Exchange Rate Instability Research Articles

Do the dynamics of financial development spur economic growth in Nigeria’s contemporal growth struggle? A fact beyond the figures

This paper investigates whether long-run economic growth can be fostered by the impact of financial development in Nigeria, and what could be the empirical explanations for the factors attributable to the continued backwardness of the Nigerian economy in the current millennium? Is the relationship between financial development and economic growth monotonic? To ensure this, we measure the short run and long run Impact of Financial Development on Economic Growth from 1980 to 2011. The “U” and the ARDL bounds testing approach to cointegration were applied. The findings of the study established that financial development and population are the only variables that have contributory impacts in fostering economic growth in both the long-run and short-run in Nigeria. While, M3, bank asset, fixed capital formation, trade and private sectors have insignificant contribution to GDP and are the impediments to Nigeria’s growth dilemma. In another dimension the research established that, the relationship between FD–GDP is monotonic suggesting that too much finance does not prevail in the Nigerian economy. By policy implication the country will be facing prolonged macroeconomic volatility due to the absence of strong exogenous risk cushioning effects, chaotic and unfavourable investment climate, unemployment and persistent exchange rate instability. Eventually these factors could lead to output failure, deterioration in reserve holding that could translate in to currency crisis and an eventual financial crisis. We recommend the pursuance of synergistic monetary policy model that will not only ensure a sustainable and improved value of the local currency but should also create its foreign demand among others.

Political risk and foreign direct investment: Evidence from Pakistan economy

The purpose of the present study is to examine the impact of political risk index, comprising wide range of indicators of institutional quality and political instability, on FDI inflows in Pakistan after controlling for other relevant determinants of FDI. The study employs auto-regressive distributed lag (ARDL) approach to co-integration and an error correction model based on ARDL approach using time series data over the period of 1981–2012. The results revealed that political risk deters FDI inflows in Pakistan both in longrun and short-run period. The result further indicates that GDP per capita and infrastructure are important determinants of attracting FDI flows in Pakistan. However, the high rate of inflation and instability of exchange rate are found to be negatively associated with FDI inflows in Pakistan.

Institutional Foundation of Trade and Industrial Policies in Africa

This chapter attempts to establish the fact that much of Africa’s development problems have strong institutional roots. Other identified factors, including the issue of pareto-inferior trade and industrial policies, might be mere reflection of the faulty institutional foundation of most African states. This is a follow-up on the recent attempts by Acemoglu et al (2003) and Witold (2004) at studying macroeconomic problems of growth, revenue and expenditure volatility, high levels of unemployment and inflation, and exchange rate instability, which has plagued many LDCs in the recent past as being basically due to existing institutional matrix in these countries.

Determinants Of Foreign Direct Investments In The South Asian Association For Regional Cooperation

This paper aims to investigate the relationship between Foreign Direct Investment (FDI) inflows and their determinants in six major countries in the South Asian Association for Regional Cooperation (SAARC) over the period 1998 to 2010. Using panel data techniques, we account for the possible presence of both economic dependencies and structural breaks. The findings show that there are common variables of economic significance among the examined countries. Macro determinants, such as openness, growth rate, exchange rate, and economic instability, have a long-run impact on FDI inflows in the panel. The results are submitted to a battery of tests, including panel unit root and panel co-integration tests.

Determinants Of Foreign Direct Investment In MENA Region: Panel Co-Integration Analysis

<p>This paper aims<strong> </strong>to investigate the relationship between Determinants of Foreign Direct Investment (FDI) inflows and their determinants in MENA (Middle East and North Africa) region during the period 1970- 2010. Using panel data techniques, we take into account the both hypothesis economic dependencies and structural breaks. We find that the macro determinants like openness, growth rate, exchange rate, and economic instability have a long-run impact on FDI inflows in our panel.</p>

DOES DOLLARIZATION ALLEVIATE OR AGGRAVATE EXCHANGE RATE VOLATILITY?

