Domestic Inflation Research Articles

SENSITIVITY OF MACROECONOMIC VARIABLES TO EXCHANGE RATE SHOCK IN NIGERIA AND SOUTH AFRICA: A STRUCTURAL VECTOR AUTO REGRESSION APPROACH

This study investigates the sensitivity of macroeconomic variables to exchange rate shocks in Nigeria and South Africa between 1982 and 2018. Specifically, the study investigated the response of Foreign Direct Investment (FDI), Gross Domestic Product growth rate (GDPGR), Import rate (IMPORTR), Export rate (EXPORTR) and Inflation rate (INFR) to exchange rate shock in these Countries. The data used for analysis is secondary by nature and was obtained from the World Development Bank Indicators. The estimation technique employed was structural Vector autoregression (SVAR), impulse response function (IRF), and variance decomposition function (VDF). The Structural Var result revealed that exchange rate shock had negative effect on FDI in the countries but insignificant. The result on GDPGR revealed that the effect is only positive in South Africa but insignificant in both economies. For IMPORTR and EXPORTR, the effect is positive in all the zones but significant only in Nigeria. For INFR, the effect is significantly positive in South Africa at 5% significant level but insignificantly negative in Nigeria. Impulse response result revealed that in Nigeria and South Africa, all the variables were negatively sensitive to exchange rate shock but temporal except INFR that was positive and permanent in South Africa. However, the variance decomposition function for the zones revealed that apart from own shock, exchange rate shock had relatively high contributions to variations in IMPORTR, EXPORTR, and INFR in Nigeria. Also, in South Africa, exchange rate shock contributed the largest variations in EXPORTR and INFR. Based on the findings, this study concludes that the macroeconomic variables of the countries are sensitive to exchange rate shock more in the short run but undecided in the long run. Moreover, the permanent response of INFR to exchange rate shock in South Africa calls for serious attention by the regulatory authorities in this economy. Therefore, this study recommends that conscientious effort be made by policy makers in ensuring exchange rate management in the zones for better performance of the macroeconomic variables.
 
 JEL: F31, F41, N1, N10, N17
 
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ANALYSING THE EXCHANGE RATE-INFLATION NEXUS: EVIDENCE FROM MAURITIUS

This paper examines the degree and speed of exchange rate passthrough (ERPT) to the inflation rate in Mauritius from 1980 to 2016 using dynamics regression analysis. Results reveal that the long-run ERPT elasticity to domestic inflation is incomplete and low. However, no such relationship is discovered in the short run. The speed of adjustment of actual inflation to its long-run equilibrium level is quite high and it takes approximately two years to attain that level. From a policy point of view, domestic inflation can be tamed by tightening the domestic money supply and maintaining exchange rate stability in the long run

Inflation Dynamics and Food Prices in Hungarian Agricultural Economy

During 2021-2022, many commodity prices rose to record levels. As a result, Hungary in 2022 experiencing high inflation, large trade deficits, and an unstable macroeconomic environment. High commodity prices, particularly for food, also have adverse effects on poverty. Hungary has not experienced for a long time such increase in inflation, which is among the highest in Europe. Inflation growth has recently associated with large energy price shocks, food price increases are traditionally believed to have rather small effects. At the same time, there has been an absence of rigorous work to identify empirically the relative importance of each factor contributing to inflation. It is thus of vital importance to improve the understanding of the causes of inflation in Hungary to allow adequate policies to be put in place. The purpose of this paper is to fill this gap and thoroughly analyze the determinants of inflation in Hungary using data for the current decade, with a focus on food prices. The authors identify the relative importance of several factors contributing to overall inflation and its major components. The main finding is that, in a longer perspective, one of the main factors that determine domestic inflation are the food prices. In the short run, agricultural supply shocks strongly affect domestic inflation, causing large deviations from long-run price trends. The results suggest the need for a multi-pronged approach to fight inflation. This analysis suggest monetary and exchange rate policies need to take into account agricultural production, which is among the key determinants of inflation. Moreover it has a greater influence on inflation than is widely known.

Foreign Monetary Policy and Domestic Inflation in Emerging Markets

Foreign Monetary Policy and Domestic Inflation in Emerging Markets

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.

