Effects Of Exchange Rate Shocks Research Articles

The spillover effects of external economic shocks on African international sovereign bonds

African nations are facing increasing debt repayment pressure and default threats as a result of the severe fiscal deficit, falling commodity prices, weakening global demand, the COVID-19 pandemic, the Russia-Ukraine war, etc. This paper uses the BVARSV model to build multiple exchange rate-import (export) commodity-spread systems to analyze the time-varying impact and intermediations of external economic shocks on sovereign bonds of three representative high-, medium-, and low-risk default nations—Zambia, Nigeria, and Egypt during the whole sample and critical times. The findings indicate that the linkages between the exchange rate and Egypt's spreads are time-varying but static in Zambia and Nigeria. Simultaneously, the spread system is unstable in Zambia while relatively stable in Nigeria and Egypt for distinct effects of exchange rate shocks. Also, the intermediated commodities are significant, especially for exported copper, exported crude oil and imported wheat in Zambia, Nigeria and Egypt, respectively. Moreover, The Fed's interest rate adjustments and the market environment caused by Covid-19 and Russia-Ukraine conflict explains for the changes in African bond spread in different stages. The paper's findings are useful for determining the sensitivity of African sovereign bond spreads to external economic shocks and guiding bond investors.

Asymmetric Effects of Exchange Rate Shocks on Urban Household Health Expenditures in Iran

Background: The evidence of Iran's economy shows that many economic variables, including household health expenditures, can be affected by exchange rate shocks. According to previous studies, the increase in the exchange rate from two channels of the general increase in prices, as well as the increase in the price of medicines and imported medical supplies, increases health expenditures. This study investigated the asymmetric effects of the unofficial exchange rate on the health expenditures of urban households in Iran.
 Methods: The present applied study investigated the short-run and long-run effects of positive and negative shocks of the unofficial exchange rate, gross domestic product (GDP), and CO2 emissions on the health expenditures of urban households during 1971-2019 using time series data. The data were collected from the database of the Statistics Center and the Central Bank. To investigate the reliability of data, generalized Phillips-Prone and Dickey-Fuller tests and to check the stability of the coefficients, cumulative sum and cumulative sum squares were used. Also, to check the short-run dynamics and adjustment towards the long-run, the error correction model was estimated. The regression model was estimated using the Nonlinear Autoregressive Distributed Lag approach by Eviews (12.0) software. After estimation, diagnostic tests including Wald test, normality, heterogeneity of variance and autocorrelation were performed.
 Results: The results showed that the increase in exchange rate has a positive and significant effect on household health expenditures, its reduction has no significant effect Therefore, the effect of exchange rate shocks was asymmetric. Accordingly, 1% increase in the unofficial exchange rate led to a 0.237 % increase in household health expenditures in the short-run and 0.55 % increase in the long-run. In addition, 1% increase in GDP led to 0.49 % increase in household health expenditures in the short-run and 1.57% increase in the long-run. Finally, 1 % increase in CO2 emissions led to a 1.49 % increase in household health expenditures in the long-run.
 Conclusion: Based on the results, after the increasing exchange rate shocks and possible future declines, due to the persistence of the shocks effects for up to three years, it is suggested not to stop supportive policies for providing health expenditures, especially for low-income groups.

Handling asymmetries in the trade balance

The existing literature in the US-Mexico trade balance reports mixed evidence on the effects of exchange rate shocks. In this paper we propose a new approach of studying exchange rate effects that allows for asymmetries in the balance of trade. Our results show that using either linear modelling or non-linear modelling and zero threshold, there is no evidence of co-integration for the US-Mexico trade. However, using a quantile analysis and median threshold, for the first time in the literature on trade balance, we obtain evidence of co-integration. Indeed, our findings show the existence of a long-run relation between the trade balance and its determinants except for periods of significant deficits, where the trade balance is detached from underlying fundamentals and follows a random walk. A USD depreciation, especially a small one, is effective in the short run in improving the trade balance, while in the long run, any depreciation worsens the trade balance. These findings hold due to the complementarity of the US and Mexican economies and the change in the structure of the Mexican economy towards higher value-added products that have led to income effects outweighing in the long run, any intending short-run effects, of exchange rate depreciation.

Nonlinear exchange rate pass-through and monetary policy credibility: Evidence from Korea

Applying a smooth transition vector autoregression model with survey expectation data, we investigate the nonlinear effects of exchange rate shocks on inflation across monetary policy credibility states in Korea. We find that the impact of the exchange rate shocks is statistically larger in the low credibility regime, particularly in the short run. Our findings suggest that monetary policy credibility plays a significant role in maintaining for price stability in Korea.

