Exchange Rate Devaluation Research Articles

Energy price reforms, exchange rate devaluation and macroeconomic instability: Evidence from Bayesian VAR identified with sign‐and‐zero restrictions

AbstractThis study sets out to examine the effects of the interaction of subsidy removal on premium motor spirit (PMS) and exchange rate devaluation on macroeconomic instability in Nigeria. In this regard, this study adopted the Bayesian vector autoregressive model (BVAR) identified with sign‐and‐zero restrictions for annual data between 1985 and 2022. The empirical results reveal that both the removal of subsidies on PMS and the devaluation of the naira exchange rate significantly undermine real gross domestic product (GDP) growth and raise inflationary pressures in Nigeria. One important implication of this finding is that the ongoing subsidy reforms in the energy sector and associated devaluation of the naira exchange rate raise the risk of stagflation in Nigeria. Secondly, the simulation shows that simultaneous subsidy removal on PMS and exchange rate devaluation can trigger macroeconomic instability. This finding implies that stabilising PMS price and the exchange rate is key to achieving macroeconomic stability in Nigeria. Thus, this study recommends that Nigeria should be cautious and act quickly to cushion the price of PMS from the vagaries of foreign exchange market fluctuations to improve macroeconomic stability in the country.

The effect of exchange rate pass-through to inflation in Nigeria

The study examines the effect of exchange rate pass-through (ERPT) to inflation in Nigeria. The study period spans from 1990 to 2022 and data were sourced from Central Bank of Nigeria Statistical Bulletin and World Bank’s Development indicators (WDI). The study employed preliminary test of Augmented Dickey Fuller unit root test. Analytical technique of Autoregressive Distributed Lag (ARDL) model was used for the analysis. The dependent variable is Consumer price index proxied by inflation while the explanatory variables include monetary policy rate (MPR), nominal effective exchange rate (NEER), import price index (IMPI) and Global oil price (GOP). The result of unit root suggests mixed order of integration while the ARDL bound test demonstrate long run relationship among the variables under consideration. Findings indicate that exchange rate exhibit a positive and significant impact on consumer price while import price exerts a negative and significant influence on consumer price. Based on this outcome, the study suggests that monetary authority should exercise caution in using devaluation of the domestic currency to promote economic growth, as that would not only aggravate domestic inflation but also likely increase the ERPT. Given that exchange rate devaluation is unlikely to improve the country’s chances in the international market vis-à-vis its exports.

An Empirical Analysis of the Nexus Between Inflation, Exchange Rate, Unemployment and Economic Growth in Ethiopia: A Granger Casualty Approach

High unemployment, volatile exchange rates and hyperinflation contest the steady economy of Ethiopia. The aim of this study is to examine the relationship between inflation, unemployment, exchange rate and economic growth in the steady transition economy of Ethiopia. For this purpose, descriptive and econometric analyses with VAR and Granger causality estimations have been employed by using the annual time series data from 1980 to 2022. The descriptive results show that after 2010, in Ethiopia, stagnant economic growth, extreme volatile exchange rates and hyperinflation were observed. The VAR estimate is consistent with the results of the Granger causality test. It showed that in the long run, economic growth and currency depreciation are directly associated, but unemployment has a negative impact on inflation and economic growth. Economic growth and unemployment have an enlightened impact on the exchange rate devaluation, but they are not ultimately impacted by the rate of inflation. The study implied that between 1980 and 2022, in Ethiopia, there were high rates of unemployment, slow economic growth coupled with hyperinflation and a high exchange rate. The study suggested that boosting industry and agricultural productivity through the adoption of innovation, replacing foreign commodities with domestic commodities and expanding the supply of domestic commodities in international markets can resolve the inspected Ethiopian macroeconomic problems.

Threshold of financial development and currency devaluation that stimulates stock market returns

In this study, we endeavored to establish a threshold of financial sector development (FSD) and exchange rate devaluation (EXD) that stimulates stock market returns (SR) based on an analysis of 25 stock exchanges in the Middle East and North Africa (MENA) region. Threshold generalized autoregressive conditional heteroskedasticity (GARCH) regressions were estimated. Only the Istanbul Gold Exchange stock return was found fit for GARCH volatility analysis. However, results from threshold regression revealed that EXD does have significant threshold effects on SR and when EXD falls lower than its threshold of 19.69 percent, FSD had an increased influence on SR by 11.8 percent. The effects of EXD and FSD on SR are greater when the FSD level is beyond the threshold value of 23.45 percent. FSD below thresholds of 23.5 percent, and 51.1 percent would be insignificant in predicting SR. Lagged SR within an economy below the FSD threshold of 50.59 percent will negatively affect SR. By and large, our results reveal that FSD cannot influence returns of stock on their exchange floors given the devaluation of local currencies beyond the threshold value of 19.69 percent. Future studies could extend our threshold regression framework to allow for endogenous threshold variables.

