Effects Of Exchange Rate Depreciation Research Articles

International reserves, currency depreciation and public debt: New evidence of buffer effects in Africa

The paper adds to the literature on the issue of public debt in African economies, by investigating the role foreign exchange reserves play in improving the level of indebtedness and as buffer of the negative effect of exchange rate depreciation while considering the exchange rate policy. Our results show a direct link between the level of foreign currency reserves and that of external debt in Africa. Particularly, we demonstrate that higher foreign currency reserves tend to decrease the public debt stock to GDP. This effect is even more significant when countries go through high exchange rate depreciation episodes (10% or higher). This impact, however, is not homogenous among country groups, as only countries with a floating exchange regime tend to benefit from this buffer effect compared to anchored regimes. In a time where most African economies face severe exchange rate depreciation episodes following the U.S. monetary tightening policy, central bankers and policy makers need to consider a plethora of policy issues including interventions in the FX market to mitigate depreciations and maintain a sustainable public debt stock.

Are macroprudential policy instruments effective? Evidence using difference-in-difference approach with heterogeneous treatment effects

ABSTRACT We empirically investigate the effectiveness of 17 macroprudential policy (MPP) instruments on financial and macroeconomic stability for 98 emerging market and 36 advanced economies between 1990 and 2020. We use Difference-in-Difference estimators with heterogeneous treatment effects which are robust in estimating treatment effects as compared to time and group fixed effects estimators. We find that while in short-term MPP instruments stabilize capital & other investment flows, in longer term, the regulations may increase fluctuations. Further we find that the MPP regulation reduces leverage growth in short-term, however, it may increase leverage growth in longer term. Our results show that broadly, tightening MPP instruments has a stabilizing impact on financial variables. However, the results indicate that MPP may have negative spill-over effects on real GDP growth. The impact on real effective exchange rate depreciation is mixed.

Dynamic effect of exchange rate depreciation on carbon emission in the Mediterranean basin: fresh insights from linear and non-linear ARDL approaches

The key objective of this study is to explore the relationship between economic growth, renewable and non-renewable energy consumption, exchange rate variation, and environmental pollution by carbon dioxide (CO2) emissions in 19 coastline Mediterranean countries over the period 1995-2020. We suggest the application of two different approaches, namely, the symmetric autoregressive-distributed lag (ARDL) and the non-linear ARDL (NARDL) model. These methods distinguished from traditional ones by the fact that they assess both the long and short run dynamics among variables. More importantly, the NARDL method is the only technique enabling us to test the asymmetric effects of a shock in independent variables on dependent ones. Our results indicate that the long-term pollution is positively correlated with exchange rate for developed countries and negatively correlated for developing ones. Since environmental degradation in developing countries is more vulnerable to any fluctuation in exchange rate, we suggest that policymakers in Mediterranean developing countries must pay more attention to exchange rate variation as well as boosting renewable energy consumption in order to decrease CO2 emissions.

Exchange Rate Dynamics, Energy Consumption, and Sustainable Environment in Pakistan: New Evidence From Nonlinear ARDL Cointegration

Pakistan's local currency has been devalued during different exchange regimes, which may substantially affect energy consumption and CO2 emissions. Therefore, this study investigates the effects of exchange rate depreciation on Pakistan's CO2 emissions and energy consumption from 1990–2018. We apply the nonlinear autoregressive distributed lag (ARDL) cointegration approach for the empirical analysis and found that exchange rate depreciation increases CO2 emissions and energy consumption in both the short and long runs. These results suggest that currency devaluation has an expansionary effect which enhances economic growth at the cost of high energy consumption and CO2 emissions. Therefore, the government needs regulations along with an exchange rate policy to control CO2 emissions. Moreover, the government should search for alternate energy resources such as renewable energy resources that meet the country's energy needs and mitigate CO2 emissions.

Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets

Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets

Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets

Real Effects of Exchange Rate Depreciation: The Roles of Bank Loan Supply and Interbank Markets

Currency depreciations in emerging economies: A blessing or a curse for external debt management?

We investigate the long-term effect of domestic currency depreciation on external debt for a panel of 41 emerging economies over the years 1999–2019 based on quarterly data. Using heterogeneous panel cointegration methods, we find that domestic currency depreciation leads to an increase in the external debt to GDP ratio over the long-term and it might, therefore, reduce the sustainability of external debt. This is particularly the case for larger depreciations, while smaller depreciations might even reduce the external debt burden over the long-term for more developed emerging economies. Poorer emerging economies face a greater increase in external debt burden following domestic currency depreciation. We also find that higher exchange rate volatility and the use of floating exchange rates contribute to a greater increase in external debt burden over the long-term following currency depreciation. Furthermore, we find asymmetric effects of exchange rate depreciation on external debt: greater central bank independence limits the effect of currency depreciation on external debt, while higher financial development and illicit financial flows augment the effect of depreciation on external debt.

