Exchange Rate Management Research Articles

Cheaper currencies and long‐term growth: The effect of exchange rate management and capital controls

AbstractIn this paper, we test whether weakening the domestic currency can help boost economic growth. To estimate this policy‐relevant but yet complex link, we apply a new mediation analysis to isolate the long‐term growth effects of currency undervaluation induced by active exchange rate management and capital control policies. Using a dataset of 182 countries in the post‐Bretton‐Woods period, we find that changes in undervaluation driven by exchange rate management and capital control policies have no significant impact on long‐term growth. In addition, the direct growth effects of these policies are typically negative and offset the small positive impact gained indirectly through increased currency undervaluation.

Exchange Rate Risk Management in Natural Rubber Industry: Implications for Multinational Corporations in China

With the development of big data and information technology, the possibility of enhance the control of exchange rate risk in Chinese multinational corporations is increasing. A large of papers have already discussed exchange rate risk management, however the methodology used in accounting remain to be elucidated. This thesis focuses on China Hainan Rubber Industry Group Co. Ltd, analyzes problems of exchange rate management in its financial statements from 2015 to 2019, calculates the impact of exchange gains and losses with different accounting methods, and then discusses the policy implication. We set up a model to explain the details of exchange gains and loss, then subdivide (A) actual exchange gains and losses and (B) financial accounting exchange gains and losses to reflect the enterprise’s business status, and verify the feasibility of this model for practical use. Finally, we provide new policy implications, such as suggestions for accounting entries with classified exchange gains and losses, strengthen enterprise communication management by using IT, and pay attention to the development trend of CNY’s internationalization.

Factors Influencing the Processed Pineapple Export Competitiveness of Thailand

This study aims to explore the factors influence the competitiveness of Thailand’s processed pineapple exports as well as the impact size of these factors by focusing on canned pineapple (HS 200820) and pineapple juice (HS 200949). This study also determine the competitiveness and market share effects for both products in each market in each Thailand major partner countries. The average price of processed pineapple, GDP per capita and exchange rate were the explanatory variables. The panel data from 2013 to 2017 of 10 partners were used in a panel regression model with pooled OLS, fixed effect and random effect models. The empirical results show that the fixed effect model is the most suitable and that price significantly negatively affected the market share of both products. Moreover, there is a positive effect from GDP per capita on market share for pineapple and the exchange rate positively affected market share for canned pineapple. In addition, Thailand’s pineapple juice market share is less price sensitive than the canned pineapple market. The stable and competitive price are necessary conditions to enhance sustainable export competitiveness under current intense competition. The implementation of effective exchange rate management to prevent massive fluctuation is a crucial supporting mechanism to achieve this target. Moreover, the appropriate devaluation is other essential policy to enhance sustainable price competition under the tension competitive environment leads to accelerate the continue market shares in important markets.

Differences in Tourism Demand: A Comparison between Developed and Developing Economies

Tourism is important in bringing a positive socioeconomic change in the form of creating jobs, increasing income and welfare. The study at hand employs the generalized method of moments approach in the course of investigating the dynamic relationship of tourism expenditures, GDP, globalization, CO2 emissions, and exchange rate with tourism demand during 1995-2014. A total of 50 countries are included in this research study, which is divided into two categories, i.e. 25 developed economies and 25 developing countries. Based on the Panel GMM estimates, for both economies and overall sample, the findings reveal a positive and a significant association between tourism expenditures, world income, globalization and GDP per capita, while there are mixed results for the real exchange rate, environment quality and government effectiveness. It can be suggested that the governance, growth, environment protection and exchange rate management policies can be tapped to boost the tourism receipts.

Quarterly Projection Model for the National Bank of Rwanda

National Bank of Rwanda (BNR) modernized monetary policy and transited to the price-based policy framework in January 2019. The Forecasting and Policy Analysis System (FPAS) is the cornerstone for the new forward-looking framework, which mobilizes and organizes resources and sets processes for regular forecasting rounds. The core of this system is a structural macroeconomic model for macroeconomic analysis and projections to support the BNR staff’s policy recommendations to the monetary policy committee. This paper documents the quarterly projection model (QPM) at the core of the FPAS at the BNR. The model is an extension of the canonical structure in Berg et al (2006) to reflect specifics of the interest-rate-based policy framework with a managed exchange rate, the effect of agricultural sector and harvests on prices, and the role of fiscal policies and aid flows.