Effects of Economic Uncertainty on the Asset Quality of Banking Sector: Evidence from a Developing Country

ABSTRACT: Extant literature investigates on the determinants of NPL (non-performing loan) many a time, however, little is known on the relationship between economic uncertainty and NPL for any developing country. Historically, Bangladesh is suffering from high level of NPL in the banking sector. In addition to that, Bangladesh observes high level of macroeconomic uncertainty as characterized by high and volatile Gross Domestic Products and inflation, continuous exchange rate devaluations, and shallow financial markets. Motivated by this, we investigate the nexus between economic uncertainty and NPL for Bangladesh. Based on the data availability, we use the annual dataset covering 1990–2018. Furthermore, we use autoregressive distributed lag (ARDL) model considering its benefit accommodating both I(0) and I(1) variables. The empirical results show that there is positive relationship between economic uncertainty and NPL in the long run. The results are robust to the alternative measures of economic uncertainty and specifications. Consistent with the expectation, financial development carries a negative sign on the asset quality albeit the effect of economic uncertainty is actually pronounced (both the size and significance changes) in the augmented models. Key policy implication of this study is that government should formulate well anchored, rule-based policies to reduce inflation and interest related uncertainties. With a rule-based policy (for example, inflation targeting), people believe that central bank can achieve its targets. Government should adopt floating exchange rate regime that will adjust the external shocks well via exchange rates. In addition to this, government can monitor, and regulate stock market so that uncertainty in stock market is reduced. Finally, monetary and fiscal policies should be communicated well to the people. Thus, it is possible to reduce asymmetric information among the people, which may reduce economic uncertainty, and thus reduce NPL.

Devaluation and stock prices

Aim: The study evaluated the causal link between exchange rate devaluation and stock prices in African stock markets within the African region, namely, Zambia, Nigeria, Uganda, Tunisia, Tanzania, Botswana, Indonesia, Egypt, South Africa, and Malaysia. Research method: The Toda-Yamamoto (T-Y) Granger causality methodology which entails a determination of maximum order of integration, determination of optimal lag length, and finally conducting the T-Y causality test based on augmented var k + dmax was used in the study. We also deployed the ARDL model to estimate the effects of devaluation on stock prices in Africa. To accommodate issues of endogeneity, we further implemented dynamic panel model estimation to unravel the true effects of exchange rate devaluation on stock prices. Findings: Currency devaluation and the consumer prices negatively impacted stock prices by 3.6% and 3.2% respectively in the short term period following a 1% rise in devaluation and consumer prices. In the long-term period, a 1% rise in currency devaluation and consumer price level stimulated 1.45% and 0.68% reductions in stock prices respectively in ten developing African countries. The lending interest rate also significantly and positively impacted stock market prices over the long-term period by 0.25% following a 1% rise in lending rate, whereas, in the short-term period, a 1% rise in lending rate stimulated 0.38% decline in stock prices of the ten African countries. Originality: in this research, we executed the Toda-Yamamoto granger causality methodology in explaining the causal relation between exchange rate devaluation and stock prices in ten developing African countries and with the ARDL model, the study estimated the effects of devaluation on stock prices in Africa. Contributions: The research is a contribution to a remarkable long-run connection linking stock market price, exchange rate and price index. Though there was a remarkable long-term association linking them, the outcome also showed an essential short-run relationship linking stock market price, consumer price index and interest rate. Limitations: This research is limited to ten countries within the African region. This choice of countries was made on basis of the available data. Hence, data could be sought on additional developing countries and estimation done for a larger sample of countries to obtain results that can be used to generalize the causality between devaluation and stock price movements.