An Analysis of Exchange Rate Pass-Through and Impact on Domestic Inflation in Sri Lanka

An Analysis of Exchange Rate Pass-Through and Impact on Domestic Inflation in Sri Lanka

On the distribution of monetary policy tools by targets of development

Monetary policy is the main means for stimulating economic growth and achieving other goals of economic development. The objective of the study is to develop the “goals-instruments” principle in relation to monetary policy in order to show the possibility of distributing influence and, for this reason, selecting monetary policy instruments that have different effects on changing development goals, the latter considered to be changes in gross domestic product, inflation and unemployment. The research methodology is represented by Tinbergen's theory of economic policy, structural analysis, and monetary theory. The use of these approaches makes it possible to construct a set of econometric equations that reflect the impact on GDP and its growth, inflation and unemployment; it also allows to conduct an empirical analysis of the relationship between inflation and growth and the dynamics of the M2 money supply components for the Russian economy. The overall result of the study is a picture of the distribution of monetary policy instruments by economic development goals for the Russian economy. It is substantiated that the policy of raising the interest rate was not a strong reason for reducing inflation, but hindered economic growth, creating a potential basis for future inflation. The monetary policy pursued in Russia did not take into account the structure of the money supply and its impact on inflation and growth.

Modelling the Equilibrium Real Exchange Rate: Evidence from Oil-Exporting Country

This study aims to specify the best model to estimate the real equilibrium exchange rate of the Libyan dinner during the period 1985-2020 utilizing ARDL model. The results of this study indicate that the best model explains the determinants of the actual exchange rate (ARE) and predicts the equilibrium real exchange rate (ERER) is the one that consists of oil revenues (OR), terms of trade (TOT), ration of bored money supply to gross domestic product (M2/GDP), ratio of domestic inflation to forging inflation (DINF/FINF) and DUMMY. They also point out that OR is the domino force as it drives the exchange rate of the Libyan dollar against the US dollar. The results also reveal that the misalignment between the AER and the ERER had notably increased since the 2002 devaluation. This study provides valuable information for monetary policy makers by establishing a benchmark for the ERER. This information would assist them to reasonably set the exchange rate for future economic purposes.

Is the Impact of Digitization on Domestic Inflation Non-Linear? The Case of Emerging Markets

Is the Impact of Digitization on Domestic Inflation Non-Linear? The Case of Emerging Markets

MONETARY AND FISCAL POLICY REDUX—THE MINI-BUDGET

Not so very long ago, I argued that it was possible to characterise modern monetary and fiscal policy in the UK as a function of three key events: exit from the European Exchange Rate Mechanism in September 1992, the election of ‘New Labour’ in May 1997 and the global financial crisis of 2007–2009. The first led to the adoption of a domestic inflation target in October 1992, the second to the operational independence of the Bank of England and the establishment of the Monetary Policy Committee and the third to the acceptance of the need for macro-prudential policies, extraordinary monetary interventions to augment a simple interest rate rule and formal budgetary oversight by a fiscal council. The latter was provided by the Office for Budget Responsibility, which was established in 2010.

THE EFFECTS OF INTEREST RATE ON REAL EFFECTIVE EXCHANGE RATE VOLATILITY SPILLOVER IN MALAYSIA AND THAILAND: EMPIRICAL EVIDENCE

The research examined this asymmetric effect between the interrelationship of the interbank rate on the external competitiveness purchasing power represented by the real effective exchange rate for Malaysia and Thailand using monthly data covering the period of 1994 until 2020. The empirical findings confirms an asymmetric effect between interbank rate and real effective exchange rate based on the nonlinear autoregressive distributed lag estimates. The research also finds a unidirectional asymmetric causal relationship running from real effective exchange rate on interbank rate Thailand, which indicate the monetary policy has a direct relationship on interbank rate volatility. While in Malaysia, there is no causality running between both variables since the country has proposed several soft monetary policies and more concentrating on the short-term borrowing by improving the tight money supply circulation based on the domestic inflation, global economic, and financial market volatility. Therefore, the research recommends a specific need of monetary stabilizer policy to stabilize both countries’ currencies and put more effort to liberalize the foreign exchange rate system in a globalized economy.

Currency substitution as an automatic stabilizer

AbstractIn the presence of frictions, the existing literature shows that currency substitution is detrimental for domestic aggregate stability. This paper singles out the role of currency substitution and shows that diversified currency holdings operate as an automatic stabilizer that mitigates belief-driven cyclical fluctuations in Farmer’s (1997) indeterminate monetary economy. When the foreign inflation rate is lower than the domestic inflation rate, the model’s steady state always displays saddle-path stability. Hence, equilibrium indeterminacy originally present in the domestic country is entirely removed in the presence of diversified currency holdings. When the foreign inflation rate is higher than the domestic inflation rate, then depending on the degrees of currency substitution and relative risk aversion, indeterminacy is either impossible or the requisite level of the foreign inflation rate for indeterminacy is too high to square with data. The stabilizing effect of diversified currency holdings on domestic aggregate stability is robust to whether domestic and foreign currencies display as Edgeworth substitutes or complements, or are additively separable in the household’s preferences.

