Effects Of Exchange Rate Movements Research Articles

Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa

Effect of Exchange Rate Movements on Inflation in Sub-Saharan Africa

The Effects of Exchange Rate Movements on Publicly Traded US Corporations

The Effects of Exchange Rate Movements on Publicly Traded US Corporations

The macroeconomic effects of exchange rate movements in a commodity-exporting developing economy

This paper empirically examines the macroeconomic effects of exchange rate movements and their transmission mechanisms (trade and financial channels) in Mongolia, a net debtor in foreign currency and a commodity-exporting developing economy, using Structural Bayesian Vector Autoregression (SBVAR) models. Our findings suggest that both the financial and trade channels of exchange rates are operative and have a notable impact at the macroeconomic level. We identify a significant financial channel, causing GDP contractions and affecting investments, particularly in sensitive sectors such as manufacturing and construction in response to DWER depreciation shocks. The traditional trade channel, driven by NEER depreciation, leads to increased net exports with pass-through to CPI. Despite these effects on key macro variables, exchange rate shocks do not substantially destabilize the economy. Foreign shocks, including federal funds rates, China's GDP, and copper prices, have a more pronounced impact. The trade channel plays a crucial role in the transmission of external demand and commodity price shocks, while the financial channel is essential in the transmission of commodity price shocks.

Stock Returns and State-Dependent Effects of Changes in Exchange Rate and Money Supply from Central Banks

This study investigates the state-dependent effects of exchange rate movements and money supply shocks on stock market returns using daily stock returns, exchange rate, and variations in money supply data obtained from the databank.worldbank.org website from 1990 to 2022. The stock markets of ten emerging and developed countries were used in the study. The Markov-Switching regression methodology was utilized for this study. The results suggest that for the developed stock markets, in Regime 1, a positive shock to the money supply stimulated a significant rise in the stock returns while in Regime 2, a positive shock to the money supply induced a drop in returns. This suggests that for the developed stock markets, the effect of money supply shock on returns is state-dependent. In the developing stock markets, the coefficient for exchange rate was negative and significant in Regime 1, while it was insignificant in Regime 2. Therefore, the effect of exchange rate on returns is state-dependent in developing countries. Also, the coefficient for volatility in the exchange rate was negative and sizable in both regimes, indicating that the returns effect of volatility is not state-dependent. Basically, each day the exchange rate appreciates, stock returns rises in the developed stock markets while a devaluation policy executed in developing countries stimulated some decline in returns of emerging markets. In both regimes, a rise in money supply shock had positive and significant returns. The effect of money supply on stock returns is not state-dependent. Consequently, developing countries need flexible approaches to managing the variations in the exchange rates and money in circulation. While policymakers in developed markets may need to focus more on reducing volatility rather than adjusting exchange rates to influence stockpiling, those of emerging countries could benefit more from policies that stabilize exchange rates.

Measuring non-linear effects of exchange rate movements on reserve holdings

Due to flaws in fiscal and financial structures, currency rate changes have detrimental effects on emerging economies. The lack of financial protection tools and insufficient levels of financial market development leaves African nations exposed to such harmful consequences of rates of exchange volatility. This study attempted to investigate the impact of exchange rate movements on the volume of reserves held by African countries struggling to maintain enough earnings to warrant floating their currency against the dollar. The non-linear autoregressive distributed lag (NARDL) of Shin et al. (2014) filters movements in exchange rates into the negative and positive partial sum, respectively. We found that devaluation weakens reserve volume in Morocco, Namibia, Nigeria, South Africa, Zambia, Kenya, Malawi and Mauritius. Exchange rate appreciation significantly decreases Ghana, Kenya, South Africa, and Mauritius reserves. The magnitude of exchange rate devaluation, 0.94, 0.85, and 0.91 in Nigeria, Malawi, and Zambia, as reported by the positive cumulative sum of the changes in the exchange rate, exceeded the magnitude of appreciation, 0.12, 0.10, and 0.17, respectively. Accordingly, the effects of exchange rates on reserves in Ghana, Malawi, Morocco, Nigeria, Namibia, and Zambia are asymmetric, while the impact in Egypt, Kenya, South Africa, and Mauritius is symmetric.

