Current Account Convertibility Research Articles

Indian Falling Rupee Impacting Foreign Education

The volatility of foreign exchange rate is a characteristic feature of flexible exchange rate regime initiated in early 1970s. After independence, in a paradigm shift in exchange rate regimes, the Indian rupee changed path from par value system to basket-pegged system. It was closed in 1991 and, for one year, India followed a dual exchange rate system through Liberalized Exchange Rate Management System (LERMS) which replaced the pegged exchange rate regime in March 1992 leading ultimately to unified exchange rate system in March 1993. It was an important step towards current account convertibility which was finally achieved in August 1994. But a widely recognized fact is that the power and greed politics of Wall Street over the years led to the development of unfettered stock and forex markets which are never self-correcting. J.M. Keynes long back believed and advocated that markets left to their own measure could be destructive leading to cycles of recessions, depressions and booms. The continuously falling Indian rupee against US dollar has been adversely affecting the Indian economy, particularly the students studying in USA, UK, Canada, and Australia etc. In USA, Indian student’s population is largest, next only to China.

Management of Exchange Rate in India : A Look at Recent Depreciation of Rupee

India has recently gone through the crisis of sharp depreciation of rupee and depletion of foreign exchange reserve resulting into inflation, demand recession and slow down of economic activities. The paper examines issues related to management of both domestic and external sectors of Indian Economy in a Globalized world. The paper first examines the operation of open economy- the interconnectivity developed through exports and imports and capital flows. Then, an analysis is carried out on long period movements of the exchange rate in the regime of full Current Account and Partial Capital Account convertibility of rupee. The statistical analysis on the association of exchange rate movements with various components of capital inflows and Current Account deficit has been done. The last section analyses, the crisis period until Sept. 2013, measures to manage the crisis and turnaround of the external environment of Indian economy in the framework developed in the paper.

Black and official exchange rates in Morocco: an analysis of their long-run behaviour and short-run dynamics (1974–1992)

Using Vector Error-Correction (VEC) model estimation on monthly data from Morocco for the period January 1974 to December 1992, this article tests the hypothesis that there is a long-run stable relationship between the official and the black-market exchange rates for US dollars. We also examine the short-run dynamics in the relationship between the two markets. The econometric results indicate that the two exchange rates are cointegrated. Furthermore, we reject weak exogeneity in the case of the official exchange rate, but fail to reject it in the case of the black-market rate. Granger causality tests show that the black-market rate causes the official exchange rate. The results seem to support the efficiency hypothesis, suggesting that participants in the black-market are able to anticipate changes in the official exchange rate. The findings also suggest that Morocco's decision (in January 1993) to introduce only current account convertibility and keep controls on capital accounts was wise.

Rupee Convertibility: Current and Capital Account Convertibility

Convertibility meaning - Convertibility of a currency implies that a currency can be converted into another currency without any limitations or any control. A currency is said to be fully convertible, if any currency can be converted into some other currency at the prevailing rate of exchange. Now the issue is why we need to convert one currency in terms of another. This can be explained with the help of a simple example. If a person in India wants to purchase some commodity from the U.S. then he will have to pay the seller in US dollars. Thus, he needs to convert rupee in terms of US dollar.

The Full Convertibility of Renminbi: Sequencing and Influence

This paper examines the issue of achieving full convertibility for the Chinese currency, Renminbi (RMB), and its impact on the economies of both mainland China and Hong Kong. It focuses on the sequencing of Renminbi's full convertibility, clarifying the different concepts of currency convertibility, i.e. current account convertibility, capital/financial account convertibility, and full convertibility. It also discusses the differences between removing restrictions on international transactions and removing restrictions on the exchange of foreign currencies. There still exist various extremely strict restrictions on capital/ financial account convertibility in China. There is still a long way to go before these restrictions can be removed completely. China's accession to the World Trade Organization (WTO) will surely drive the course of Renminbi's full convertibility. However, the Renminbi may not become a fully convertible currency within the five years after China's accession to the WTO. This paper comes to the conclusion that there does not exist a uniform or fixed sequence in adopting the full convertibility of a currency due to the differences between countries. At the same time, based on the common practices and basic sequence taken by most countries in the world, drawing on the experience and lessons from other countries' practice and given the fact that China is a large developing country, we also conclude that a progressive and prudent sequential process is needed for the full convertibility of Renminbi.

Hot Money Inflows and Renminbi Revaluation Pressure

Despite a series of revaluations, which started in July 2005, hot money has been sporadically sneaking into China in anticipation of further revaluations of the renminbi. In this paper we build a monetary model to show how anticipated revaluations lead to the instability of a pegged exchange rate regime. This model assumes current account convertibility and some degree of capital control, and fundamentally sound domestic policies and economy, as is the case in China. The model demonstrates that market-oriented interest rates can act as an automatic stabilizer to ease revaluation pressures, but cannot resolve them completely because the nominal interest rate has a zero nominal bound. Therefore, the official parity is difficult to defend and the revaluation expectations can be self-fulfilling, in the absence of external intervention. The empirical results of Granger causality tests are consistent with the main findings of our theoretical model. There are a number of policy intervention measures that can extend the life of a pegged exchange rate regime.