Relying on hard currency or dollarizing an economy has been a common practice of many developing countries taking the form of dollarizing bank deposits and loans, settling transactions in dollars and the indexation of wages and prices in dollars. The relationship between dollarization and exchange rate volatility is both theoretically and empirically unresolved. While the effect of such practices has been the focus of numerous investigations, such studies have concentrated on the Latin American and Asian economies. This paper contributes to the limited research on the African economies by specifically investigating the consequences of dollarization on Eritrean exchange rate volatility. Using quarterly official and black market exchange rate data for the study period 1996-2008, E-GARCH analysis suggests that dollarization has a positive impact on real exchange rate volatility.Keywords: Dollarization, Exchange Rate Volatility, Eritrea, Official and Black MarketJEL classification: F3, O2, O5(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONThe dollarization of the developing countries has been an inspiring field of research for many scholars. Despite a number of studies that address the measurement and consequences of dollarization, this literature concentrates on the Latin American and Asian economies with very limited focus on African economies. In this paper, we investigate whether dollarization alleviates or aggravates exchange rate volatility in the case of Eritrea. The existing literature suggests that the impact of dollarization can depend on the form of dollarization that exists in a given economy. For example, Akofio-Sowah (2009), Savvides (1996), Schnabl, (2007) and Barrell et al. (2009) among others show that if dollarization is full, then dollarization minimises exchange rate volatility. Similarly, Fielding and Shields (2003) argue that full monetary union leads to lower real exchange rate volatility than is the case under a fixed exchange rate system. However, if dollarization takes a partial form, then the evidence is less clear-cut. The theoretical work of Girton and Roper (1981), Akcay et al. (1997) and Corrado (2008) demonstrate that exchange rate instability increases with the increase of the degree of currency substitution. Empirical studies by Calvo and Vegh (1992, 1996), Yinusa (2008) and Akcay et al. (1997) suggest that an increase in dollarization increases the exchange rate volatility. In contrast to these studies, Devereux and Lane (2003) find that financial dollarization in the form of acquiring dollar loans alleviates exchange rate volatility.In addition to an African focus, our contribution to the literature is further enhanced through the construction and utilisation of a new hard currency index based on a holistic approach towards its measurement. This approach suits the nature of the Eritrean economy and addresses the shortcomings of alternative measures of dollarization adopted by earlier studies. In further contrast to the existing literature, we analyse both the official and black market exchange rate in both nominal and real form.The paper is organized as follows. In the following section, we briefly review the relevant literature. The third section discusses the data and methodology. Quarterly time series data for Eritrea are employed for the study period 1996Q1-2008Q4. Estimation is based on extending the Exponential Generalised Autoregressive Conditionally Heteroscedasticity (E-GARCH) model originally proposed by Nelson (1991). The fourth section offers a discussion of the econometric findings. We find that dollarization has a positive impact on exchange rate volatility. The final section offers a summary and conclusion.2. LITERATURE REVIEWDollarization, which refers to the use of US dollars or any other foreign currency within the domestic economy, has become a contemporary economic feature of many countries from the developing world. …

Inflation Uncertainty, Output Growth Uncertainty and Macroeconomic Performance Comparing Alternative Exchange Rate Regimes in Eastern Europe

In the late 90's, after severe financial and economic crisis, accompanied by inflation and exchange rate instability, Eastern Europe emerged into two groups of countries with radically contrasting monetary regimes (Currency Boards and Inflation targeting). The task of our study is to compare econometrically the performance of these two regimes in terms of the relationship between inflation, output growth, nominal and real uncertainties from 2000 till now. In other words, we test the hypothesis of non-neutrality of monetary and exchange rate regimes with respect to these connections. In a whole, the empirical results do not allow us to judge which monetary regime is more appropriate and reasonable to assume. EU enlargement is one of the possible explanations for the numbing of the differences and the lack of coherence between the two regimes in terms of inflation, growth and their uncertainties

La demanda de dinero y las innovaciones financieras en Venezuela: equilibrio de largo plazo