An empirical analysis of the determinants of the U.S. banks’ profitability

This study investigates the determinants of the profitability of U.S. banks. Employing quarterly data, this paper further examines the historical and recent trends for all U.S. banks from 1996 to 2019 in the relationship between return and assets (ROA) and other bank internal (or endogenous) profitability contributors such as net interest margin (NIM), loan loss reserves, ratio of non-performing loans to gross loans, and external (or exogenous) macroeconomic variables, such as the 30-year average mortgage rate, Gross Domestic Product (GDP) economic growth rate, unemployment rate, interest rate, inflation rate and openness (i.e., exports + imports/GDP) by using the Generalized Method of Moments (GMM) estimator technique. The results reveal that bank-specific variables, including net interest margin, loan loss reserves and non-performing loans, have a significant impact on bank profitability in the United States. Similarly, the results show that macroeconomic variables, namely the average mortgage rate, economic growth, and unemployment rate, exert significant effects on the U.S. banks’ profitability. The results further indicate that changes in openness are detrimental to bank profitability. The implications are discussed.

Macroeconomic effects of shocks to import and services sector prices

This paper investigates the macroeconomic implications of inflationary shocks that originate from the import and services sectors. The set-up is a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model calibrated for the Greek economy. The results suggest that a temporary increase in import price inflation adversely affects economic activity and drives up domestic inflation. The largest output losses occur in the medium term, since in the short term the adverse effects are dampened by the presence of price rigidities and an import substitution effect that induces expenditure to switch towards domestically produced goods. Additionally, the findings suggest that a temporary increase in the price of the services sector exerts strong inflationary pressures and negatively affects economic activity. Finally, the results show that inflation persistence matters for the effects on the macroeconomy. The more persistent inflation is in imports and the services sector, the larger the output losses.

Public debt and inflation dynamics: Empirical evidence from Zimbabwe

Abstract The study seeks to empirically test the hypothesis that public debt has a significant influence on inflation in Zimbabwe, covering the period 1980-2020. The study was motivated by recent trends in public debt and domestic inflation in Zimbabwe, and the need to guide debt-inflation related policy. These latest trends have started to ring alarming bells, which raises questions on the effectiveness of fiscal and monetary policies in bringing macroeconomic stability in the country. Applying the Autoregressive Distributed Lag (ARDL) bounds testing procedure to cointegration and an error correction mechanism (ECM), expanded by incorporating structural breaks, the study finds evidence in support of positive and significant impact of public debt on inflation dynamics in Zimbabwe, particularly in the long run. Based on the findings, public debt dynamics matter for inflation process in Zimbabwe. That is, fiscal policy can be considered to be an important determinant of the effectiveness of monetary policy in Zimbabwe. Therefore, the government should be mindful of increases in public debt as this was found to be inflationary.

Effects of trade openness on renewable energy consumption in OECD countries: New insights from panel smooth transition regression modelling

This paper investigates the effects of trade openness on renewable energy consumption in 35 OECD countries for the period between 1999 and 2018. A panel smooth transition regression model is built. Imports, exports, and total trade are used as proxy variables of trade openness. To reduce the error of omitted variables, a control variable pool is constructed, consisting of foreign direct investment, access to electricity, international remittances, GDP per capita, domestic inflation rate, and carbon emissions. The empirical results demonstrate the existence of a strongly nonlinear relationship between trade openness and renewable energy consumption. In terms of imports, three structural breakpoints are identified: 33.732, 40.945, and 76.395. When the imports reach 40.945% of the GDP, their effect on renewable energy consumption will switch from promoting to inhibiting. Both exports and total trade have one structural breakpoint and can constantly promote renewable energy consumption. The analyses on the temporal and spatial variations of the effects show that imports, exports, and total trade all positively impacts renewable energy consumption between 1999 and 2018. Their effects first follow a downward trend, which later change to an upward trend. Imports, exports, and total trade exert the least impact on renewable energy consumption of OECD Asia Oceania. Regarding specific countries, exports and total trade most strongly impact the renewable energy consumption in Mexico and exert the least impact on the renewable energy consumption of the United States.

Fed tapering announcements: Impact on Middle Eastern and African financial markets

We study the impact of the announcements of “tapering” (exit from the unconventional monetary policies of the Federal Reserve) on a sample of 16 countries of the Middle East and Africa region. The events under study are the announcements of the Federal Open Market Committee in the context of meetings and minutes during the tapering period (2013/01–2015/04). We compare the impact on these countries with that on three emerging and advanced economies control groups. We find that the countries under study, despite a lower level of financial development, are also characterized by significant announcement effects. The dates of significant announcements are more similar to Western Europe than to the other emerging economies, which reflects major economic ties with Europe. Domestic inflation and FDI have the most significant direct and interaction effects. In particular, the direct effect of FDI is favorable, but their indirect effect is unfavorable, as in the literature on emerging countries where financial development frequently increases vulnerabilities to the impact of international monetary policy announcements. More generally, this result points to the macroeconomic issue of the absorptive capacity necessary to achieve the benefits of FDI (Durham, 2004).