Inflation Effects of Exchange Rate Movements during the Pandemic

Inflation Effects of Exchange Rate Movements during the Pandemic

Dynamic Effects of Exchange Rate Movements on Productivity Levels: New Evidence From Nigeria Based on NARDL

The dynamic relationship between exchange rate movements (appreciation and depreciation) and macroeconomic fundamentals had preoccupied the minds of researchers across the globe. Consequently, extensive research works have been conducted to unravel the puzzle; however, the findings remain inconclusive. The inconclusiveness of these researches may not be unconnected with the choice of model, the omission of key variables and erroneous assumption of symmetric interrelationships of the variables. To mitigate such error and fill the observed research gaps, this study leveraged on the non-linear autoregressive distributed lag to trace the possible asymmetric pass-through of the exchange rate to output growth in Nigeria. The study made use of monthly time series for the period 2000M1–2018M12 for empirical estimations. The empirical findings reveal an asymmetric pass-through from exchange rate to productivity. Exchange rate depreciation led to output retardation in the short run, but neither appreciation nor depreciation of the exchange affected output in the long run. The findings highlight that exchange rate depreciation of the local currency does not improve the country’s productivity. This reveals a disconnection and misalignment between exchange and productivity in Nigeria. The findings call for proper alignment of the Naira exchange rate with the U.S. dollar for improved productivity in the economy.

Relative Prices and Hysteresis: Evidence from US Manufacturing

This study uses new measures of real exchange rates to study the collapse of US manufacturing employment in the early 2000s in historical and international perspective. To identify a causal impact of RER movements on manufacturing, I compare the US experience in the early 2000s to the 1980s, when large US fiscal deficits led to a sharp appreciation in the dollar, and to Canada's experience in mid-2000s, when high oil prices and a falling US dollar led to an equally sharp appreciation of the Canadian dollar. I use disaggregated sectoral data and a difference-in-difference methodology, finding that an appreciation in relative unit labor costs for the US lead to disproportionate declines in employment, output, investment, and productivity in relatively more open manufacturing sectors. In addition, I find that the impact of a temporary shock to real exchange rates is surprisingly long-lived. I explain the persistent effects of exchange rate movements on manufacturing using a Melitz model extension with sunk fixed costs, which leads to a dynamic gravity equation whereby shocks to trade have persistent effects that decay over time. The appreciation of US relative unit labor costs can plausibly explain more than two-thirds of the decline in manufacturing employment in the early 2000s.

Exchange Rate and Import Price Pass-Through in Turkey

This study researches the effect of exchange rate movements on Turkey’s domestic prices from 2003 through 2019. For the Turkish economy, the structural problems behind the inflation phenomenon are the dependency on imported intermediate goods for production and inflation expectations. Therefore, changes in exchange rates have a significant impact on domestic inflation. To analyze this process, the consumer price index (CPI), producer price index (PPI) and import price index (IPI) are examined by using VAR analysis. Estimations for two distinct periods- stable and upward courses in the exchange rate movement- yield different results. For the first stable period, import price and producer price shocks were more reflective than exchange rate shocks. Exchange rate shocks are found to be stronger than the import price shocks in the second period. The results show that structural problems of the Turkish economy related to production based on the import of intermediate goods, dollarization, and pricing behavior support exchange rate and imported price pass-through to consumer prices.

Asymmetric effect of real exchange rate risk on foreign direct investment: Empirical evidence in ASEAN-4

This study investigates the asymmetric effect of exchange rate risk (volatility) on the real foreign direct investment (FDI) inflows in Malaysia, the Philippines, Singapore, and Thailand (ASEAN-4) using the Nonlinear Autoregressive Distributed Lag (NARDL) model. The results revealed the occurrence of a long-run asymmetric cointegration between real FDI inflows and real exchange rate risk in the Philippines, Singapore, and Thailand, but not in Malaysia. For the Philippines and Singapore, there is evidence of long-run asymmetry whereas short-run asymmetry exists for the case of Thailand. These findings imply that the asymmetric effects prove to be useful in providing essential information to the related parties on how FDI inflows react to exchange rate risks differently. Therefore, policymakers in ASEAN countries should be concerned about the asymmetric effect of the exchange rate volatility to mitigate the stylized effects of exchange rate movements on FDI inflows.