Asymmetric Response of Fiscal Sustainability to the Financial Development in Nigeria

This study examines the asymmetric response of fiscal sustainability to financial development in Nigeria while augmenting the model with exchange rate volatility within the non-linear autoregressive distributed lag framework. The empirical evidence reveals that positive and negative shocks in domestic credit to the private sector result in significant unsustainable fiscal balance and fiscal sustainability both in the short run and long run respectively. Increase and decrease in annual market capitalization have a positive and negative significant impact on the fiscal sustainability in the long run respectively. Exchange rate devaluation or depreciation has a devastating effect on fiscal sustainability both in the short run and long run. Wald test revealed that credit to the private sector and annual market capitalization have an asymmetric effect on fiscal sustainability both in the short run and long run, while the exchange rate has no asymmetric effect on fiscal sustainability. For a sustainable fiscal stance, we recommend a financial model that channels credits towards productive activities to boost GDP as this will go a long way in reducing the debt-to-GDP ratio and enhancing solvency.

The Gold Standard and the international dimension of the Great Depression

AbstractWas the Gold Standard a major determinant of the onset and protracted character of the Great Depression of the 1930s in the USA and worldwide? In this paper, we model the “Gold Standard hypothesis” in an open-economy, dynamic general equilibrium framework. We show that encompassing the international and monetary dimensions of the Great Depression is important to understand the turmoil of the 1930s. In particular, the Gold Standard turns out to be a strong transmission mechanism of monetary shocks from the USA to the rest of the world. Our results also suggest that the waves of successive nominal exchange rate devaluations coupled with the monetary policy implemented in the USA might not have enhanced the recovery.

Saving in Presence of Volatilities in Interest Rate and Exchange Rate Devaluation

Many developing countries have rationalized their economies in response to the liberalization of financial markets giving renewed concerns to the role of exchange rate management and interest rate deregulation. The study examined the effects of interest rate volatility and exchange rate devaluation on aggregate savings in ECOWAS using a panel group of grouped means (PMG) estimator. The study also applied GARCH/ARCH (1,1) models to ascertain volatility in interest rates amongst the countries. In Burkina Faso, Cabo Verde, Guinea, Ghana, Niger, Senegal, and Togo, holding bank savings accounts in form of demand and time deposits serves as a buffer to higher volatility in interest rates. This could be informed by increase in yearly percentage yield on a certificate of deposits for savings account holders. In Liberia, Guinea-Bissau, Gambia, Mali, Nigeria, Sierra Leone, Cote d’Ivoire, and the Republic of Benin, holding bank savings accounts in form of demand and time deposits because of higher volatility in interest rate is not a buffer compared to the acquisition of stocks and securities. Further finding from the study is that exchange rate devaluation had a negative drift on aggregate savings in all countries except Niger. This was attributed to undeveloped export sectors in these countries.

TRANSMISSION MECHANISM FROM EXCHANGE RATE TO CONSUMER PRICE INDEX: EVIDENCE FROM VAR MODEL IN NIGERIA

The direction of flow is not certain in which variations in the exchange rate could be transmitted to the consumer price index. To examine the transmission mechanism arising from the exchange rate to consumer price index in the Nigerian economy, eight variables-VAR model was employed in this regard. The data for the study span from the period first quarter of 2009 to the fourth quarter of 2021. The results had it that exchange rate devaluation is transmitted directly to consumer price index through a rise in the net exports and also the aggregate demand. The study therefore, recommends a rise in terms of outputs in local production so that the weight of the inflationary impact of the exchange rate devaluation could be minimal.

Assessment of some economic factors affecting inflation in Sudan: An econometric study

The paper aimed to Assessment of Some Economic Factors Affecting Inflation in Sudan; an econometric study (1996-2021). The study focused on the exchange rate (EX), the unemployment rate (UR), and the money supply (MS). The study is based on the following main hypotheses: There is a positive effect between the inflation rate (INF), the exchange rate (EX), and the money supply (MS), and that there is a negative effect between (INF) and (UR). The study revealed the following conclusions: The devaluation of the currency exchange rate leads to an increase in the inflation rate, but the increase in the unemployment rate leads to a decrease in the inflation rate in Sudan. The study recommended that the state adopt an effective fiscal and monetary policy to reduce the rate of inflation in order to increase the employment rate and improve the level of the country's national product.

