Exchange Rate Mechanism Research Articles

Relationship Between Exchange Rate and Inflation in Afghanistan

Afghanistan is an import dependent country and has been facing perpetual trade balance deficit for decades. In case of imperfect competition in the market or existence of market monopoly, there is a higher chance of reflecting the exchange rate changes on the prices of the goods. In Addition, countries with low level of domestic production and higher amounts of imports usually experience higher degree of the exchange rate pass-through effect on inflation. Countries with high import volumes and low export levels often face a deficit in foreign currency inflows and an excess in outflows. These countries need substantial foreign currency to purchase and import goods from both neighboring and international markets, increasing domestic demand for foreign currencies and consequently leading to domestic currency depreciation. This study investigated the relationship between exchange rates and inflation in Afghanistan, examining how exchange rates impact inflation and the benefits associated with exchange rate mechanisms. The primary research questions include: What is the relationship between exchange rates and inflation in Afghanistan? How does the exchange rate influence inflation in the country? What are the benefits of exchange rate systems? The hypothesis posits that higher inflation typically depresses a country's currency value and that exchange rates directly affect inflation. Additionally, exchange rates determine the value of currency exchanges between different nations. This research aims to elucidate the relationship between exchange rates and inflation in Afghanistan, assess the impact of exchange rates on inflation, and explore the benefits of exchange rate systems. The methodology involves a binary system and utilizes secondary data collected from books, websites, and research papers. Findings indicate that Afghanistan's reliance on imports results in a persistent trade balance deficit, with a significant portion of goods, especially non-food items, being imported due to insufficient domestic production. To import goods, Afghanistan requires foreign currencies, which are typically earned through exports of goods and services as of a result, Afghanistan will experience stability in the exchange rate and in the domestic prices.

Current Situation, Problems and Countermeasures Analysis of China's Foreign Exchange Market

China, as the second-largest economy in the world, plays a vital role in the development of FX market. In recent years, China's FX market has been expanding continuously, liquidity has been enhanced, and the exchange rate mechanism has been perfected. However, there are still some problems in the market, such as preventing and controlling the market risk, the irrational structure of participants, and so on. To solve these problems, it is necessary to deepen the opening-up of the financial market, perfect the mechanism of the formation of the exchange rate, enhance the risk prevention and control, optimize the structure of the market participants, and enhance the infrastructure of the foreign exchange market. Therefore, the study of this thesis is of great importance, and it can offer some help to the problems which should be resolved in FX market. This article will analyse the current situation of Chinese FX market, the four existing problems and the corresponding countermeasures. This article discusses some problems in the foreign exchange market: China's FX market has been severely influenced by the increase of interest rate, while China has been in a disadvantageous position in the field of FX operations, the size of assets and the establishment of institutions. The types of FX derivatives in China are less, and the participants in the FX market are unitary, and the investors' acceptance is low.

Pengaruh Profitabilitas, Exchange Rate, Inovasi Perusahaan dan Mekanisme Bonus terhadap Transfer Pricing Aggressiveness

This study aims to see the effect of profitability, exchange rate, company innovation, and bonus mechanism on the aggressiveness of transfer pricing. The data and sampling used in this study are consumer sector companies, both primary and non-primary, listed on the Indonesia Stock Exchange in 2018-2022. The analysis method used is multiple linear regression analysis by utilizing the SPSS application. The results showed that simultaneously all independent variables have a significant influence on the dependent variable. However, partially, profitability and exchange rate have a positive effect on transfer pricing aggressiveness, while corporate innovation and bonus mechanism have no effect on transfer pricing aggressiveness.

Economic policy uncertainty and the ECOWAS exchange rate mechanism

This study examines the nexus between economic policy uncertainty and real exchange rates of ECOWAS countries to observe the countries’ responses to external shocks and explore the potential success of exchange rate mechanism (ERM) in the West African region. We explore several robustness in the analysis which include consideration of symmetric and asymmetric Autoregressive Distributed Lag model specifications, four alternative real exchange rates measures (US dollar-denominated, Euro-denominated, SDR-denominated, and real effective exchange rates), and three alternative economic policy uncertainty measures (global EPU, US-EPU, and EU-EPU). In line with theory, the findings suggest that the Meese–Rogoff puzzle is alive in West Africa given the widespread statistical insignificance of the estimates. Other dimension of the findings suggest that the countries respond asymmetrically to external shocks. The study highlights the importance of commitment to flexibility criteria in the region in place of devotion to macroeconomic convergence.