Exchange Rates and Firm Exports: The Role of Foreign Ownership and Foreign Subsidiaries

This paper examines the role of global production linkages on exchange rate elasticities by using Korean firm-level data. Firms with foreign ownership or with foreign subsidiaries, which are linked to global production, tend to weaken the effects of exchange rate movements on firm exports. We find the exchange rate elasticities of firm exports are significant and tend to have a negative effect on domestic firms or firms with no foreign subsidiary. In contrast, the results show an insignificant effect on foreign-owned firms or firms with foreign subsidiaries. After controlling for the export to foreign affiliates, we still find the estimated exchange rate elasticities of exports to be statistically insignificant, although it has a negative and relatively large impact for firms with global production linkages. Moreover, firms with a higher global value chain integration measure or more imported intermediate inputs have a significantly lower exchange rate elasticity of exports. This indicates that the developments in global production linkages have an important role in explaining lower exchange rate elasticity to exports.

Global Value Chains and External Adjustment

The paper explores how international integration through global value chains shapes the working of exchange rates to induce external adjustment both in the short and medium run. The analysis indicates that greater integration into international value chains reduces the exchange rate elasticity of gross trade volumes. This result holds both in the short and medium term, pointing to the rigidity of value chains. At the same time, greater value chain integration is associated with larger gross trade flows, relative to GDP, which tends to amplify the effect of exchange rate movements. Overall, combining these two results suggests that, for most countries, integration into global value chains does not materially alter the working of exchange rates and the benefits of exchange rate flexibility in facilitating external adjustment remain.

Non-linear impact of exchange rate changes on U.S. industrial production

This paper contributes to the literature on the nexus between production and exchange rate in the United States (U.S.) by considering non-linear adjustments of exchange rate effects on industrial production in several sectors of the U.S. economy. We employ a Non-linear Autoregressive Distributed Lags (NARDL) model which is built upon the Solow model. We show that there exists a non-linear relationship between these two variables in some of the MMIGs. We document short-run non-linear effects of exchange rate on production of non-energy materials, durable manufacturing, consumer goods and business equipment. The short-run effects last into the long-run for all the sectors. While exchange rate changes have short-run linear effects on production of electricity in the U.S., there are no effects of exchange rate movements on the production of mining, and energy materials. Moreover, the paper finds misspecification error of the model for the case of durable manufacturing. The existence of non-linearities considering import content of exports, support our hypothesis and conclusions. Further, the factors that influence demand provide justifications for our results.

The impact of exchange rate movements on mergers and acquisitions FDI

This paper investigates the effect of exchange rate movements on return outcomes associated with mergers and acquisitions FDI. We examine this relationship for cross-border mergers and acquisitions undertaken in 2001-2010 by 591 U.S. firms using both real and nominal bilateral exchange rates. The analysis of abnormal returns reveals no consistent relationship between the real exchange rate movements and bidder returns. However, we do find a statistically significant positive impact of exchange rate volatility on bidder returns. In addition, we find support for a significant relationship between bidder’s overseas experience with bidder returns and deal size with bidder returns.

Valuation effects of capital inflows: Evidence from emerging market economies

This paper studies valuation changes of capital inflows in 19 emerging market economies (EMEs). In most of the EMEs, we find that there are significant valuation changes and a positive rate of return on external liabilities by foreigners. Furthermore, the nonlinear effects of exchange rate movements on valuation changes are investigated using panel smooth transition regression models. Empirical results show that the transition is centered at approximately −22.3% of exchange rate change, which implies that when the exchange rate appreciates more than this level, foreign investment value gains increase considerably.