EFFECT OF VOLATILITY IN THE NAIRA - DOLLAR EXCHANGE RATE ON THE VOLUME OF IMPORTS TO, AND EXPORTS FROM NIGERIA

We analyzed the effect of volatility in the Naira-Dollar exchange rate on the volume of imports to and exports from Nigeria between 1990 and 2019. Data for all variables, except volatility, were sourced from the Central Bank of Nigeria (CBN), the National Bureau of Statistics (NBS), and the International Financial Statistics. The volatility of the naira exchange rate was calculated from the model. The study employed both the autoregressive distributed lagged (ARDL) and exponential generalized autoregressive conditional heteroscedasticity (EGARCH) models to test for the short and long-run relationships between changes in the Naira-Dollar exchange rate and the volume of imports and exports. Volatility in the Naira-Dollar exchange rate was found to be related to the volume of imports to and exports from Nigeria in the long run with no short-run effects because of the pass-through effect to domestic inflation. The study recommends that government should sustain efforts at promoting exports and reducing imports to improve the trade balance. The study brings into perspective another way of looking at the long-run relationship between the Naira-Dollar exchange rate and Nigeria's trade balance.Keywords: Foreign exchange rate, foreign exchange market, Imports, Exports, The balance of trade, Nigeria.JEL Classifications: F14, F31, 024.DOI: https://doi.org/10.32479/ijefi.11799

Risk-premium shocks and the prudent exchange rate policy

Using a medium-size New Keynesian open economy model, we examine the issue of a prudent exchange rate policy when the economy encounters an adverse risk-premium shock. We show that the shock leads to terms of trade (ToT) deterioration and an increase in both the aggregate output and inflation. While examining the choice of an appropriate exchange rate policy to deal with the effects of the shock, analytical results of our baseline model show that neither a fully flexible nor a fully pegged exchange rate policy can yield the desired outcome. In the absence of the supply-side effects of ToT and a cost channel of monetary policy, a managed exchange rate policy can stabilize both domestic inflation and aggregate output. However, in the presence of either a cost channel of monetary policy or supply-side effects of the ToT or both, the central bank faces a trade-off between aggregate output and domestic inflation stabilization. We find that the presence of a cost channel of monetary policy gives rise to a pro-cyclical exchange rate policy. Simulation of a more general model suggests that, instead of using the conventional Taylor rule, the central bank should follow a ToT-augmented Taylor rule, which involves further monetary tightening as the ToT deteriorates. We find that the need for monetary tightening is linked to both the nominal and real rigidities in economy, which gives rise to increased exchange rate volatility. We also briefly consider the case of a productivity shock.

Impact of socioeconomic development on inflation in South Asia: evidence from panel cointegration analysis

Purpose This study aims to examine the influence of socioeconomic development on inflation in South Asia using the foreign exchange rate and money supply as control variables. Design/methodology/approach The study uses annual panel data for five South Asian economies, namely, Bangladesh, India, Nepal, Pakistan and Sri Lanka over the period 1990–2018, applies cointegrating regression techniques, namely, the panel dynamic ordinary least square (OLS) and fully modified OLS estimators to examine the long-run relations and conducts the Toda-Yamamoto Granger causality test to detect the direction of causality among variables. Findings The cointegrating regression estimations have documented that the socioeconomic development proxied by the human development index (HDI) has no significant impact on inflation. Although economic development represented by gross domestic product (GDP) growth causes inflation, socioeconomic development represented by HDI has no impact on inflation and has demonstrated as a better macroeconomic indicator, and thus creates no inflationary pressure in the economy. The foreign exchange rate has a positive impact on inflation. The broad money supply has the usual positive effect on domestic inflation that endorses the monetarist view about prices. The Toda-Yamamoto Granger causality test has confirmed several unidirectional causalities: inflation causes HDI, money supply causes both inflation and HDI and the foreign exchange rate causes HDI. Practical implications The study has practical implications for policymakers in South Asia, to improve HDI, particularly GDP per capita, education and health-care facilities to realize continuous socioeconomic development, which will take care of inflation. Moreover, these counties may follow a conservative monetary policy to control inflationary pressure in their economies. Originality/value The study is original and claims to be the first to examine the impact of socioeconomic development on inflation. The findings have socioeconomic values regarding controlling inflation in South Asia.