Quarterly Projection Model for the National Bank of Rwanda

National Bank of Rwanda (BNR) modernized monetary policy and transited to the price-based policy framework in January 2019. The Forecasting and Policy Analysis System (FPAS) is the cornerstone for the new forward-looking framework, which mobilizes and organizes resources and sets processes for regular forecasting rounds. The core of this system is a structural macroeconomic model for macroeconomic analysis and projections to support the BNR staff’s policy recommendations to the monetary policy committee. This paper documents the quarterly projection model (QPM) at the core of the FPAS at the BNR. The model is an extension of the canonical structure in Berg et al (2006) to reflect specifics of the interest-rate-based policy framework with a managed exchange rate, the effect of agricultural sector and harvests on prices, and the role of fiscal policies and aid flows.

Before the ‘locomotive’ runs: the impact of the 1973–1974 oil shock on Japan and the international financial system

This article offers a Japanese perspective on the debate about the international financial system immediately after the first oil shock of 1973–4. Using archival records from the OECD and Bank of Japan, I analyze the three key policy issues discussed at the meetings of Working Party 3 (WP3) of the OECD: petrodollar recycling, balance-of-payments adjustments, and the management of global growth. Documents show that the Japanese approach to capital controls, exchange rate management, state-led growth orientation and international banking strategies was rather strengthened by the impact of the oil shock. By 1975 the OECD viewed Japan, together with Germany and the United States, as one of the ‘locomotives’ that would trigger a revival of economic growth in the industrialized West.

Unveiling the Effects of Foreign Exchange Interventions

This paper analyzes determinants and consequences of FX interventions in the Kyrgyz Republic. Most of the literature on the topic focuses on advanced and emerging economies and this paper provides new evidence from a low-income country. We find that FX interventions take place in response to movements in the exchange rate and its volatility. There is also evidence of “leaning against the wind”, which is more pronounced for relatively larger FX sales and purchases. The “leaning against the wind” is asymmetric toward FX sales and largely reflects leaning against depreciation of domestic currency. We document a varying degree of de-facto exchange rate stability despite the de-jure floating exchange rate regime. During most of the sample, the exchange rate management index was relatively low in line with the floating exchange rate regime, with the exception of the period from 2018 Q4 until the COVID-19 shock, during which the exchange rate management index was relatively high.

Real exchange rate management and economic growth: export performance in Kazakhstan, 2009–2019

ABSTRACT This study contributes to the literature on the evaluation of the effects of the stable and competitive real exchange rate management (SCRER) on economic growth by studying the exporting performance of the tradable sector in Kazakhstan between 2009 and 2019. We also aim to capture the impact of a significant change in the behavior of the exchange rate in August of 2015, following the introduction of inflation targeting monetary policy and switching to the flexible exchange rate regime of domestic currency – tenge. Our results show that a 10% undervaluation of the RER leads to a 0.05 percentage points increase in the growth rate of manufacturing exports. At the same time, a one percent increase in RER leads to a 0.08 percentage points growth in primary products industries, while a depreciation of the RER by one percent leads to a rise of 0.14 percentage points in the growth rate of high-tech manufacturing industries. We also find that a highly volatile exchange rate regime of the exchange rate is not favorable to the development of capital-intensive sectors. Overall, the results suggest that a macroeconomic policy targeting a stable and competitive real exchange rate can be beneficial for the advancement of higher technologically intensive sectors, increased price competitiveness for Kazakhstan’s manufacturing goods and high-skill tradable services, and the process of rapid capital accumulation.

Exogenous and endogenous sterilisation under managed exchange rates

AbstractOne of the most widely debated aspects of international macroeconomics surrounds the efficacy of Central Bank sterilisation. However, ‘exogenous’ sterilisation initiatives by the Central Bank are involuntary if policymakers are to achieve a policy rate objective. Also, in many instances any excess liquidity is able to be sterilised ‘endogenously’ by commercial banks. To demonstrate both forms of sterilisation, this paper employs several structural VAR models. We show that (a) both exogenous and endogenous sterilisation initiatives are more or less involuntary, (b) the impossible trinity can be challenged and (c) why imbalances across the international monetary system can occur and persist.