Exchange rate pass-through to inflation in South Africa: is there non-linearity?

PurposeThis paper aims to examine the asymmetric effects of exchange rate shocks on inflation for a small open economy, namely South Africa, over the period 1970Q1–2020Q1.Design/methodology/approachA threshold vector autoregressive model that allows parameters to switch according to whether a threshold variable crosses an estimated threshold is employed to address the objective of this paper. The threshold value is determined endogenously using the Hansen (1996) test. Generalized impulse responses introduced by Koop et al. (1996) are used to study the effects of exchange rate shocks on inflation depending on their size, sign and timing to the inflation cycle. The authors also employed a Cholesky decomposition identification scheme to identify exchange rate shocks in the non-linear model.FindingsThe results show that there is a non-linearity effect of the exchange rate shock on inflation. In particular, the effects of 1 or 2 standard deviations of positive (appreciation) or negative (depreciation) exchange rate shock on inflation are small in the long run but a bit larger in the high inflation regime than the low inflation regime.Originality/valueThis paper contributes to the literature on the non-linear effects of exchange rate pass-through (ERPT) to inflation for Sub-Saharan African economies in general and the South African economy in particular by incorporating the size and timing of the exchange rate shocks to the inflation cycle.

What have been the Effects of Monetary and Exchange Rate Shocks on Brazilian Agriculture GDP? The Direct and Indirect Effects Approach

From 1996 to 2016, Brazil faced great fluctuations in both its exchange and interest rates and simultaneously a huge growth of its agriculture has taken place. Examining the literature that deals with the relationships among these three variables (interest rate, exchange rate and agriculture GDP) we verified that monetary and exchange shocks can affect directly and/or indirectly (through relative prices) the agriculture GDP. However, these effects can be coincident or contrary between them. What actually happened in Brazil from 1996 to 2016? This article aimed to access the direct and indirect effects of monetary and exchange rate shocks on Brazil´s agriculture GDP taking into consideration years ranging from 1996 thru 2016. Using quarterly data for the 1996-2016 period, autoregressive vector models (VAR and VEC) were estimated. The exchange rate and monetary shocks were analyzed considering three different interest rate types, namely: the current Brazil´s Federal Funds Rate (Nominal SELIC rate), real interest rate of agricultural loans, and ex-ante real interest rate. We also analyzed the effect of the exchange rate separately on prices paid and on prices received by the agriculture (both make up the relative prices of agriculture) using an ARDL (Distributed Lag Self-Regressive Model) model with monthly data. Our econometric results revealed that both direct and indirect effects of monetary shocks were negative on the agriculture growth while the direct and indirect effects of exchange rate shocks were mutually contradictory themselves on the Brazil´s agriculture GDP. Because of the technical changes that have taken place during the 2000s and the 2010s, which turned some of the most representative crops more dependent on imported inputs, and the hedging behavior that the firms have adopted during the first two decades of the 21st century, which protects them from exchange oscillations, the agricultural sector lost sensitivity to the exchange rate variations in some extent. Regarding policy implications, it could be said that monetary policy can be efficient in the promotion of the agricultural sector, and, in fact, Brazilian government has been doing such through the rural credit subsidized interest rate. Exchange policy, on the other hand, proved to be inefficient in favoring the agriculture, or, in other words, the government can freely exercise exchange policy without regards to harm the agricultural sector.

Asymmetric reactions of stock prices and industrial output to exchange rate shocks: Multiple threshold nonlinear autoregressive distributed lag framework

Motivated by swings in the exchange rate of many developing economies which exert influence on firms? input costs, output, stock prices, and profits, the study investigated the asymmetric reactions of stock prices and industrial output to various shocks in the exchange rate in Nigeria using a multiple threshold nonlinear autoregressive distributed lag model and high frequency series from January 1999 to December 2021. Empirical results suggest that stock prices and industrial output react asymmetrically in the opposite direction to exchange rate depreciation. It further indicates that the reactions of both stock prices and industrial output to exchange rate changes are sensitive to the size of shocks. Exchange rate shocks above the 25th percentile significantly and inversely affect both stock prices and industrial output, and the effects of exchange rate shocks on stock prices and industrial output become pernicious if above the 75th percentile. The main economic implication of the empirical finding is that in the upper quantile, both exchange rate depreciation and appreciation hurt industrial output, and hence, stock values. Thus, the multiple threshold nonlinear autoregressive distributed lag results suggest that the reactions of both stock prices and industrial output to exchange rate changes are highly sensitive to the extent of the shocks.

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.