Foreign Exchange Exposure of Indonesian Listed Firms

Foreign exchange exposure or exchange rate exposure is the risk that a firm’s cash flows and earnings may be affected by exchange rate movements. For multinationals that have several subsidiaries overseas, exchange rate movements may have an adverse effect on a huge number of contractual transactions. The exchange rate movements may have an impact on future cash flows, generated by the firm’s production and marketing operations. For example, a rising Indonesian rupiah may result in Indonesian goods becoming more expensive, leading to Indonesian exporters selling less in the future, resulting in unfavourable future cash flows. Lower future cash flows mean the firm’s stock valuation may decline and investors may not be attracted to investing in the firm’s stock. In this paper, we examine the effect of exchange rate movements on Indonesian listed firms’ stock prices using a multivariate model with six bilateral exchange rates. We further add a generalized autoregressive conditional heteroskedasticity (GARCH (1,1)) model for each of 100 Indonesian listed firms’ monthly closing prices from the period of January 1994 through to November 2015, and the GARCH (1,1) results are summarized and presented in Tables 1 – 4 , 7 and 8 . We find a total of 80 per cent of our sample firms to have significant exchange rate exposure. The overall results show that most of the Indonesian listed firms under study are exposed to Japanese yen, Great Britain pound and Malaysian ringgit. We posit that this sensitivity of their stock prices may be due to the fact that most of these Indonesian firms are net importers. Interestingly, the agricultural sector comes out as the most stable sector, having the least exposure and exhibiting stable performance during the Asian financial crisis of 1997/1998. For overall exchange rate exposure across all firms, we run a pooled generalized least squares model. We find that the exchange rate exposure of the Indonesian sample firms is time-variant, or in other words, very much dependent on the subperiods (before crisis, during crisis and after crisis) under study.

Global Value Chains and External Adjustment: Do Exchange Rates Still Matter?

The paper explores how international integration through global value chains shapes the working of exchange rates to induce external adjustment both in the short and medium run. The analysis indicates that greater integration into international value chains reduces the exchange rate elasticity of gross trade volumes. This result holds both in the short and medium term, pointing to the rigidity of value chains. At the same time, greater value chain integration is associated with larger gross trade flows, relative to GDP, which tends to amplify the effect of exchange rate movements. Overall, combining these two results suggests that, for most countries, integration into global value chains does not materially alter the working of exchange rates and the benefits of exchange rate flexibility in facilitating external adjustment remain.

Asymmetric effects of exchange rate movements on traditional and modern services exports: Evidence from a large emerging economy

ABSTRACTThe service sector in India has emerged as the ‘new engine of growth’ with an increasing share in output and exports. In this paper we analyse the effect of real exchange rate movements on service exports of India, incorporating goods exports, financial development, FDI inflows, world demand and the role of globalization as drivers. We find that while traditional service exports are negatively and significantly affected by the real exchange rate movements, the modern service exports are negatively but not significantly affected. By applying the asymmetric cointegration approach, the results also confirm the non-existence of any asymmetric relationship between the real exchange rate and service exports in India. Further, the results also show that the supply augmenting and demand-side factors are more dominant than the exchange rate to affect service exports from India.

The effect of exchange rate movements on trade balance performance in Egypt: Is there a J-curve phenomenon?

This study targets to test the J-curve hypothesis in Egypt. The dynamics of the bilateral trade balance with Egypt’s main eight trading partners is investigated. The findings of the paper investigate that the J-curve hypothesis does not hold in case of Egypt, especially in the long-term. This is consistent with most of the previous studies tested the same hypothesis in developing countries. The conclusion to policy makers can be presented in two main points. First, the negative impact of the depreciation of the pound against the US dollar was confirmed in the short term. This requires action to mitigate these effects, especially for the poor. Second, it is not possible to rely only on devaluing the Egyptian pound to improve the long-term balance of trade; both of domestic production and export development policies should be developed to help improve the balance of trade as a result of the devaluation of the pound. The effect of exchange rate movements on trade balance performance in Egypt: Is there a J-curve phenomenon?

Backward participation in global value chains and exchange rate driven adjustments of Swiss exports

This paper examines the effect of exchange rate movements on export volume, export revenues and propensity to export taking into account the extent of foreign value added content of exports (“backward integration”) in global value chains (GVCs). Using both product-level and firm-level panel data, our results suggest that Swiss exports (intensive margin) and the export probability (extensive margin) are negatively affected by a currency appreciation. However, this adverse effect is mitigated in sectors and firms that are more integrated in GVCs, which could be explained by the “natural hedging” of exchange rate movements. Our findings are robust to the use of different measures of natural hedging and GVC integration and also hold across various specifications and estimation methods that control for sample selection, firm heterogeneity, heteroskedastic errors and persistence in export behavior. The dynamic specifications also reveal that export hysteresis driven by a currency appreciation is a concern particularly for firms that are not established in export markets.