Exchange Rate Depreciation Shocks Research Articles

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.

Does real exchange rate depreciation increase productivity? Analysis using Korean firm‐level data

AbstractWe examine the effects of real exchange rate (RER) depreciation shocks on firm productivity. Using the firm‐level data of Korean manufacturing industries for 2006–13, we distinguish between yearly RER movement and persistent RER depreciation during 2007–09 and analyse 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.

Do exchange rate and oil price shocks have asymmetric effect on inflation?: some evidence from Nigeria

The effects of exchange rate and oil price on inflation have been fundamental issues in the macroeconomic literature. As a result, a number of studies have been devoted to examining the effects of exchange rate and oil price on inflation using various econometric approaches to measure the effects. However, most of the empirical studies employed restrictive models. This study, therefore, investigates the asymmetric effects of exchange rate and oil price shocks on inflation in Nigeria using monthly data obtained from the Central Bank of Nigeria (CBN) Statistical Bulletin for the period 2006M1-2016M6. The study employs the impulse response functions (IRFs) to determine the reaction of inflation to shocks from exchange rate and oil price. The IRFs are estimated from the vector autoregressive error correction (VECM) model. The results suggest that the immediate effect of a shock to the exchange rate in 12 months is about 50% increase in the price level. While the effect of an exchange rate depreciation shock is about 41% increase in the price level, the effect of an exchange rate appreciation is about 14% decrease in the price level. Similarly, the immediate effect of a shock to the oil price in 12 months is about 52% increase in the price level. While the effect of an increase in oil price in 12 months is about 43% increase in the price level, the effect of a decrease in oil price is surprisingly about 29% increase in the price level. Moreover, there is an evidence of significant effects of exchange rate and oil price shocks on inflation in the long run. The policy implication of this study, for an oil exporter such as Nigeria, is that monetary policymakers will have to keep the inflation rate at the comfort zone and stabilize the Nigerian currency. From a structural policy perspective, the falling crude oil price has certainly strained Nigeria. The country should, therefore, reshape its policy to redouble efforts to diversify its trade activities from oil.

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.

Analyzing the Exchange Rate Pass-through in Mexico: Evidence Post Inflation Targeting Implementation

This paper presents an analysis of the exchange rate pass-through mechanism for the Mexican economy after the formal adoption of inflation targeting policy. In particular, this research work analyzes how a change in the nominal exchange rate depreciation is transmitted to domestic prices along the distribution chain of pricing. The analysis is carried out using a recursive Structural Vector Autorregression with exogenous variables (recursive SVAR-X) model, which aims at the estimation of structural impulse-response-functions as a tool to analyze the degree and speed of the effect of exchange rate depreciation changes on domestic prices. Additionally, variance decompositions are computed to capture the relative importance of exchange rate depreciation shocks in explaining inflation fluctuations. Our results show that, for the period of analysis (after the formal adoption of inflation targeting in Mexico), the exchange rate pass-through to consumer prices is quite small and fast and exchange rate surprises are not relevant to explain consumer price inflation variation.