Alternative paths to structural adjustment in a three-gap model: the case of Uzbekistan

This study presents an internally consistent macroeconomic framework that could be used as a first step toward a more comprehensive quantitative and qualitative assessment of the adjustment alternatives facing Uzbekistan. The three-gap frame work focuses on the major imbalances of the economy for evaluating policy choices facing Uzbekistan. It lays emphasis on both domestic and external factors that determine economic outcomes and welfare. An attempt is made to quantify two policy scenarios (gradual as against an accelerated policy implementation strategy). It turns out that an aggressive adjustment policy would indeed improve most perform ance and welfare indicators. Two major ingredients of such an aggressive adjustment strategy are the unification of the exchange rate and implementation of current account convertibility in the balance of payments. The study also draws attention to the relative importance of external financing and the sustainability of the balance of payments under alternative structural adjustment paths facing Uzbek istan.

Integrating China into the Global Economy. By Nicholas Lardy [Washington, DC: The Brookings Institution Press, 2002. x+244 pp. Hard cover $48.95, ISBN 0-8157-5136-2; paperback $19.95, ISBN 0-8157-51235-4.

This book assesses the extent of China's increasing integration into the global economy during the reform era and explores the likely global impact of China's membership in the World Trade Organization (WTO). The five chapters of the book cover China's pre-WTO trade reforms; the terms of China's final WTO accession package; and the implications of China's WTO membership for foreign companies, world trade, the international trading system, and US-China relations. It presents sober and reasoned analyses of these issues and represents a solid attempt to take stock of China's economic progress to date and its prospects over the coming decade.Witnessing the mounting publications on this subject, one may wonder what perspectives or insights from this book are still worth repeating and remembering. Within this short review, I would like to highlight the following three.First, Lardy contends that, contrary to popular wisdom in the media and research literature, China's economy had become far more open than Japan's and it was ready to join the WTO. Before WTO entry China had already achieved the lowest tariff protection of any developing country and had also shrunk non-tariff barriers impressively. Most price distortions were eliminated in the decade before WTO entry and much of the necessary industrial and agricultural restructuring was already underway before accession. Other substantial progress included expansion of trade rights, adoption of current account convertibility, vast expansion of the legal scope for foreign investment, legalized development of the private sector, and establishment of basic social security systems in urban areas. If this assessment is correct, why did it take 15 years for China to get into the WTO? Lardy argues that the long waiting “reflects as much the rising bar imposed by members of the Working Party . . . as China's slowness to embrace the principles of the multilateral trading system” (p. 9). This leads to the second insightful message.

Convertibility, currency controls and the cost of capital in Western Europe, 1950‐1999

AbstractFor most of the post‐war period, Europe's capital markets remained largely closed to international capital flows. This paper explores the costs of this policy. Using an event‐study methodology, I examine the extent to which restrictions of current and capital account convertibility affected stock returns. The delayed introduction of full currency convertibility increased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapse of the Bretton Woods System had considerable negative effects. These findings offer an explanation for the mounting evidence suggesting that capital account liberalization facilitates growth. Copyright © 2003 John Wiley & Sons, Ltd.

Convertibility, Currency Controls and the Cost of Capital in Western Europe, 1950-1999

For most of the postwar period, Europe's capital markets remained largely closed to international capital flows. This paper explores the costs of this policy. Using the familiar event-study methodology, we examine the extent to which restrictions of current and capital account convertibility affected stock returns. We find that the delayed introduction of full currency convertibility increased the cost of capital. Also, a string of measures designed to reduce capital mobility before the ultimate collapse of the Bretton Woods System had considerable negative effects. These findings offer an explanation for the mounting evidence suggesting that capital account liberalization facilitates growth.

China's Currency Control: Features, Mechanisms, and Effects

Five years have passed since China's foreign exchange regime entered the era of current account convertibility in 1994. During the turbulent Asian currency crisis, China's foreign exchange management has met tests and challenges. To fight capital flight and defend the stability of the renminbi, the Chinese monetary authorities tightened foreign exchange controls in 1998. In this context, this paper reviews the evolution of China's foreign exchange management regime and reveals the features of the current regime's functional mechanisms. By critically assessing the successes and failures of the system, the paper examines the nature of foreign exchange policy changes in 1998. The paper concludes that, in the near future, Beijing is likely to consolidate the framework of the current foreign exchange regime by ensuring current account convertibility and keeping its grip over cross-border capital flows.

Fiscal policies in Eastern Europe

We focus on the role of fiscal policies in macroeconomic stabilization in eastern Europe and assess the sustainability of fiscal policies for the central and eastern European economies in transition. We show the main causes of fiscal imbalances experienced at the beginning of the transition process. Countries that adopted tight fiscal policies were more successful with their inflation stabilization programmes, have experienced a faster recovery of growth, and did not experience a steeper decline in output. Countries with unsustainable fiscal policies all floated their exchange rate, but there are both floating and peg arrangements among the successful stabilizers. In all the successful cases, however, current account convertibility was established. We also discuss the experience of Poland and Romania--two polar cases in terms of fiscal policies and present lessons and policy recommendations for other economies in transition. Copyright 1997 by Oxford University Press.

