Appreciation Of Domestic Currency Research Articles

Assessment of exchange rate determination in a mono-resource economy: A case of Nigeria

<p style="text-align:justify"><span style="font-size:16px"><span style="font-family:Times New Roman,Times,serif"><span dir="ltr" lang="EN-US"><span style="color:black">This study examined the determinants of the exchange rate in a mono-resource economy, during the period of currency and oil price fall in Nigeria. The aim of the study is to ascertain the potentiality of economic diversification (non-oil export) in saving the falling value of the domestic currency, as well as, its stability. The study employed the use of monthly data from the Central Bank of Nigeria and Nigeria National Petroleum Corporation from January 2008 to December 2020 using the ARDL and NARDL models to achieve the stated objectives. In the literature, several empirical studies analyzed the relationship between exchange rates, oil price, and oil export and came to the logical conclusion that a rise in the price of oil would bring about a rise in the exchange rate, all things being equal while the reverse is the case. To add to the existing body of knowledge this study did not only look at the relationship between the variables but also examined the determinants of the exchange rate in a mono-resource economy and ascertained the potentiality of economic diversification in bringing succor to the falling exchange rate in the midst of falling oil price. The NARDL result corroborates the findings of previous studies on the relationship between exchange rate, oil price, and the performance of non-oil export. It maintains that positive changes in oil prices would lead to the appreciation of domestic currency while negative changes in oil prices would lead to the depreciation of the domestic currency. With this analysis, the study recommends the diversification of the economy and revitalization of the non-oil sector. Since import proves to have a negative impact on the exchange rate, the revitalization of the non-oil sector stimulates domestic consumption and thus reduces import bills which raise the demand for the dollar and weakens the naira.</span></span></span></span></p>

Monetary policy responses to COVID-19 in emerging European economies: measuring the QE announcement effects on foreign exchange markets

This paper examines the effects of quantitative easing (QE) announcements by emerging market central banks in Europe during the COVID-19 pandemic, particularly on exchange rates with a higher frequency setting. Two different methodologies are used for analysing the policy announcement effects. The first methodology is the event study method that measures the sample exchange rates’ mean and cumulative mean abnormal return around the time of event. The second one is the time series approach that measures asymmetric behaviour of the exchange rate volatility to monetary policy shocks by employing exponential GARCH model. The results show that the foreign exchange markets respond to QE announcements in all selected countries. The response of exchange rates varies across countries and event windows. QE announcements cause appreciation of domestic currency in Hungary and Poland, and depreciation in Turkey. Additionally, the QE announcements increase exchange rate volatility in Hungary and Poland while they reduce volatility in Turkey. The asymmetric behaviour of domestic currencies prevails in all selected countries, but this asymmetry is sensitive to the exchange rate and the length of the window.

The Domestic Private Investment in Ethiopia: Contribution, Constraints, Trends and Determinants

The intended purpose of this study was to investigate the contribution, constraints, trends and determinants of private domestic investment in Ethiopia by taking annual data set of 34 years spanning from 1987-2021. The objective was achieved by collecting secondary data. Accordingly, domestics private investment has contributed a lot for the growth of the national economic despite the constrains. The domestic private investment in Ethiopia has faced severe trend due to trends in economics system in the country, i.e., pre-1974, 1974-1991 and Post 1991. The determining factors in this study included private investment, foreign direct investment, inflation rate, access to credit, GDP per capita, lending interest rate, human capital, exchange rate, public investment, taxation and political stability. Accordingly, GDP per-capital, political stability, public investment and lending interest rate have significant positive long run effect on private investment, while human capital and exchange rate have negative long run effect. Public investment and political stability have positive significant effect while lending interest rate and exchange rate have negative significant effect in the short run. Finally, expansion of infrastructure, increasing income generation mechanism for citizens, appreciation of domestic currency and creating fertile investment climate are some of the recommendations forwarded.

