Effects Of Depreciation Research Articles

Девальваційні шоки та їх наслідки для економіки України

The article investigates the impact of devaluation shocks on Ukraine's economy. The author argues that the mechanism of exchange rate effect is mixed, with positive and negative effects of exchange rate fluctuations affecting the competitiveness of the internal and external sectors in different directions. The author considers three waves of devaluation of the hryvnia (1998-1999, 2008-2009, and 2014-2015) and analyzed their effects. It is shown that hryvnia devaluation in 1998-1999 had the largest effect, which was initially manifested in the growth of exports in 2000, being its peak observed in 2001-2004. The share of imports in the trade balance did not significantly decrease, because Ukraine had a high degree of energy dependence and needed a lot of components for domestic production. However the high prices on international commodity markets contributed to the formation of the raw-material character of Ukraine's exports. The second wave of devaluation (2008-2009) caused by the global financial crisis did not have a large positive impact on Ukraine's trade balance, as the international markets saw a decline in global demand for goods and services. The depreciation of the hryvnia had a negative impact on domestic output, because the total negative effect of currency devaluation considerably affected the sectors, which were oriented to the domestic market and had a significant share of imported raw materials and energy in their cost structure. The third wave of hryvnia devaluation (2014-2015) to some extent contributed to the reduction of the negative trade balance, but the full effect of the hryvnia depreciation is difficult to assess because the balance indicators were calculated less the lost territories. The raw material orientation of Ukrainian exports contributed to a hypertrophy of the domestic economy and the emergence of Dutch disease, which showed itself in the sector of semi-finished goods. As a result, there took place a substitution of more complex items with more simple ones having lower added value. Along with the impact of devaluation shocks on Ukraine's trade balance, the author examines the relationship between devaluation of the hryvnia, inflation and living standards. It is shown that, between inflation and devaluation, there is a close relationship, which is explained by the technological structure of Ukraine's import dependent economy. It is concluded that high inflation and devaluation of the hryvnia make no contribution to the stability of money circulation in Ukraine and lead to lower living standards. The author recommends diversifying this country's export structure towards a significant increase in the share of high tech products and services.

External Commercial Borrowings and Balance Sheet Effects of Exchange Rate in India: A Firm Level Analysis

The depreciation of currency expected to increase the cost of borrowing of the firms that denominate debt in foreign currency and thus adversely affect the investment and net worth of the firms. This study examines the effect of currency depreciation on investment of those firms that hold external commercial borrowings (ECB) in India. The sample data comprises non-financial firms for the period 2004 to 2015 and panel regression quantifies the balance sheet and competitiveness effect. This study does not find significant negative effect of rupee depreciation on investment of ECB indebted firms. This study shows that sample ECB firms have some natural hedge against exchange rate volatility. The performance of listed firms in terms of investment and income is better than that of unlisted firms. The findings of the study imply the effectiveness of current exchange rate regime and prudential norms laid by RBI for external commercial borrowings.

Does Real Exchange Rate Depreciation Increase Productivity?: Analysis Using Korean Firm-Level Data

We examine the effects of real exchange rate (RER) depreciation shocks on firm productivity. Using the firm-level data of Korean manufacturing industries for 2006–2013, we distinguish between yearly RER movement and persistent RER depreciation during 2007–2009 and analyze how each affects productivity. We find the positive effect of RER depreciation on productivity among exporters and this positive effect increases with higher export exposure. However, the positive productivity gain disappears when the depreciation persists. Our findings suggest that while immediate depreciation leads to productivity upgrade via price competitiveness and scale expansion, persistent depreciation nullifies the productivity gain by slackening the innovation effort.

Earnout-Klauseln bei Asset Deals: Eine betriebswirtschaftliche Analyse unter bilanziellen und steuerlichen Aspekten

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Exchange Rates, Borrowing Costs, and Exports: Firm-Level Evidence

This study empirically examines the effects of currency depreciation on the exporting firms' borrowing costs and exports. Using Korean data, first we find evidence that unanticipated currency depreciation increases the firm-level real interest rate for firms carrying foreign-currency debts, and firms in sectors importing intermediate inputs. In addition, the rise in the firm-level real interest rate is driven by long-term foreign-currency debts rather than short-term ones. Next, we show that currency depreciation has a contractionary effect of rising costs of borrowing and imported inputs, and an expansionary effect of an improvement in price competitiveness. However, the overall effect of currency depreciation on exports is ambiguous and depends on the share of foreign-currency debts in total debts and the share of imported intermediate inputs in total inputs.

