period of 1993-2016. The results show that the most appropriate method in such studies is the use of asymmetric and nonlinear models, and it provides more efficient short-run and long-run coefficient estimates. On the other hand, the increase of the exchange rate, which is the depreciation of the Rial against the Yuan, improves in the long-run and short-run trade, although its long-term effect has been more than its short-term effects. But the depreciation of the Yuan makes the balance in favor of China, as well as the effect of the depreciation of the exchange rate more than its effect on the trade balance between the two countries. Therefore, it is suggested that the realization of the value of the Rial against the yuan and allowing the depreciation of the national currency in line with inflation and other indicators would increase the competitiveness and expand foreign trade.