<p align="justify">Dado que los resultados obtenidos en la literatura no muestran consenso sobre el im- pacto de las innovaciones financieras en la demanda de dinero, este trabajo investiga sobre la estabilidad de la demanda de dinero de largo plazo en Venezuela en presencia de innovaciones financieras durante el periodo: 1984Q1- 2008Q4 mediante un análisis de cointegración. Para ello, se construye la razón circulante/depósitos (CD) y una varia- ble <em>ratchet </em>(RCD), a partir de la anterior, a objeto de medir el efecto de las innovaciones financieras. La evidencia empírica revela que existe una relación de equilibrio de largo plazo entre el logaritmo de los saldos reales, el logaritmo del nivel del ingreso real, la tasa de interés real, la tasa de inflación, la tasa de depreciación de la moneda local, y las innovaciones financieras, pudiendo interpretarse esta relación como una demanda dine- ro. Esto sugiere que cuando se introducen nuevos instrumentos financieros, se produce una disminución en la demanda de saldos reales, lo cual induce a pensar que los agentes económicos realizan una reasignación de sus recursos que afecta la composición del portafolio, y por tanto, la demanda de dinero, siendo este evento muy propio de econo- mías caracterizadas por elevadas y persistentes tasas de inflación, problemas de balanza de pagos, inestabilidad en el mercado cambiario e incertidumbre económica y política.</p>

Macroeconomic Determinants of Foreign Direct Investment and Economic Transformation in Nigeria, 1981–2010: An Empirical Evidence

Foreign direct investment is identified as a major catalyst of economic growth and transformation in developing economies of the world including Nigeria given the investment–savings gap. Over the years, Nigeria has witnessed sustained increase in foreign direct investment in the economy. It is however worrisome that it has not been able to transform the economy to any significant level. Consistent efforts have been made by successive governments in Nigeria that focus on policies that would attract foreign direct investment into the economy but the impact has been dismal. Consequently, the country is still characterised by a high level of unemployment, unstable prices, low per capita income, exchange rate volatility, external imbalances and prevalence of a poverty situation. This article aims at determining the macroeconomic determinants of foreign direct investment and its impact on economic transformation in Nigeria. Secondary data for the period 1981–2011 was used for the investigation. Time series estimates are obtained using Ordinary Least Squares (OLS) methodology which includes: stationary and co-integration tests. It was discovered that market size (GDP), human capital (HCAP), infrastructural development (INFRADEV), inflation (CPI) and index of energy consumption (IEC) are positively related to foreign direct investment in Nigeria. Unstable exchange rates (NEXR), interest rate (INT), under developed financial sector (BSTCR) and low per capita incomes have had negative impact on Foreign Direct Investment in the economy. The research recommends increase in energy consumption through regular supply of electricity, increase in GDP, development of human capital and a critical infrastructure to create a competitive and conducive business environment as well as reduction of exchange rate instability, interest rate distortions and development of the financial sector for a meaningful transformation of the Nigerian economy.

EFEK INSTABILITAS NILAI TUKAR RUPIAH TERHADAP PENAWARAN EKSPOR KOPI INDONESIA DAN HARGA KOPI DOMESTIK

This research is to examine the volatility of rupiah exhange rate and investigate influenced factors to export supply and domestic price of Indonesian Coffee. Double log model of export supply as proposed by Cerra dan Saxena (2003) and of domestic price are used in this study. Using three monthly data of 1990:1 to 2005:4, the result shows that export supply of Indonesian coffee is significantly and positively inflenced by International coffee price and previous export, and negatively influenced by exchange rate instability while domestic price is not. Domestic price is influenced positively by international coffee price, is not by exchange rate instability.Keywords: Exchange Rate Instability, export supply, domestic price, Coffee.

How Does Stability in Financial Openness Affect Growth?