Commodity trade between Pakistan and the US: is there evidence of the J-curve?

ABSTRACTA few studies that have attempted to estimate the short-run (J-curve) and long-run impact of exchange rate depreciation on Pakistan’s trade balance are either based on aggregate trade data between Pakistan and the rest of the world or between Pakistan and her bilateral trading partners. The findings are mixed at best. Considering the trade balance between Pakistan and the US, as one of its major partners, no significant effects have been discovered. Suspecting that the trade flows between the two countries could suffer from another aggregation bias, we disaggregate their trade flows by commodity and consider the trade balance of 45 industries that trade between the two countries. We find significant short-run effects of currency depreciation on the trade balance of 17 industries. The short-run effects last into the long run in 15 cases. The largest industry that account for more than 10% of the trade seems to benefit from real depreciation in the long run.

Industry level J-curve in Turkey

Purpose – The purpose of this paper is to examine the J-Curve effect in Turkey at the industry level. Design/methodology/approach – In order to find the long-run and short-run effects, 58 industries (by Standard International Trade Classification Rev.3) have been identified by using monthly data that covers the periods from January 1990 to December 2012. Present study employs bounds testing procedure, developed by Pesaran and Shin (1999) and Pesaran et al. (2001). Findings – Although results indicate a positive satisfactory effect of real depreciation of lira in 13 industries, the J-Curve effect is detected in only 13 industries. Originality/value – The present study is one of the first studies to analyze the J-Curve effect at the industry level on Turkey. In addition to being one of the first studies, it will be an invaluable addition to the J-Curve literature.

Quanto CDS

This paper presents a new modeling approach for credit quanto spreads, covering credit default swap quanto spreads, bond quanto spreads and bond redenomination spreads. Credit quanto spreads are implied from a hazard rate diffusion model and a FX rate jump diffusion model, where the jumps are triggered by defaults. Here, we additionally let the expectation of a default influence the FX rate, as would be expected with rational economic agents. The quanto spread arise from correlation between the hazard rate and FX rate and a jump in the FX rate in case of default. One source of correlation is the common macroeconomic environment governing the FX and underlying credit entities. Another source stems from the FX rate depreciation at default of the credit entity. This second source can be subdivided into the direct depreciation effect and FX rate changes arising from changes in credit default expectation by the economic agents. Correlation arising from a common macroeconomic environment, will be present for all credit entities, whereas correlation arising from movements of the FX rate at default or at changes of default expectation, will be significant only for systemically important credit entities. We find that rational agent behavior reduces the credit quanto effect which arises from FX jumps when credit defaults. Numerical results are obtained by Monte Carlo simulations. Analytically, and model independently, we find that the credit default swap quanto spread can be expressed directly in terms of bond prices and annuities and is roughly equal to the bond quanto spread.

Nonlinear ARDL approach, asymmetric effects and the J-curve

Purpose– Previous research that investigated the effects of currency depreciation on the trade balance assumed that the adjustment of all variables in a given model is in linear fashion. The authors wonder if introduction of nonlinearity in the adjustment of some variables such as the exchange rate can shed additional light on evidence of the J-curve. The new approach also allows to test whether exchange rate changes have symmetric or asymmetric effects on the trade balance. Estimates of a trade balance model for Canada, China, Japan, and the USA reveal that the effects are indeed asymmetric. The paper aims to discuss these issues.Design/methodology/approach– The methodology is based on linear and nonlinear ARDL approach.Findings– When nonlinearity is introduced into testing approach for the J-curve, more evidence is found in support of the J-curve.Research limitations/implications– The models are estimated using aggregate trade flows of each country with the rest of the world, hence they suffer from aggregation bias. Using trade flows at bilateral level and at commodity level are highly recommended for future research.Originality/value– This is the first paper that applies nonlinear ARDL approach to test the short-run and long-run effects of currency depreciation on the trade balance.