Evaluation of Hot Money Drivers in China: A Structural VAR Approach

This paper investigates the drivers of hot money in China. It develops a model based on expectation‐variance utility theory in the theoretical analysis section. The model considers a foreign investor who faces the question of how to distribute his wealth between foreign and domestic assets. The model’s analysis suggests that economic variations, such as expected domestic currency appreciation, rise in domestic asset return, drop in foreign asset return, domestic economic growth, decrease in domestic inflation, and rise in foreign asset risk will cause foreign investors to distribute more wealth in domestic assets. Therefore, hot money flows in, and vice versa. In the empirical analysis section, the paper estimates structural VAR models using data from 2000 to 2019 in China. The impulse response functions are consistent with the theoretical predictions: when there is a positive domestic inflation shock, hot money outflows increase (inflows decline) in the current period, but the response is not significant. When there is a positive domestic growth rate shock or positive domestic asset return rate shock, hot money inflows increase (outflows decline) in the current period, and the response reaches its peak in the next period. Furthermore, when there is a positive expected exchange rate shock, hot money outflows increase (inflows decline) in the current period. Of these drivers, the expected exchange rate has the largest impact on hot money, and the domestic growth rate has the most enduring effect.

Export modes and firms’ adjustments to exchange rate movements

The paper provides novel evidence on the heterogeneous response of exporting firms to exchange rate movements. Italian firm-level trade data by product and destination indeed unveil that adjustments to exchange rate variation substantially differ across export modes. The estimates show that, in the event of a domestic currency appreciation, export intermediaries react by decreasing more their price – and less their export volume – than direct manufacturing exporters; and that the different response of direct exporters and wholesale firms is not driven by firm heterogeneity in size or productivity. By examining the aggregate implications of such micro-level findings, the paper documents that, following an appreciation, aggregate bilateral exports routed through wholesale firms tend to decline by less than total direct exports. Overall, our results suggest that, in addition to facilitating trade, export intermediation may substantially contribute to stabilizing trade patterns across countries.

Nonlinear Interactions and Volatility Spillovers between Stock and Foreign Exchange Markets: The STVEC-STGARCH-DCC Approach

This study aims to investigate the interactions, volatility spillovers and smooth transition effects between stock and foreign exchange markets in emerging versus developed countries by the Smooth Transition Vector Error Correction-Smooth Transition GARCH with Dynamic Conditional Correlation model (STVE-STGARCH-DCC). The empirical results yield several findings. Firstly, boom stock markets in emerging countries will trigger their domestic currency appreciation, while prosperous stock markets in developed countries result in currency depreciation. Secondly, the conditional variances for stock markets mainly result from unexpected shocks, past volatility, and short-term impact effects, thus leading to a persistence of volatility in both emerging and developed markets. The conditional variances for foreign exchange markets display similar patterns but show weaker short-term impact effects and slower transition speeds. Thirdly, unexpected shocks in a stock market broadly affect its own stock volatility, while those only affect India’s volatility in the rupee market. In contrast, unexpected shocks in foreign exchange markets mainly affect foreign exchange volatility, except for India; however, those influence their stock volatility only for emerging countries, such as India and South Africa. Lastly, developed markets are more efficient than emerging markets are. JEL classification numbers: C32, C51, C52, G11, G15 Keywords: Asymmetric Effects, Bivariate STVEC-STGARCH-DCC, Market Efficiency, Nonlinear Model, Smooth Transition Auto-regression, ICSS Algorithm.

OECD ÜLKELERİNDE REEL DÖVİZ KURU HAREKETLERİNİN AÇIKLANMASINDA BALASSA-SAMUELSON ETKİSİ

According to Balassa-Samuelson hypothesis which explains real exchange rate movements by productivity differences between tradable and non-tradable sectors, an increase in the relative productivity of tradable sector leads to a real appreciation of domestic currency. In this study, we analyze whether the Balassa-Samuelson hypothesis is valid employing recent panel data tehniques for a panel data set covering 25 OECD countries and the period 1990-2016. To this aim, the effect of sectoral relative productivity on real exchange rate is examined employing panel data estimators considering country heterogeneity, dynamic behavior and cross-section dependency. Results of Pooled Mean Group estimations support the Balassa-Samuelson hypothesis for OECD countries. However, the effect of relative productivity on real exchange rate becomes statistically insignificant when we control the cross-section dependency that arises due to common global shocks by employing Cross-sectionally Augmented Panel ARDL estimator (Chudik and Pesaran, 2015). Consequently, Balassa-Samuelson hypothesis cannot be robustly supported for OECD countries.