Monetary policy and exchange rate regime in tourist islands

The broad impact of the travel industry on economies has been comprehensively analysed in the tourism literature. Despite this, its consequences for monetary policy have remained unaddressed. This article aims at providing a first approach in this line for the case of three small tourist islands such as Cabo Verde, Mauritius and Seychelles. The research is based on a Bayesian estimation using a dynamic stochastic general equilibrium model (DSGE), and the optimal response to a tourism demand shock of four monetary policies is analysed. According to the results, both a conventional peg and an inflation-targeting policies achieve better economic performance. More precisely, the inflation is lower in the former. However, the rise in consumption and the gain in the external competitiveness are sharper in the latter. Finally, the other two policies, an inflation-targeting with managed exchange rate policy and an imported-inflation targeting policies, generate higher consumption and external competitiveness, but, also higher inflation and interest rate.

Managing Exchange Rate Risk with Derivatives: An Application of the Hedge Ratio

Risk management practices have become increasingly sophisticated. Derivatives have been developed and they can be widely used by economic agents in order to effectively hedge the risk, or by those who want to speculate on the evolution of prices. This study presents a hedging alternative with future contracts using an ARMA/ARIMA model. Employing five futures contracts on several exchange rates -AUD/CAD, EUR/JPY, EUR/USD, GBP/USD, RMB/USD - the actual value of the base at a future time (defined as the difference between spot rate and futures rate) can be predicted with a certain number of days until maturity. Apart from the classical calculation of the hedge rate this is another method for hedgers to use in order to reduce the volatility of their positions by trying to predict the future spot price in the currency market.

The impact of US monetary policy on managed exchange rates and currency peg regimes

I study the impact of US monetary policy on managed exchange rates and currency peg regimes by analyzing the pricing of American Depositary Receipts (ADRs) around FOMC meetings. I identify a significant negative impact of US monetary surprises on abnormal ADR returns for currencies that are managed, which reflects changes in these currencies’ fundamental values due to US monetary policy shocks. In line with currency crises models of interest rate defence like Lahiri and Végh (2007), positive US monetary surprises increase the breakdown probability of currency pegs of countries characterized by low real GDP growth, high fiscal deficits and a weak domestic banking sector.

Do managed exchange rates and monetary sterilization encourage capital inflows?

Economies with exchange rate pegs generally attract higher capital inflows either through lower transaction costs of trade and finance, or by encouraging investors to exploit any interest differentials, or where foreign exchange (FX) interventions are sterilized, any previous interest differentials are preserved. This paper examines these relationships using FDI, portfolio and bank inflows for 28 emerging market economies. We find that greater fixity of the exchange rate and sterilized intervention can potentially encourage capital inflows, and that the effect is magnified when combined. Further, we find that the effect differs by region, and it is larger for higher inflows.

International Trade Costs and Trade Flows: Evidence from the West African Monetary Zone (WAMZ)

Purpose: The study examines the effect of international trade costs on trade flows in the West African Monetary Zone (WAMZ), a sub-regional economic bloc within the Economic Community of West African States (ECOWAS).
 Method: Six member countries of the WAMZ, based on data availability, are examined using panel data estimation technique and the Fully Modified Ordinary Least squares (FMOLS), which is employed to test for the robustness of results, for the sample period of 2006-2018.
 Results: The study finds a negative and significant effect of international trade costs on trade flows in the WAMZ sub-region. Time to trade is also found to be negatively and significantly related to trade. Exchange rate, financial development (measured by commercial banks' credit to the private sector), and real GDP growth rate (a measure of growth in annual national income/economic size) have a positive and significant impact on trade in the sub-region. The study further finds evidence that the ease of doing business is positively related to trade in the sub-region, but the impact is weak. 
 Implications: In the light of the empirical findings, the study recommends that policy measures and strategies to reduce international trade costs and time to trade through simplified and harmonized trade procedures be implemented in the sub-region. Policies to encourage domestic investment (i.e increase capital stock) and rapid development of the financial sector should also be implemented. These should be supported with sound and stable macroeconomic exchange rate management policies, in order to enhance trade and integration in the sub-region.