Is There Any Wage Loss During the Period of Unemployment Among Older Workers?

Using the data from the Survey of Income and Program Participation (SIPP) between 1996 and 2013, the paper empirically estimates the effect of duration of unemployment on reemployment wages for workers 40 years of age and older and decomposes the given effect into the stigma and skill depreciation effects. The findings indicate that a one month increase in the duration of unemployment reduces reemployment wages by 0.9%. The observed reduction in reemployment wages for older workers is mainly explained by the stigma effect ensued from prolonged unemployment spells. The simulation exercise also suggests on the substantial effect of the stronger state age discrimination law on durations of unemployment and a very modest effect on wages; while, the 1983 Social Security reforms had a small impact on durations of unemployment with no impact on wages of older workers.

Impact of the Effective Exchange Rate on the Trade Balance of Sri Lanka: Evidence from 2000 to 2013

This study investigates the possibility of improving the trade balance of Sri Lanka through currency depreciation. An error correction model (ECM) was used to examine the short-term and long-term effects of nominal and real effective exchange rate depreciation on the trade balance. While there is no long-run relationship between the real effective exchange rate and the trade balance, depreciation of the nominal effective exchange rate will lead to a deterioration of the trade balance in the long term. Further, the results indicate that there is a positive causality relationship from the real GDP to the trade balance. Conversely, growth in money supply will worsen the country’s trade balance in the long run. The empirical findings show that currency devaluation is not an effective policy tool to improve the country’s trade balance. JEL Classification: F 140

Brazil Through the Eyes of CHORINHO

CHORINHO, a medium scale DSGE model used in the financial sector to inform investment decisions, consists of a small open economy version of Smets and Wouters (2007) with a financial accelerator mechanism, adapted for estimation with Brazilian data. Marginal likelihood comparisons indicate that the model compares favorably to Bayesian Vector Autoregressions that use Sims and Zha (1998) priors. The model is used to (i) identify the reasons behind recent deceleration episodes, (ii) study the effects of currency depreciation, and (iii) investigate whether monetary policy has recently become more powerful.

Exchange rate sensitivity of the USA-Singapore trade flows: evidence from industry data

The Marshall-Lerner condition is a condition that is judged to assess the long-run effects of currency depreciation on the trade balance. It is obtained by estimating price elasticities of a country's demand for imports and rest of the world demand for its exports. When the analysis is extended to bilateral level between two countries using aggregate bilateral trade data or bilateral commodity data, due to lack of prices researchers directly relate inpayments and outpayments to the exchange rate in addition to scale variables. In this paper we try to determine the short-run and long-run effects of real depreciation of the dollar on inpayments of 141 US industries that export to Singapore and 59 US industries that import from Singapore. While we find that most industries are affected in the short-run. However, the short-run effects last into the long-run only in 45 exporting industries and 15 importing industries. Most of the affected industries are small.

Monetary and fiscal policy mix in a small open economy: the case of Croatia

In this article we use a structural vector autoregression (VAR) model to analyse the possibilities of monetary and fiscal policy in achieving main economic policy goals, namely price stability and economic growth, in Croatia from 2004 to 2012. Our main results indicate that expansionary monetary and fiscal policies both have positive effects on economic activity. On the other hand, fiscal expansion leads to nominal exchange rate appreciation while monetary expansion has depreciation effects on nominal exchange rate. Thus the main conclusion of the article is that coordinated measures of monetary and fiscal policies could achieve both goals, i.e. that fiscal and monetary authorities can stimulate economic growth without endangering price stability.

The J-Curve Effect on the Trade Balance in Armenia

Over the past years the Armenian Dram has appreciated against their major trading partners’ currencies. Such appreciation has received mixed reactions. Some economists argue that the depreciation of currencies is a good stimulant for export growth, while others argue that the net benefits of depreciation cannot outweigh its ills on the economy. The purpose of this paper is to investigate the effects of depreciation on the trade balance of Armenia using vector error correction model (VECM) and to trace the response of the trade balance to the shocks in the exchange rate using Impulse response function. This study finds evidence of the J-curve on the Armenian trade balance and the existence of a long-run equilibrium relationship among the variables. This suggests that following a real depreciation the trade balance will initially deteriorate, but will improve in the long run.