Repercussions of exchange rate depreciation on the economy of Pakistan: Simulation analysis using macroeconometric model

Expansionary and contractionary effects of exchange rate shock in developing economies has been the subject of an extensive debate but the results are inconclusive. This study has been conducted to examine the repercussions of unexpected exchange rate depreciation in the Pakistan economy. Unlike the previous literature, this study utilizes a fairly large macroeconometric model constructed on the basis of Cowles Commission structural approach. The study explores that expansionary effect of exchange rate depreciation explained by the traditional theories of open economy macroeconomics persists only for one fiscal year but these theories don’t work in the long-run as contractionary phase starts in the subsequent years. Monetary and fiscal authorities are not neutral and contractionary policy is taken in response to depreciation which pushes the economy into recession. Stagflationary effects are clearly observed. However, improvement in foreign sector prolongs for a number of years and policy makers would have to face a trade-off between opposite response of output and current account balance. Hence, unexpected depreciation generates sharp cyclical fluctuations on demand which immediately transmit to supply side of the economy. In line with the views of “New Structuralists”, exchange rate depreciation may be considered as a source of shock rather than shock absorber in the case of Pakistan economy. Although this study is specifically estimated for the Pakistan economy, authors believe that their methodological contributions and results are of wider importance for policy makers in developing countries.

The Role of Returns to Scale in the Relationship between Exchange Rate and Economic Growth

This paper aims to understand how the returns to scale can boost or deprive the effects of exchange rate depreciation on economic growth. A simple mathematical model was developed to describe the problem of the exporting firm in this context of internationalization. Theoretical results show that exchange rate depreciations can boost the growth of production of firms with technologies with decreasing returns to scale, while in firms that have increasing returns of scale, the effect is null or negative. In addition, two important exchange rates were found for the firm’s decision, namely the minimum operating exchange rate (MOE) and the reversal exchange rate (RVER). Therefore, the present model helps understanding the role that the returns to scale plays in the relationship between exchange rate and economic growth. Finally, the current study presents a few limitations that can be addressed in future research. For instance, the following statements can integrate them: 1) allow that firms to influence the exchange rate and place it above the minimum operational level; 2) considering new players in the markets considered and 3) take into account more input and outputs variables.

Returns and volatility spillover between food prices and exchange rate in Nigeria

PurposeEmpirical studies have documented the linkage between exchange rate movement and food prices. However, the purpose of this study is to investigate the degree and direction of returns and volatility spillover transmission between exchange rate and domestic food prices in Nigeria.Design/methodology/approachThe study uses weekly data from January 2010 to January 2019. Also, the study adopts the improved Diebold and Yilmaz (2012) approach to evaluate the return and volatility spillover between food price and naira to dollar exchange rate. The study also account for 2016 exchange rate crash in the interconnectedness between food prices and naira to dollar exchange rate.FindingsThe paper finds evidence of directional interdependence among the considered food prices and exchange rate based on the obtained spillover indexes. In addition, exchange rate returns and volatility transmission to food prices is more than it receives, particularly after the exchange rate crash.Research limitations/implicationsThe high consumption of staple foods requires policies on price stabilisation such as massive investment in local production and reduction in import dependence, in order to cushion the effects of exchange rate depreciation on domestic prices of food.Originality/valueThis study is the first empirical study to investigate the interconnectedness between exchange rate and domestic food prices for a food import–dependent developing country using the Diebold and Yilmaz approach.

The Nexus Among Trade Volume, Trade Deficit and Real Exchange Rate: An Empirical Evidence from Pakistan

The study estimates the causal nexus among trade volume, trade deficit and real exchange rate in Pakistan by using a time series data from 1985 – 2017. Certain Econometric techniques have also been applied i.e. Unit Root Test has employed to stationeries the data of the selected variables which leads to avoid the Autocorrelation problem in the model. The study uses Johnson Co-integration for long run cointegration. The results confirmed that all the chosen variables are co-integrated in long run. The ordinary least square is employed to examined long run relationship between the variables of interest. The result shows that there is strong robust significant relationship among trade, trade deficit and real exchange rate. Beside the main variable the control variables of infrastructure, Foreign Direct Investment inflow impact significantly on dependent variables which strengthen the causal relationship among the selected variables. It is suggested that the Government should enhance the quality and quantity of infrastructure facility which will leads to favorable balance of trade in Pakistan. It is also suggested that whenever the policy makers providing the policy of trade, especially exports, then adverse effect of Exchange Rate Depreciation is to be quantified and necessary measures be suggested so as to reduce the repercussion. Keywords: Trade, Trade Deficit, Exchange Rate, Co-integration, Pakistan. DOI : 10.7176/JESD/10-4-10