Exchange rate pass-through & management of inflation expectations in a small open inflation targeting economy

In the context of inflation targeting, this study analyses the exchange rate pass-through (ERPT) to inflation expectations in a small open inflation targeting economy. We also augment the inflation expectations function with GDP, inflation, unemployment, fiscal stance, oil prices and money supply. Drawing on the data from May 1999 to Dec 2018 on the Czech Republic, which was the first developing country to adopt inflation targeting, our key results suggest that ERPT has significant implications for inflation expectations. Inflation expectations are also strongly influenced by actual inflation and past inflation expectations suggesting evidence of adaptive expectations. Economic growth, labour market outlook, money supply, oil price shocks and fiscal stance also showed a considerable impact on inflation expectations, though results varied in the short and long run. Our study contributes to the debate on ERPT and inflation targeting by reflecting on the inflation expectations channel.

Examining stress in Asian currencies: A perspective offered by high frequency financial market data

By harnessing the changes in jump behavior of high frequency currency market data we construct a means of detecting stress dates in exchange rates. Using 5-min data for Asian currencies covering more than 20 years from 1996 to 2018 we align the identified stress dates to domestic and international economic and political events or exchange rate management actions. Each currency has distinctive characteristics, particularly evident with political turmoil and exchange rate management. While we find some evidence that liquidity is related to financial stress, cross-country results show that increased liquidity does not dramatically contribute to the identification of a stressful episode.

The more the Merrier? The reaction of euro area stock markets to new members

The adoption of the euro is a crucial turning point for the economy of any EU member and the culmination of a long process of exchange rate management and macroeconomic convergence. But how does the prospect of euro area enlargement play out in the countries that have already adopted the euro? Are new members seen as a way to expand the club of like-minded countries, or are they perceived as a threat to stability, either because there exists a moral hazard risk from the side of old members to adopt riskier behavior on behalf of new members or vice versa? This paper looks at the effects of the news of the euro’s adoption event in new members on the stock returns of nineteen euro area countries, employing both an event study methodology and APARCH modeling to capture and test the form of responses of European financial market volatility. Our results show that markets were indeed pleased when new members joined the euro area, with negative responses due solely to local conditions rather than euro area-wide travails. In our most interesting finding, the expansion of the euro actually helped to dampen local market volatility in the post-crisis period in the founding member states, while euro adoption quelled volatility both pre- and post-crisis for non-founding members.

RMB Internationalization and Financing Belt-Road Initiative: An MMT Perspective

The Belt Road Initiative (BRI) is a global development plan that sets out to invest trillions of dollars in infrastructure within the coming decade in over 60 countries. Financing the BRI has come mainly from the Chinese government funded development banks, commercial banks and investment funds. BRI investment has done primarily in the US dollar, which is not a sovereign currency for the Chinese government. As China’s current account surplus narrowed and foreign exchange reserves shrank, the affordability of the BRI becomes questionable. From the Modern Money Theory’s perspective, it is much more desirable, or even necessary, to use the Chinese RMB as the main investment vehicle currency. However, despite the RMB internationalization efforts by the Chinese government in the recent years, especially after the 2008 Global Financial Crisis, RMB internationalization is still quite limited. Financing BRI presents a difficult dilemma for China because on the one hand, continuing with dollar investment requires much capital account and exchange rate management, which hinders RMB internationalization; on the other hand, RMB internationalization, which is desirable for BRI investment, requires more liberalization of the capital account and exchange rate regime. Based on the Modern Money Theory, this paper reveals some of the implications of the connections between RMB internationalization and BRI financing.

Solomon Islands

Solomon Islands has made substantial progress since the Tensions in the early 2000s but faces considerable economic and governance challenges and is highly vulnerable to natural disasters. Finding new sources of growth is becoming urgent with the decline in logging. Budget pressures are re-emerging; revenues have weakened while spending has picked up, including a sharp increase in payroll. Governance challenges stem from weak oversight of the resource sectors, a lack of transparency and a need to strengthen public financial management. The consultation focused on similar issues to last year—restoring fiscal buffers to build resilience, strengthening public financial management and public investment management, setting a medium-term fiscal strategy, improving governance, improving exchange rate management and building conditions for sustainable growth.