In the growth process, financing is needed to fulfill the potential for growth. If there is an insufficiency, the potential is said to be underutilized. It is suggested that financial openness prevents the congestion when the real side of the economy is in need of finance. Therefore, the relief in accessing finance, in an indirect way, can contribute to economic growth. Recently, there has been a growing literature analyzing whether the financial side has an impact on the real side of the economy. Within the financial side, a special attention is paid to international capital flows and whether they can have impact on economic growth. Some channels are described within the theory originating from financial openness to economic growth. However, there is a controversy for the causal link. Moreover, the link is criticized in the way that financial openness brings about exchange rate instability which further leads to destabilization in the real sector (Dornbusch, 1976). This study attempts to focus on domestically stable financial openness by considering financial openness and exchange rate stability together. Direct and indirect mechanisms are introduced. According to this, a new index is constructed to proxy stable financial openness via including portfolio investment plus exchange rate volatility. The new dataset is employed to analyze whether a domestically stable financial openness is able to affect the real side of the economy positively.

Flexible Inflation Targets, Forex Interventions and Exchange Rate Volatility in Emerging Countries

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of strict IT which implies a fully flexible exchange rate, or applying a flexible IT, which entails a de facto managed floating exchange rate with forex interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective in reducing volatility than in non-IT countries, which may justify the use of flexible IT by policymakers.

Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of “strict IT”, which imply a fully flexible exchange rate, or applying a “flexible IT”, which entails a de facto managed-floating exchange rate with foreign exchange (forex) interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of “flexible IT” by policymakers.

Global Imbalances, Under‐consumption and Over‐borrowing: The State of the World Economy and Future Policies

ABSTRACTThis contribution addresses the question of whether growth convergence can be sustained in the global economy without compromising welfare and without causing major crises. It employs a simplified stock‐flow analytical framework to examine the proposition that the pace and pattern of global growth is conditioned by ‘under‐consumption’ in some regions of the world and ‘over‐borrowing’ in other regions. A baseline projection using the Cambridge‐Alphametrics model (CAM) illustrates consequences of resumed global imbalances after the 2008–2009 crisis. An alternative scenario exemplifies the case in which China and India shift towards internal income redistribution and domestic demand‐orientated policies and suggests that this will not be sufficient to correct global imbalances or induce improved growth rates in other developing regions. Finally a more ambitious development perspective is simulated. Such a scenario requires internationally‐coordinated policy efforts, with a greater role for governments in the management of demand, income distribution and environmental sustainability, as well as measures to reduce instability of exchange rate and commodity markets.

Flexible Inflation Targets, Forex Interventions and Exchange Rate Volatility in Emerging Countries

Emerging economies with inflation targets (IT) face a dilemma between fulflling the theoretical conditions of strict IT, which implies a fully exchange rate, or applying a flexible IT, which entails a de facto managed floating exchange rate with forex interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although lead to higher exchange rate instability than alternative regimes, forex interventions in some countries have been more effective in reducing volatility than in non-IT countries, which may justify the use of flexible IT by policymakers. Keywords: Inflation targeting; Exchange rate volatility; Foreign exchange interventions; Emerging economies. JEL codes: E31; E42; E52; E58; F31

A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal

The idea of introducing a general financial transaction tax (FTT) has recently attracted rising attention. There are three reasons for this interest: First, the economic crisis was deepened by the instability of stock prices, exchange rates and commodity prices. This instability might be dampened by such a tax. Second, as a consequence of the crisis, the need for fiscal consolidation has tremendously increased. A FTT would provide governments with substantial revenues. Third, the dampening effects of a FTT on the real economy would be much smaller as compared to other tax measures like increasing the VAT. The paper summarises at first the six main arguments in favour and against a FTT. It then provides empirical evidence about the movements of the most important asset prices. These observations suggest that a small FTT (between 0.1 and 0.01 percent) would mitigate price volatility not only over the short run but also over the long run. At the same time, a FTT would yield substantial revenues. For Europe, revenues would amount to 1.6 percent of GDP at a tax rate of 0.05 percent (transaction volume is assumed to decline by roughly 65 percent at this rate). In the UK, tax receipts would be highest. Even if only transactions on exchanges are taxed in a first step (at a rate of 0.05 percent), a FTT would yield 3.6 percent of GDP in the UK. In Germany, FTT receipts would amount to 0.9 percent of GDP in this case. If a FTT is introduced in the UK and in Germany at the same time, neither country needs to fear a significant emigration of trading. This can be presumed because roughly 97 percent of all transactions on exchanges in the EU are carried out in these two countries.