Reducing large net foreign liabilities

AbstractIn light of persistently large net foreign liability (NFL) positions in several euro area countries, we analyze 138 episodes of sizeable NFL reductions for a broad sample of advanced and emerging economies. We provide stylized facts on the channels through which NFLs were reduced and estimate factors that make episodes “stable”, that is, sustained over the medium term. Our findings show that while GDP growth and valuation effects contribute most to NFL reductions overall, stable reduction episodes also require positive transaction effects (i.e., current account surpluses), in particular in advanced economies. Considering the different components of a country's external balance sheet, we observe that reduction episodes were almost exclusively driven by a decline in gross external liabilities in emerging economies, while in advanced economies also gross external asset accumulation contributed significantly, in particular in stable episodes. Our econometric analysis shows that NFL reductions are more likely to be sustained if a country records strong average real GDP growth during an episode and exits the episode with a larger current account surplus that consists of a combination of relatively high exports, low imports and low net factor income payments. Moreover, we find evidence that nominal effective exchange rate depreciation during an episode is helpful for achieving episode stability in the short run, while IMF programs and sovereign debt restructurings also contribute to longer term stability.

Assessing the effects of exchange rate depreciation on the US economy

PurposeThe purpose of this paper is to examine the effects of exchange rate shock on the broad spectrum of the US economy using a factor-augmented VAR model (FAVAR).Design/methodology/approachThe authors developed a two-factor FAVAR model and estimated it with the single-step Bayesian likelihood approach using the Gibbs sampling technique. The two factors represented, respectively, the economic activity and price pressures. The exchange rate shock was identified with the Choleski decomposition method for VARs. The authors used the data of 117 time series for the period from 1973:02 to 2007:12. Impulse responses and variance decompositions were computed as the main results.FindingsThe authors found that exchange rate shock has pervasive effects on the US economy as the following: depreciation does not appear to help reduce the US trade deficit as both import and export rise with the depreciation shock; in the short run, depreciation appears expansionary as industrial production, manufacturing and employment all increase within a year; in the medium run, depreciation appears inflationary, as consumer price, producer price, import price and export price all increase; and in the medium run, depreciation appears contractionary as personal consumption, consumer confidence, stock price and housing start tend to fall.Research limitations/implicationsSome caveats remain: first, our simple model symmetrically estimates depreciation shock and appreciation shock and, hence, cannot draw inferences for how exchange rate appreciation and depreciation may affect the US economy asymmetrically. Second, the simple model used did not distinguish the different possible sources of exchange rate depreciation shock, the knowledge of which may lead to richer policy implications and is the direction of research for the future.Originality/valueThis research contributes to the literature of whether exchange rate is expansionary or contractionary to the US economy using the FAVAR model. This is the first comprehensive study in the literature studying the pervasive effects of the exchange rate on the broad spectrum of the US economy in one integrated model.

Exchange Rate Dynamics, Endogenous Risk Premium and the Balance Sheet Effect: An Effective Demand Model

This article describes a macroeconomic framework for analysing the interaction between output, domestic interest rate and exchange rate in the presence of the endogenous risk premium and balance sheet effect of exchange rate depreciation on investment demand. Output is demand determined. There are three assets: money, domestic bonds and foreign bonds. Domestic bonds and foreign bonds are not perfect substitutes due to the presence of risk premium. The endogenous risk premium depends on certain macroeconomic fundamentals, namely budget deficit and current account balance. Using this framework, we will examine implications of monetary policy, fiscal policy, tariff liberalization and global interest rate hike for exchange rate dynamics and output. The balance sheet effect and the risk premium together explain how an expansionary fiscal policy may generate recession, while tariff liberalization may produce favourable macroeconomic outcomes. Moreover, the model shows that an increase in world interest rate may have contractionary effect on the domestic output level due to the presence of the balance sheet effect of exchange rate depreciation. JEL Classification: E27, E63, F13, F32

REAL EXCHANGE RATE, MONETARY POLICY, AND THE U.S. ECONOMY: EVIDENCE FROM A FAVAR MODEL

This paper examines the effects of exchange rate depreciation to the U.S. economy in a factor‐augmented vector autoregression model using monthly data of 148 variables for the post–Bretton Woods period of 1973–2017. Exchange rate shock is identified to reflect exogenous disturbances to the foreign exchange market, and movements in exchange rate that are not accounted for by changes in the U.S. monetary policy. We find that depreciation is expansionary and inflationary to the broad U.S. economy, the current account improves over time conforming to the J‐curve theory, and monetary policy is leaning against the wind. (JEL E3, E5, F31, F32, F41)