Operationalizing growth models

We introduce a novel approach to operationalizing growth models. Drawing on the most recent release of OECD Input–Output Tables, we compute the import-adjusted growth contributions of consumption, investment, government expenditures, and exports for sixty-six countries in the years 1995–2007 and 2009–2018, covering not only advanced Western economies but also Central and Eastern European, South-East Asian, and Latin American countries. We find that most are export-led or domestic demand-led and other forms of growth are rare. Our results differ from other classifications in that they reveal important geographical variation as well as temporal change. In a subsequent step, we illustrate the utility of the methodology by investigating the link between real exchange rate devaluation and export-led growth, a contentious issue in the existing literature. For pre-crisis advanced Western economies, we find an association between the two variables, which is statistically significant only when our new indicator is used.

Exchange Rate and Manufacturing Sector Performance in Nigeria

This study examined the impact of exchange rates on the performance of the manufacturing sector in Nigeria between 1990 and 2020. Using canonical cointegrating regression (CCR) framework, the result obtained showed that exchange rate devaluation constrains manufacturing sector while exchange rate fluctuation hampers manufacturing output. The study indicated that price increase leads to decline in the manufacturing sector, the study recommends among other things the need to formulate policies that align with the exchange rate to the actual needs of the manufacturing sector. The study further suggests that change in exchange rate management strategy should be allowed to run a reasonable course of time. Jettisoning strategies at will and on frequent basis has implication for exchange rate and obvious consequence for a sector that depends on foreign inputs

The COVID-19 pandemic and the exchange rate: a lesson learned from Indonesia

This paper aims to capture the relationship between the COVID-19 pandemic and the exchange rate. We utilized high-frequency data by utilizing daily data from January 21st, 2020, through June 29th, 2022. In contrast to the vast majority of research that disregards the incubation period of COVID-19 in the number of daily transmission cases, we use the growth of COVID-19 as a 14-day moving average of confirmed cases as the main independent variables. Findings indicate that the devaluation of the rupiah exchange rate is long-term associated with the increase in COVID-19 cases and deaths. According to the efficient market hypothesis, the rupiah depreciates due to the increase of COVID-19 transmission, which is publicized by the media. In the midst of the debate over the impact of the pandemic on the exchange rate and using Indonesia as a lesson learned for emerging market economies, our research is a recent study that examines this topic with completed data-generating processes – when the pandemic entered its last wave phase. In regard to exchange rate behavior, the disease outbreak channel exists. The government must restrict widespread media coverage of data on the spread of COVID-19 while focusing on accelerating measures to control the pandemic. A low-interest rate imposed by the monetary authorities as an effort to stimulate economic recovery can also exert pressure on the exchange rate, necessitating the optimization of other instruments, such as foreign exchange intervention.

The effects of currency devaluation on Ethiopia’s major export commodities: The case of coffee and khat: Evidence from the vector error correction model and the Johansen co-integration test

Devaluation of the currency has been stipulated and utilized increasingly as a stabilization device in developing countries. The Ethiopian government employed a devaluation policy to improve the export performance of the country. However, various literature demonstrates that the devaluation of the Ethiopian Birr (ETB) has an ambiguous effect on the country’s export performance. Therefore, the prime objective of the study was to investigate the effect of domestic currency devaluation on Ethiopian major primary export commodities by employing time series data for the period 1987 to 2020. With the help of Johansen’s co-integration and vector error correction modelling, the impact of the devaluation of the real effective exchange rate on major export commodities was assessed in the long run as well as in the short run. The study found that the devaluation of the real effective exchange rate has a positive and significant relationship with the values of major export commodities in the long run. This implies that the decrease in the value of the domestic currency promotes exports in the long run. Other variables like foreign direct investment, with an expected positive sign, and real gross domestic product (with a negative sign), are also found to be statistically significant in explaining exports in the long run. The findings of this paper suggest that policy intervention in the form of devaluing the domestic currency could be effective in improving export performance given that the effect of inflation on output is controlled.

Estimating covariance between exchange rate devaluation and oil price volatility during COVID-19

The economies of West African Monetary Zone (WAMZ) countries have recorded a long trend of currency devaluation and hiking instability in oil prices. We estimated the covariance of currency devaluation and volatilities in global oil prices caused by the COVID-19 outbreak on WAMZ economies from January 30 to December 30, 2020. The BEKK model was estimated for analysis. The results from generalized autoregressive conditional heteroskedasticity (GARCH) show that all variance equation coefficients, are significant, suggesting strong volatility transmission and spillovers between the COVID-19 outbreak and oil price shocks on the economic performance of WAMZ. The estimates obtained for both current and lagged gross domestic product (GDP) equations are relatively similar. Consequently, all WAMZ economies weakly responded to shocks arising from fluctuations in international oil prices, volatility of inflation rate, and excess devaluation caused by the COVID-19 outbreak. The instabilities in oil prices and devaluation caused by the COVID-19 outbreak had decelerating consequences on the output growth of WAMZ economies. The estimated covariance effects of oil price shock and currency devaluation are negative for all countries in the study. A 1 percent devaluation-oil price shock caused by the COVID-19 pandemic resulted in negative output growth rates of 1.3 percent, 1.12 percent, 1.1 percent, and 1.09 percent in Nigeria, Sierra Leone, Ghana, and The Gambia, respectively.