The Hedging Channel of Exchange Rate Determination

We propose the currency hedging channel that connects countries' external imbalances to their exchange rate behavior. We present a model in which investors increase their currency hedging during periods of financial distress, in proportion to their net foreign asset exposure. This behavior coupled with constrained financial intermediation explains observed relationships between gradually adjusting external imbalances and volatile spot and forward exchange rates. We find empirical support for the hedging channel in both the conditional and unconditional moments of exchange rates, option prices, and countries' uses of Federal Reserve swap lines. Additionally, we forecast currency returns using a hedging demand proxy.

The Hedging Channel of Exchange Rate Determination

We document the exchange rate hedging channel that connects country-level measures of net external financial imbalances with exchange rates. In times of market distress, countries with large positive external imbalances (e.g. Japan) experience domestic currency appreciation, and crucially, forward exchange rates appreciate relatively more than the spot after adjusting for interest rate differentials. Countries with large negative foreign asset positions experience the opposite currency movements. We present a model demonstrating that exchange rate hedging coupled with intermediary constraints can explain these observed relationships between net external imbalances and spot and forward exchange rates. We find empirical support for this currency hedging channel of exchange rate determination in both the conditional and unconditional moments of exchange rates, option prices, large institutional investors' disclosure of hedging activities, and central bank swap line usage during the COVID-19 market turmoil.

Fiscal policy transmission mechanism in Pakistan: A general equilibrium analysis

This paper explores the impact of fiscal spending on key macroeconomic indicators for Pakistan economy using an estimated open economy new Keynesian dynamic stochastic general equilibrium (DSGE) model. Results show that a positive shock to government consumption leads to fall in private consumption, private investment and exports owing to negative wealth effect, rise in interest rate and domestic currency appreciation, respectively. Imports and inflation also rise. Estimated values of present value fiscal multipliers are 0.54, 0.29 and 0.18 after 1 year, 5 years and 10 years, respectively. These results show that although positive in the short run, yet the magnitude of the fiscal multiplier is very low in the case of Pakistan. Sensitivity analysis shows that the value of the multiplier marginally rises with rise in degree of price stickiness. Transitory shocks have a substantially higher multiplier relative to persistent shocks.

Empirical Analysis of Exchange Rate Fluctuationsand Gross Fixed CapitalFormation in Nigeria

This study investigated the effect of exchange rate Volatility on gross fixed capital formation. Mundell-Fleming Model is used as a theoretical framework for establishing relationship between relevant variables. The erratic fluctuation in exchange rates referred to as exchange rate volatility could be described as periods of domestic currency appreciation or depreciation. Exchange rate has considerable attention in terms of its influence on gross fixed capital formation. The study covered the period between 1980-2016 and Ordinary Least Square (OLS) techniques was used in estimating the relationship between the variables included in the specified regression model. The data was collected from Central Bank of Nigeria Statistical Bulletin and the World Bank Indicators for Nigeria. The major finding of this study shows that the Exchange rates (EXCHR) has a positive and significant linear relationship with gross fixed capital formation. This implies that a unit increase in naira gain against other currencies will result to 0.961 increases in GFCF. The result equally shows that the Degree of trade openness (TOP) has negative and significant relationship with Gross fixed capital formation .This implies that a unit increase in trade openness will result to a 1.613 unit decline in GFCF. The result of Inflation rate (INFL) has negative and significant relationship with gross fixed capital formation. This implies that a unit increase in inflation will result to a 0.558 unit decline in GFCF. It implies that Stringent trade measures should be adopted to checkmate inflation mostly the imported inflation through foreign trade. The study therefore recommends that monetary authorities should adopt measures that will strengthen the naira against other currencies. Also that Stringent trade measures should be adopted to protect local industries and reduce the depletion of our foreign reserves through excessive importation. This can be achieved through high tariffs, quotas and outright ban on some certain goods and services.