Exchange rate pass-through: A comparative analysis of inflation targeting & non-targeting ASEAN-5 countries

In the context of the debate on Exchange Rate Pass-Through (ERPT) under inflation targeting regimes, this study analysis the ERPT in inflation targeting and non-targeting economies of ASEAN-5. Employing a Non-linear Autoregressive Distributed Lag (N-ARDL) framework on data from 2000: Q1 to 2019 Q:4, our key empirical findings suggest that the exchange rate shocks do lead to significant changes in inflation. There is also prima facie evidence of asymmetric effects of exchange rate shocks in Singapore, Philippines, and Indonesia and the results varied between and among inflation targeting and non-targeting countries. The results also varied in the short and long-terms, whereas in the long-run, asymmetric effects of real exchange rate persist only for Indonesia and Singapore. Regardless of the inflation targeting or non-targeting regime, oil price shocks are found to be the most crucial factor with the largest impact on inflation in ASEAN-5 economies. Money supply and output growth also found to have some effect on inflation, though the results varied among countries. Our findings have profound implication for monetary policy formulation and price stability.

Effects of Exchange Rate Shocks and Political Risk on the Turkish Manufacturing Industry: Some Evidence

In cases where debt dollarization of firms is more than asset dollarization, sudden and high depreciation of the national currency causes firms to lose net wealth and may adversely affect their investments and profitability. Real exchange rate depreciation, on one hand, increases the incomes of manufacturing industry firms by providing international competitive advantage and it can prevent the competitive advantage by creating negative balance sheet effect due to high debt dollarization on the other. In this context, the aim of this study is to discuss the determinants of the debt-dollarization and the balance sheet situation of the manufacturing industry, which is facing political instability and exchange rate volatility. Dynamic panel data method was used for manufacturing industry sub-sector data for the 2008-2015 period. Overall, our empirical results reveal that the exchange rate shocks have positive impact on both debt dollarization and profitability. That means there is an exchange rate dependency in manufacturing industry. In addition, results show that there is no significant effect of political uncertainty on debt dollarization and the profitability of firm.

Exchange Rate and Inflation Dynamics in a Resource Rich Setting: The Case of Zambia

AbstractThis paper investigates the relationship between copper prices, the exchange rate and consumer price inflation in Zambia using a structural vector autoregression with quarterly data for 1995–2014 and a combination of sign and zero restrictions to identify relevant global and domestic shocks. The paper makes two contributions. First, it provides new measures of exchange rate pass through (ERPT), based on less restrictive assumptions than previous estimates, to show how changes in the value of the kwacha are reflected in changes in consumer prices (distinguishing food and non‐food inflation). Second, the ERPT is disaggregated to demonstrate that measured ERPT depends on the nature of the shock, with implications for policy responses. Although the price of copper is the most important driver of the exchange rate, the fluctuations it caused are associated with a low pass‐through of about 7% (consistent with a period of relatively low inflation). Exchange rate fluctuations caused by monetary shocks, in contrast, come with a pass‐through of up to 25% (and even more for food prices). A fast response by monetary authorities can mitigate the adverse effects of exchange rate shocks.

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.

Modeling the transfer Effect of Exchange Rate on Prices in Russia

The article examines the relationship between the dynamics of the exchange rate and prices in Russia in a volatile environment of foreign markets and the change of the monetary and credit policy of the Bank of Russia. The purpose of this work is to assess the transfer effect of the nominal exchange rate of the ruble on the prices for consumers and producers in 2002–2017 in general and in the periods of relative homogeneity of the monetary policy regime in Russia. The analysis was based on statistical data on the Russian economy for the period 2002–2017. The method of econometric modelling is used to quantify the observed effects. The study is based on the apparatus of structural vector autoregressions, evaluated using Bayesian methods. The structural identifcation of the model is carried out by the recursive ranking of variables and decomposition of structural shocks elaborated by André-Louis Cholesky. Bayesian regularization is based on the application of a combination of independent normal and inverse Wishart’s a priori distributions. Qualitative interpretation of the results is based on the analysis of the impulse response functions. The results of the study confrm the existence of a statistically and economically signifcant relationship between the dynamics of the exchange rate and prices in Russia during the last two decades. The effect of exchange rate shocks is immediate. We showed that the impact of the exchange rate on consumer prices has remained signifcant for several years. The reaction of producer prices is greater than the effect observed for consumer prices. A sample of data for 2014–2017 indicates a decrease in the effect transfer of exchange rate and proved the effectiveness of inflation targeting. The transition to the policy of inflation targeting has reduced the dependence of inflation processes in Russia on the external market conditions and global risks.