The Central and East European Currency Phenomenon Reconsidered

SIx YEARS OF TRANSITION EXPERIENCE in Central and Eastern Europe (CEE) provide unique evidence on patterns of economic transformation in these countries. One of the most remarkable achievements of economic reforms has been the early introduction of currency convertibility. While the introduction of full convertibility in some West European countries took several decades,1 most of the CEE reform countries declared convertibility-at least on current account and for residents-in the first year of economic reforms.2 In spite of a substantial reduction of trade barriers, and a deep recession, as a consequence of necessary economic adjustments, all of the CEE countries were able to maintain current account convertibility. The convertibility was established and maintained under different exchange rate regimes. The countries in transition have adopted all possible sorts of regimes, ranging from a fixed to a freely floating exchange rate system.3 But independent of the chosen exchange rate policy, there were at least two important similarities among all reform economies.

The central and East European currency phenomenon reconsidered

SIx YEARS OF TRANSITION EXPERIENCE in Central and Eastern Europe (CEE) provide unique evidence on patterns of economic transformation in these countries. One of the most remarkable achievements of economic reforms has been the early introduction of currency convertibility. While the introduction of full convertibility in some West European countries took several decades,1 most of the CEE reform countries declared convertibility-at least on current account and for residents-in the first year of economic reforms.2 In spite of a substantial reduction of trade barriers, and a deep recession, as a consequence of necessary economic adjustments, all of the CEE countries were able to maintain current account convertibility. The convertibility was established and maintained under different exchange rate regimes. The countries in transition have adopted all possible sorts of regimes, ranging from a fixed to a freely floating exchange rate system.3 But independent of the chosen exchange rate policy, there were at least two important similarities among all reform economies.

Finance and Empire: Confusions and Complexities: A Note

gerold krozewski's recent article in the International History Review ('Finance and Empire: The Dilemma Facing Great Britain in the 1950s', xviii, 1 [1996], 48-69), one might be forgiven for assuming that the problems of the sterling balances and the complexities of Britain's external economic policy in the 1950s are issues that have received little attention in recent years. Indeed, Krozewski mentions only four pieces of original research from the last ten years among his voluminous footnotes. I am flattered to be included among them, but I would have preferred if Krozewski had actually engaged with the arguments in the existing literature. Although he lists my work, Krozewski fails to note that my conclusions (drawn from many of the same records as he uses) fundamentally disagree with his analysis. There are several areas of confusion in Krozewski's article. First, he is trying to place the sterling balances debate into the context of Britain's commitment to liberalization of trade and payments. He argues that the sterling balances posed a constraint on the process of 'liberalization' adopted by the Conservative governments in the 1950s. Unfortunately, he does not fully understand the nature of that process. In the 1950s, convertibility did not mean the 'full convertibility' to which Krozewski refers. Sterling was to be made convertible to other currencies only for a limited range of transactions: those on current account (essentially trade in merchandise and services). Freedom of capital movements or investment from the United Kingdom to countries outside the sterling area was not contemplated. Convertibility in the 1950s also meant 'external convertibility'; sterling was to be convertible only for residents of countries outside the United Kingdom and the sterling area. Residents of the United Kingdom as well as the sterling balance holders in the sterling Commonwealth and the colonies would still be subject to exchange control. Finally, external current-account convertibility at a fixed exchange rate was achieved in 1955, not in 1958. 1 In the years 1953-5, the controls on sterling were gradually and administratively removed. In March 1954, the transferable and bilateral sterling-account areas were unified, reducing the number of 'types' of

UNIFICATION OF CHINA'S FOREIGN EXCHANGE RATES

This paper studies China's foreign exchange market before and after the 1994 unification of the official and swap exchange rates. Examining segmentation as well as linkages among the foreign exchange adjustment centers (FEACs) reveals that the linkages were not strong enough to eliminate or narrow price differentials among FEACs. Hence, improving the foreign exchange market's efficiency requires a reform to unify the swap rates. This paper discusses the unification's implications for inflation, monetary policy, and current account convertibility.

Macroeconomic Adjustment Under Bretton Woods and the Post-Breton-Woods Float: An Impulse-Response Analysis

We use time-series methods to estimate a simple aggregate supply and demand model in order to analyse the comparative performance of fixed and flexible exchange rate systems and test competing hypotheses designed to explain shifts between exchange rate regimes. The paper provides a coherent explanation of the causes and consequences of the shift from the Bretton Woods System of pegged exchange rates to the post-Bretton-Woods float. The shift from fixed to floating was associated with a modest increase in the cross-country dispersion of supply shocks, but not with an increase in their average magnitude. There was little change in either the cross-country dispersion or the average magnitude of demand shocks. More important in explaining the collapse of Bretton Woods were factors that heightened the impact of shocks on the external account such as the 1958 removal of controls on current account convertibility and the declining effectiveness of capital controls. These factors obliged governments to respond to supply shocks with changes in demand that stabilized prices and the exchange rate at the expense of increased output volatility.