The effectiveness of exchange rate channel of monetary policy transmission mechanism in Sri Lanka

This study examines the effectiveness of the exchange rate channel in the transmission mechanism of monetary policy in Sri Lanka during the period from 1978 to 2015. A negative relationship between the two variables is accepted in theoretical insights on the topic. An increase in interest rate leads to appreciation of domestic currency against other foreign currencies. If the empirical situation is different to theoretical explanations, decision makers would not be able to make proper decisions to achieve macroeconomic targets in the economy. Monetary policy is conducted to achieve economic and price stability, and its policy shocks transforms to the economy through various transmission channels. A developing country like Sri Lanka usually prefers to depreciate local currency in order to increase export earnings and to reduce import expenditure to gain a balance of trade. Expansionary monetary policy tends to result in currency depreciation, thus increasing net exports. Higher economic growth can be achieved with domestic currency depreciation through increasing exports. In an inflationary situation, contractionary monetary policy can reduce aggregate demand with domestic currency appreciation. If there is no negative relationship between interest rate and exchange rate, the exchange rate transmission channel of monetary policy does not support the achievement of monetary policy co-objectives. The study uses the variables nominal exchange rate, Treasury bill rate, net exports and total external debt. Co-integration and Vector Error Correction tests are employed for the analysis due to the non-stationary of all the variables used in the study, and the results prove the negative relationship between exchange rate and interest rate as expected in the long run. Estimated value of the interest rate elasticity of exchange rate is -0.178, which proves that exchange rate channel is efficient in the Sri Lankan context. According to short run dynamics, 5% of the error in exchange rate is corrected annually.

The Effects of Productivity Shocks, Financial Shocks, and Monetary Policy on Exchange Rates: An Application of the Currency Crisis Model and Implications for Emerging Market Crises

ABSTRACTWhat kind of shock affects exchange rate dynamics? How much of an effect does the monetary policy have on exchange rates? To answer these questions empirically based on the currency crisis model, I use panel data on 51 emerging countries from 1980 to 2011, identify shocks, and apply instrumental variable methods. I found that both productivity shocks and shocks to a country’s risk premium affect exchange rates and a 1 percentage point increase in the policy interest rate is associated with a 1 percentage point appreciation of domestic currency. I further apply this method to Asian and Latin-American crises.

Unconventional Monetary Policy in an Open Economy

The impact of unconventional monetary policies on exchange rates and its spillovers to other economies is not yet fully understood. In this paper I develop a two-country DSGE model with interbank markets and endogenous default probabilities to analyze the cross-border impacts of unconventional monetary policy. I examine the impact of two unconventional measures commonly used: central bank liquidity injections and asset swaps. I find that liquidity injections lead to a short run appreciation of domestic currency, but a mild long run depreciation. In contrast, asset swaps cause a short run depreciation of domestic currency, but a long run appreciation. Lastly, when both countries coordinate on the implementation of unconventional policies, the model yields the following results: Non-coordinated liquidity injections lead to higher increases with respect to output and inflation variation, but have negative spillovers on the other economy in terms of lower growth. By contrast, coordinating asset swaps leads to higher increases in output and lower fluctuation in inflation in both countries. The results of this paper suggest that coordination in unconventional monetary policy may not always yield an optimal outcome, and macroeconomic outcomes in both countries depend crucially on the choice of instrument.

Exchange Rate and Country’s Export Competitiveness: An Empirical Discourse Analysis

The objective of this study is to empirically analyze the discourse on correlation between exchange rate and country’s export competitiveness, which is one of the dominant discourses having been continuously and extensively reproduced in the Thai society by the authorities from academia, the public and private sectors. The study analyzes the time-series data of the exchange rate, overall exports, exports of agricultural products, and exports of industrial products by employing advanced statistical analysis, regression, and the Johansen Cointegration Test. Through regression, we find that exchange rate is negatively related to overall exports, exports of agricultural products and exports of industrial products. On the contrary, Johansen Cointegration Test does not demonstrate any long-term relationship between exchange rate and the three variables of export. Thus, the claim that the appreciation of domestic currency will negatively affect the country’s export competitiveness, whether in overall, agricultural products or industrial products, is not a defect in good faith but another example of the dominance of oriented discourse, which gives way for the elite to take advantage as a camouflage in the form of knowledge and truth, while others in the society never suspect nor argue about it.