Rand volatility and inflation in South Africa

The floating exchange rate regime, coupled with a more open trade policy and the growth in imports, leaves South Africa vulnerable to the effects of exchange rate behaviour on import, producer and consumer prices, which all contribute to inflation. Given the central role that inflation targeting occupies in South Africa’s monetary policy, this paper examines the effect of exchange rate shocks on consumer prices using monthly data covering the period January 1994 to December 2013. Consistent with developing countries story, results show a modest exchange rate pass-through to inflation, although inflation is mainly driven by own shocks. The variance decompositions also reveal that foreign exchange rate shocks (REER) contribute relatively more to inflation than money supply shocks (M3). This suggests that South African inflation process is not basically influenced by money supply changes. The practical implication is that that the volatility of the rand is not a serious threat to inflation. The SARB should therefore focus on price stability and not be unduly worried about the volatility of the rand.

The RMB Debate: Empirical Analysis on the Effects of Exchange Rate Shocks in China and Japan

AbstractFor a better understanding of the ongoing debates on the RMB, this paper investigates the effects of exchange rate shocks on output and the current account for China and Japan. We use structural vector auto‐regression models and find that yen appreciation reduces current account surpluses while having no strong effect on output in Japan. RMB appreciation, on the other hand, has an insignificant effect on the current account, although it tends to reduce output in China. For China, dollar pricing with vertical trade integration seems responsible for the insignificant effect on the current account.

Korean Current Account Surplus and the Transmission of the Won-Dollar Exchange Rate

This paper empirically investigates the effects of exchange rate shocks on the variables of the primary interests, such as trade balance and current account, using the Korean data. The result shows that the effect of the won-dollar exchange rate on the current account is weak. This is because the effect of the won-dollar exchange rate on exports and imports are similar. We also examine the effect of the won-dollar exchange rate shock on Korea’s trade balance with major trading partners such as the US, China, Japan, and the European Union, respectively. The results show that the responses of the Korea-Japan and Korea-European Union trade accounts are weak and not statistically significant; but those from the Korea-US trade account and the Korea-China trade account are statistically significant.

What happens when the Kiwi flies? Sectoral effects of exchange rate shocks on the New Zealand economy

We use a data-rich approach, a factor-augmented vector autoregression (FAVAR), to identify idiosyncratic exchange rate shocks and examine the effects of these shocks on different sectors of the New Zealand economy. We find that an unexpected shock to the exchange rate has significant effects on relatively tradable sectors of the economy. Whilst this is expected, relatively ‘more’ non-tradable sectors of the economy are also influenced by shocks to the exchange rate, presumably due to their linkages to more trade-exposed sectors. We also find that exchange rate shocks explain a small proportion of overall business cycle variability, implying that the exchange rate acts as a buffer rather than as a source of shock.

On the benefits of nominal appreciations: Contrasting evidence across developed and developing countries

The paper studies determinants of flexibility of the nominal effective exchange rate and the effects of exchange rate shocks on macroeconomic variables and key components of the external balances using data for a sample of advanced and developing countries. The composite evidence points to the positive effects of appreciation through cheaper imports in support of higher growth and lower price inflation in advanced and developing countries. However, the negative effects of appreciation are more pervasive on the external balances in developing countries. The implication is developing countries remain highly dependent on exports of commodities. In contrast, advanced countries are more diversified and ahead in capitalizing on currency appreciation to mobilize investment growth, a channel that boosts competitiveness and mitigates the adverse effect of appreciation on external stability. The evidence attests to the need to create an environment that is more conducive to investment growth in developing countries.

Multi-Product Firms and Exchange Rate Fluctuations

This paper studies the effect of exchange rate shocks on export behavior of multi-product firms. We provide a theoretical framework illustrating how firms adjust their prices, quantities, product scope, and sales distribution across products in the event of exchange rate fluctuations. In response to a real exchange rate depreciation, firms increase markups for all products, but markup increases decline with firm-product-specific marginal costs of production. We find robust evidence for our theoretical predictions using Brazilian customs data containing destination-specific and product-specific export sales and quantities. The sample period covers the years 1997–2006, during which Brazil experienced a series of drastic currency fluctuations. (JEL F14, F31, F33, O19, O24)

The RMB Debate: Empirical Analysis on the Effects of Exchange Rate Shocks in China and Japan

For a better understanding of the ongoing debates on the RMB, this paper investigates the effects of exchange rate shocks on output and the current account for China and Japan. We use structural vector auto-regression models and find that yen appreciation reduces current account surpluses while having no strong effect on output in Japan. RMB appreciation, on the other hand, has an insignificant effect on the current account, although it tends to reduce output in China. For China, dollar pricing with vertical trade integration seems responsible for the insignificant effect on the current account.