Determinants of Pakistan’s Exports: An Econometric Analysis

The research investigated the determinants of Pakistan’s exports by using time series data from 1990–2016. Certain econometric tests were also applied to check cointegration among variables. A unit root test was used to check the stationarity of selected variables. After the stationarity of the data, a vector error correction model is used to estimate the effect of regressors, like foreign direct investment, gross domestic product, employment level, and consumption expenditures on a dependent variable, i.e. exports in the short run. The result shows the positive relationships that foreign direct investment, gross domestic product and employment level have on exports, and the adverse impact of consumption expenditures on the dependent variable. The study uses Johansen’s cointegration test for the long run. The results show that all the variables are co‑integrated in the long run. It is suggested that the government should encourage foreign direct investment and gross domestic product, which would help accelerate Pakistan’s exports. It is also suggested that whenever policymakers provide a trade policy, in particular, in relation to exports, then the adverse effect of exchange rate depreciation, external debt burdens, taxes, sanctions and protectionism should be quantified, and necessary measures be suggested so as to minimize any repercussions.

ANALYSIS OF EXCHANGE RATE PASS-THROUGH, FEAR OF FLOATING, AND IMPLEMENTATION OF INFLATION TARGETING FRAMEWORK

This paper analyze the exchange rate pass-through and fear of floating behavior on 18 countries that adopting Inflation Targeting Framework (ITF). Vector Error Correction Model (VECM) is used: (1) to estimate the effect of exchange rate depreciation to inflation (passthrough); and (2) to examine the indication of fear of floating behavior. The result shows that passthrough effect has decreased in most countries after ITF where middle income countries have higher passthrough than high income countries. This effect did not disappear completely and still has a significant role to drive inflation. The interventions on exchange rate movement can be interpreted more as control of inflation than fear of floating. The implementation of ITF especially in middle income countries needs further to be reconsidered since it requires inflation as the only nominal anchor.

ANALYSIS OF EXCHANGE RATE PASS-THROUGH, FEAR OF FLOATING, AND IMPLEMENTATION OF INFLATION TARGETING FRAMEWORK

This paper analyze the exchange rate pass-through and fear of floating behavior on 18 countries that adopting Inflation Targeting Framework (ITF). Vector Error Correction Model (VECM) is used: (1) to estimate the effect of exchange rate depreciation to inflation (passthrough); and (2) to examine the indication of fear of floating behavior. The result shows that passthrough effect has decreased in most countries after ITF where middle income countries have higher passthrough than high income countries. This effect did not disappear completely and still has a significant role to drive inflation. The interventions on exchange rate movement can be interpreted more as control of inflation than fear of floating. The implementation of ITF especially in middle income countries needs further to be reconsidered since it requires inflation as the only nominal anchor.

Trade Liberalization and Performance of the Nigerian Textile Industry

Nigeria textile industry is characterized by questionable incentives, political uncertainty, acute power shortage, poor infrastructure, smuggling and red-tape bureaucracy, among others. The study modified the endogenous growth model within a time series (1986 and 2015) estimation techniques of Autoregressive Distributed Lagged model (ARDL). Findings revealed that the effect of simple tariff rate on textile industry is negative and statistically significant in the long-run; while trade liberalization policy measure through simple tariff rate has a lag effect before it can be effective in the textile industry. In both short and long run, real effective exchange rate depreciation worsens the performance of the textile industry in Nigeria. In the long run, a 1.0% rise in trade openness would decrease the level of textile industry performance by about 17.49%, while factor affecting textile industry performance in the short run are simple tariff rate, financial development, exchange rate changes, trade openness and labor and capital inputs respectively. The study concluded that Trade liberalization has a lag effect on textile industry performance and a significant effect on the performance of the Nigerian textile industry. It is therefore recommended that government should make concerted efforts toward providing a favorable business environment, reducing inflation and improve the infrastructural facilities for the textile industry to strive.

Trade Liberalization and Performance of the Nigerian Textile Industry

Nigeria textile industry is characterized by questionable incentives, political uncertainty, acute power shortage, poor infrastructure, smuggling and red-tape bureaucracy, among others. The study modified the endogenous growth model within a time series (1986 and 2015) estimation techniques of Autoregressive Distributed Lagged model (ARDL). Findings revealed that the effect of simple tariff rate on textile industry is negative and statistically significant in the long-run; while trade liberalization policy measure through simple tariff rate has a lag effect before it can be effective in the textile industry. In both short and long run, real effective exchange rate depreciation worsens the performance of the textile industry in Nigeria. In the long run, a 1.0% rise in trade openness would decrease the level of textile industry performance by about 17.49%, while factor affecting textile industry performance in the short run are simple tariff rate, financial development, exchange rate changes, trade openness and labor and capital inputs respectively. The study concluded that Trade liberalization has a lag effect on textile industry performance and a significant effect on the performance of the Nigerian textile industry. It is therefore recommended that government should make concerted efforts toward providing a favorable business environment, reducing inflation and improve the infrastructural facilities for the textile industry to strive.