Hedging, selective hedging, or speculation? Evidence of the use of derivatives by Brazilian firms during the financial crisis

This paper analyse the use of foreign exchange derivatives by non-financial publicly traded Brazilian companies from 2007 to 2009. Using balance-sheet data on firms’ positions in derivatives and their foreign exchange exposure, the paper verifies the existence of three groups of derivative users: hedgers, selective hedgers – companies that significantly changed the volume of derivatives used during this period, but used them in line with their currency exposure – and active speculators – companies that adopted positions that would have been inadvisable had the aim been to hedge their currency exposure. Selective hedgers and speculators have one similarity: both tried to obtain gains through the continuous process of domestic currency appreciation. Confirming the optimal hedging literature, the paper shows that several firm characteristics are able to explain the use of derivatives and hedging by firms but market timing in the derivative markets is explained solely by firms’ foreign exposure, corporate governance and the macroeconomic environment.

Do imports crowd out domestic consumption? A comparative study of China, Japan and Korea

A decline in the relative price of imported goods compared to that of domestically produced goods, e.g., caused by domestic currency appreciation, may have different effects on domestic consumption. Such effects may not be accurately detected and measured in a classical permanent-income model without considering consumption habit formation as pointed out by Nishiyama (2005). To resolve this problem, this paper employs an extended permanent-income model which encompasses consumption habit formation. Both cointegration analysis and GMM are used to estimate the (modified) intertemporal elasticities of substitution (IES) between imports and domestic consumption and the parameters of habit formation as well as the (modified) intratemporal elasticities of substitution (AES). We find that import and domestic consumptions are complements in China, but substitutes in Japan and Korea. Different per capita incomes and consumer behaviors between China and the other two countries are two possible reasons for different relationships between import and domestic consumptions.

The Foreign Operation Strategy under Correlated Stochastic Price and Foreign Exchange Rate

The multinational firms facing domestic currency appreciation may move their operations to foreign countries. To investigate such a shift, we propose a framework to explore how the fluctuations and cross-correlation between the foreign exchange rate and the foreign price impact the entry strategy and the value of a foreign direct investment. The sensitivity analyses for the corporate value, the entry threshold, and the real option value are then performed in illustrations. The results indicate that the effects of characteristic parameters on corporate value, entry threshold, and real option value may depend on the degree of cross-correlation between the foreign exchange rate and the foreign price under a certain range of these parameters: drifts and volatility for foreign exchange rate and foreign price.

Hedge or Speculation? Evidence of the Use of Derivatives by Brazilian Firms During the Financial Crisis

This paper analyzes the use of foreign exchange derivatives by non-financial publicly traded Brazilian companies from 2007 to 2009. Using balance-sheet data on firms’ positions in derivatives and their foreign exchange exposure, this study finds that a significant number of companies speculated in the derivatives market. Two types of speculators are identified: companies that significantly increased the volume of derivatives used during this period but used them in line with their currency exposure and companies that adopted positions that would have been inadvisable had the aim been to hedge their currency exposure. Despite the differences between the two types, there is one similarity: both tried to obtain gains through the continuous process of domestic currency appreciation. The study shows that companies that allegedly have an informational advantage on the foreign exchange market – exporters and companies with foreign-currency-denominated debt – are more likely to speculate. No other theory about the reasons why companies speculate can explain the behavior of these companies.

Hedge or Speculation? Evidence of the Use of Derivatives by Brazilian Firms During the Financial Crisis

This paper analyzes the use of foreign exchange derivatives by non-financial publicly traded Brazilian companies from 2007 to 2009. Using balance-sheet data on firms’ positions in derivatives and their foreign exchange exposure, this study finds that a significant number of companies speculated in the derivatives market. Two types of speculators are identified: companies that significantly increased the volume of derivatives used during this period but used them in line with their currency exposure and companies that adopted positions that would have been inadvisable had the aim been to hedge their currency exposure. Despite the differences between the two types, there is one similarity: both tried to obtain gains through the continuous process of domestic currency appreciation. The study shows that companies that allegedly have an informational advantage on the foreign exchange market – exporters and companies with foreign-currency-denominated debt – are more likely to speculate. No other theory about the reasons why companies speculate can explain the behavior of these companies.