Does Real Exchange Rate Depreciation Boost Capital Accumulation? An Intertemporal Analysis

This paper examines the investment‐enhancing effect of real exchange rate (RER) depreciation in a two‐sector small open economy model where a representative firm in the tradable sector maximises its discounted profit over an infinite planning period. In this framework, a one‐time, permanent, unanticipated depreciation in the RER leads to a higher steady‐state level of capital stock and investment. This consequently increases the optimal investment rate associated with an arbitrary level of capital stock as the saddle path shifts upwards. In the benchmark calibration, the investment‐enhancing effect of RER depreciation is sizeable. One per cent depreciation in the RER leads to an increase of 0.4444 per cent in the rate of capital accumulation.

Is Currency Depreciation Always Good for Improving Trade Balance? An Empirical Analysis of Selected Asian Economies

The aim of the present study is to investigate how depreciation could affect the export sector in selected Asian countries. The current economic environment makes it difficult to sustain trade balance among developing countries with a flexible exchange rate system among emerging economies. Theoretically, depreciation will bring positive impact on trade balance. However, it is only possible when the sum of the elasticities of demand for export and import goods is greater than unity. Accordingly, the present study first analyzed the effect of depreciation on trade balance among 14 Asian economies and found no evidence that depreciation improves trade balance. This was perhaps due to the fact that exports did not respond as expected, mainly due to the decrease in primary exports as well as manufactured products. An increase in import burden may also affect trade balance. However, the above result was challenged when we focused only on eight Asian countries that are relatively bigger, industrialized, and stable economies, and eventually we found that depreciation improved trade balance among the second group of countries.

The Currency Value Deviation of China Yuan

China Yuan has been in the deviation of currency value of internal depreciation along with external appreciation since 2002. The paper, basing on exited literature, summarizes the formation mechanism as: the effect of US dollar depreciation, the effect of the export-oriented development model, the effect of sustained rapid economic growth and the effect of interest rates spreads and other factors. The conclusion implies that currency liquidity, wage rising and international inflation can account for the domestic inflation against the foreign exchange rate depreciation. Hence, in order to explore international experience of currency value deviation, we have made a statistic analysis of G20 economies’ currency growing except US and EU. We find it is universe of currency value deviation. Moreover, we have summarized the currency value relationship as consistency, stray and deviation according to the manifestations exchange rate transmission. Keywords: China Yuan, deviation of currency value, exchange rate pass-through.

Threshold effects of exchange rate depreciation and money growth on inflation

Purpose – This paper aims to investigate the impact of exchange rate depreciation and money growth to the consumer price index (CPI) inflation in Indonesia. Design/methodology/approach – Using threshold model applied to Phillips curve equation. Findings – Using monthly data from 1980:1 to 2008:12, the econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effect of exchange rate depreciation on inflation. Even though the threshold value for exchange rate depreciation is found at 8.4 percent, the F-test suggests that there is no significant difference between the coefficient below and that above the threshold value. While two threshold values are found for money growth, i.e. 7.1 and 9.8 percent, and they are statistically different. The impact on inflation is high when money grows by up to 7.1 percent, it is moderate when money grows by 7.1-9.8 percent, and it is low when money grows by above 9.8 percent. Research limitations/implications – This research is using methodology proposed by Hansen which the threshold is based on the minimum SSR. The value of SSR will differ from one model to one model. For example, model using quarterly data will give the different result from that using monthly or yearly data. Also, when the author uses the new data, the result could be different. Practical implications – Even though inflation targeting framework has been adopted by Bank Indonesia (BI) since 2005, BI should not disregard the monetary aggregate variable, especially M1. This is because the growth of money is still matter to influence inflation in the short run. The impact on inflation is found to be larger than the impact of exchange rate depreciation when it is below a certain threshold value. Originality/value – This is the first paper that evaluates the threshold effect of exchange rate and money growth in emerging country, especially in Indonesia.

Exploring knowledge appreciation and depreciation effects in technology alliance portfolios

Conducting analyses on a multi-industry sample of 494 firms that engage in technology alliances over 15 years, we examine to what extent the age of alliances within firms’ alliance portfolio influe...