An Essay on Exchange Rate Dynamics

There is rarely another field in economics where the prevailing theoretical models have been contradicted so strongly by empirical evidence as exchange rate economics. This study therefore attempts to investigate exchange rate dynamics in an exploratory way. It is first demonstrated that the exchange rate does not follow a random walk as often postulated. There exists a systematic pattern in the process of exchange rate determination which at the same time does not conform to economic theory. In order to detect this pattern, the gestalt of exchange rate fluctuations is carefully explored. It is shown that a sequence of upward or downward price runs interrupted by some erratic fluctuations is most typical for exchange rate dynamics in the short run. Since such a pattern can be systematically exploited by certain trading rules, the importance of analysis for the expectations formation and consequently the determination of exchange rates is examined. It turns out that the trading rules implied by technical analysis, which are actually employed in the market, have systematically produced extra profits over the whole period without any relevant risk. The second part of the study focuses on the medium-term fluctuations in exchange rate dynamics. It is argued that these fluctuations can be explained as the result of interacting diseuilibria in the goods market and the asset market wherein the exchange rate fluctuates around the purchasing power parity as its center of gravity without any tendency of convergence, i.e., towards a stable equilibrium. The study concludes with a discussion on the theoretical founedations of exchange rate instability.

Are Turkish Migrants Altruistic: Evidence from the Macro Data

We investigate in this paper whether the stable pattern of remittances over the last three decades can be explained by the altruistic behaviour. This possibility is tested by means of cointegration analysis, which is applied to Turkish remittances from Germany over the period 1962-2005. A single cointegrating relationship is found between the remittances of Turkish workers in Germany and the real Turkish GDP per capita, the real German GDP per capita, the stock of Turkish migrants in Germany, the real exchange rate, and the government instability. The negative coefficient associated with Turkish income and positive coefficients on the real exchange rate and political instability support the claim that Turkish remittances from Germany are altruistically motivated. In addition, we find that the coefficient on the stock of Turkish migrants to be equal to one.

The evolution of the Hong Kong currency board during global exchange rate instability, 1967–1973

AbstractHong Kong SAR is well known as one of the few economies to operate a form of currency board as the basis of its monetary system. This system arose out of colonial status and has been retained except for a period of floating from 1975-83 to the present day, with some amendments. This article explores the evolution of the Exchange Fund during a period of global exchange rate instability showing that the abandonment of the monetary anchor in 1975 was part of a series of innovations to the use of the Fund as the colonial government sought to manage the exchange rate risks posed by the collapse of the Bretton Woods system.

Exchange Rate Instability and Economic Management of an Emerging African Economy: A Case for Nigeria

This paper examines the movement of exchange rate and macroeconomic management in an emerging African economy with particular reference to Nigeria. Instability and variations have been the basic features of exchange rate in Nigeria and some other countries. The question is to ascertain the impact of instability of exchange rate on the performance of selected sectors of the macroeconomy. The ordinary least square (OLS) technique was adopted using times series data on exchange rate, Economic growth (GDP) import, export and inflation. Exchange rate instability is measured by three years moving average of standard deviation of the real exchange rate. The result of analysis is respectable. Economic growth, import and inflation have relationship with exchange rate and the instability of exchange rate impacts on these variables differently. The study advocates that a dynamic exchange rate policy should be put in place so as to enhance export promotion and greater productivity by the manufacturing/industrial sector thereby attracting more revenue into the export sector. This subsequently leads to sustained economic growth and stability.