Evaluating structural relations between money demand and its determinants

The relationship between money demand and specific macroeconomic predictors has been explained by a number of money demand theories. Panel structural vector autoregressive (SVAR) and generalized autoregressive conditional heteroskedasticity (GARCH) techniques were deployed to analyze the data on money demand with lag adjustment in relation to inflation uncertainty, interest rate variations, household consumption, and exchange rate depreciation in Africa. The study which covers 30 African nations discovered a two way relationship between money demand and price level variation. While higher prices would increase demand for money, the same demand also influences changes in a nation’s price level, such that in the long run, inflation would result from more money held by economic units. With a standard deviation of 5.51, Guinea had the most erratic money demand, followed by Sierra Leone at 5.29. A variance of inflation uncertainty ranged from 9.45 percent to an extremely high proportion for Congo. Exchange rate devaluation is found to be considerably impactful in determining money demand. Results show that as more of the units of the local currency is used to exchange a unit of foreign currency such as the dollar, local economic units are discouraged to increase demand for money in local money and thus hold fewer local currencies while investing in foreign exchange investments

Fiscal effects of exchange rate devaluation and capital flows to emerging countries

In the assessment of governments’ fiscal performance, exchange rates play some roles while capital movements could serve as determinant of fiscal discipline. This study examined the effects of exchange rate devaluation, and capital inflows, on budgetary spending, and the interactions among the variables using the Bayesian vector autoregression (BVAR) and sys-generalized method of moments (GMM) estimators with 1,184 panel observations. The study covers 37 emerging nations. The variables had a co-integrating connection, demonstrating a long-run link between the variables studied. Having executed the Gibbs sampling for simulation efficiently, our Markov Chain Monte Carlo (MCMC) simulation converged appropriately. The sampling efficiency parameter is equal to 0.96257, close to 1. The Monte Carlo standard errors (MCSE) are extremely low at 0.000 with an implication of adequate precision in the BVAR model estimation. The results disclose that a 1 percent devaluation shock compressed fiscal spending by 0.56 percent and a shock to capital inflows stimulated 0.99% growth in fiscal spending. The 95 percent credible interval suggests a considerable size of effects on devaluation and capital flows. Accordingly, managing the exchange rate can be a valuable tool for managing capital shortage in Africa. Rather than increase government spending, governments should concentrate on revenue generation by utilizing an effective exchange rate policy to influence the national pattern of product diversification.

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.

Oil-supply news and dynamics of exchange rates in oil-exporting countries

Most sub-Saharan African (SSA) countries have benefited and also suffered from the consequences of oil price fluctuations. The suffering of these nations has reverberated especially from the influencing power of exchange rate volatility, high inflation as well as an adverse impact on other macroeconomic variables. Therefore, this study estimated the magnitude of the effects of oil supply news shocks on the dynamics of exchange rates and also, the impact of exchange rate dynamics on oil supply news shocks in oil-exporting countries of West Africa (WA) countries. We implemented a panel non-linear autoregressive distributed lag (P-NARDL) model. The finding of the study indicates that rising fluctuations in oil prices caused by Organization of the Petroleum Exporting Countries (OPEC) news of oil supply disruption significantly induce exchange rate devaluation. Unambiguously, a 1 percent increase in oil supply news shocks stimulated 1.59432 percent appreciation while the same-size decrease in oil prices led to 0.86397 percent devaluation. These validate asymmetrical presence in exchange rate behaviour concerning the oil market. Also, we found 1.09452 percent devaluation and 0.25371 percent appreciation in the exchange rates of oil-producing African nations following a 1 percent rise and fall in inflation rates indicating a symmetric relationship between inflation rate and exchange rates. Oil-producing countries of WA should utilize foreign exchange (FX) from oil export to acquire capital-intensive projects.