An Attempt to Demonstrate the Significant Role Played by Institutional Change in China's Sustained Economic Growth

During China's reform and opening, the Renminbi exchange rate mechanism has undergone several modifications. It has steadily moved from an early fixed exchange rate regime to a market-determined, managed floating exchange rate system. At various periods, each stage of reform has contributed to China's economic growth. The purpose of this study is to examine, from the perspective of the reform of the Renminbi exchange rate regime, whether the change in the Renminbi exchange rate regime has impacted China's sustained economic progress. Using the theoretical system of national income accounting and the multiple linear regression model, the information includes data on gross domestic product (GDP), the real effective exchange rate of the Renminbi, social fixed asset investment, population consumption level, and import/export balance from the China Statistical Yearbook 2006-2021. Then, it is concluded that this institutional change contributes significantly to China's sustained economic growth, and reform ideas for China's institutions are presented.

Business cycle transmission between France and United Kingdom

PurposeThe literature mostly investigates the business cycle transmission of the United Kingdom (UK) and France as a part of a wider group (e.g. European Exchange Rate Mechanism or G7), despite their historical links and regional significance. Thus, herein paper aims to analyse the inter-dependence of these economies and how a shock from one of them affects the other for the data since 1978 to 2019.Design/methodology/approachIn this paper, first, preliminary statistics were calculated in order to describe the historical relationship between these countries. The econometric part estimates the vector auto-regression model (VAR) to assess the inter-dependence of the economies. VAR model allows further to inspect the impulse response functions that shows the shock dynamics from one country to another. In order to verify if a shock from one of the economies is important to another, the study uses granger causality test.FindingsThe study establishes a strong link between these countries. A business cycle is transmitted significantly between the economies of France and UK, with a single standard deviation shock from France resulting in a long term effect of 0.4% change in gross domestic product (GDP) of UK and 1% vice versa. Additionally changes in GDP of both of the countries significantly Granger-cause change to GDP of the corresponding economy.Originality/valueThis is the first empirical study investigating the business cycle transmission between France and UK and providing a quantitative assessment of their inter-dependence.

Moderating remittance and economic growth relationship with exchange rate: What new can we learn from Africa’s economy?

The paper employs partial and biwavelet coherence techniques to examine the time-frequency dependence structure of international remittance inflow on economic growth by moderating the effect of exchange rates. We investigate the comovements of remittance and economic growth from 1980 to 2020. We observed heterogeneous patterns in the comovements structure of international remittance inflow and economic growth at various timescales. By examining the biwavelet coherence, the comovements are noticeable at elevated occurrences, implying that exchange rates, when acting as moderator in the nexus between remittance and economic growth, can hamper economic growth. Findings from the partial wavelet coherence reveal that exchange rates influence remittance and economic growth connectedness in emerging and frontier economies in Africa. Consequently, in situations where radical changes occur in exchange rates, the implemented policies of emerging African countries seem to have largely influenced the comovements between remittance inflow and economic growth. The risk posed by exchange rates on remittance inflow requires sustainable policies to prevent widespread spillovers, mostly during severe economic downturns. We posit that implementation of exchange rate mechanisms are central to parity which is essential to mitigating potential risk.

International journal of finance and economics: A bibliometric overview

AbstractThe International Journal of Finance & Economics (IJFE) contributed substantially to its research domain between 1996 and 2021. We conduct a comprehensive bibliometric study to examine IJFE's evolution. We use various science mapping approaches to study its performance, intellectual structure, and determinants of academic influence. IJFE's contributions and impact have grown markedly. Authors affiliated with the United Kingdom and the United States are its most frequent contributors. Authors linked with the International Monetary Fund and the City, University of London top the journal's list of contributors. The keyword ‘exchange rate/real exchange rate’ is the most frequently used in IJFE articles, followed by ‘economic growth.’ IJFE's knowledge structure consists of eight themes: (1) exchange rate mechanism, currency crisis, and capital flows, (2) stock market volatility, (3) effects of credit rating on international financial markets, (4) exchange rate volatility and market efficiency, (5) banking sector efficiency, (6) linkage between financial development and economic growth, (7) technical analysis in the foreign exchange market and R&D investment, and (8) stock markets and environmental sustainability. Using regression analysis, we find five factors positively associated with IJFE citations: lead article in an issue, number of authors, article age, number of tables, and number of references.

Monetary Policy in Oil Exporting Countries with Fixed Exchange Rate and Open Capital Account: Expectations Matter

This paper shows that for UAE, an oil exporting country with pegged exchange rate and open capital account, adjusting nominal interest rate only to foreign rate could be economically inconsistent. By incorporating a market-expected exchange rate mechanism in a semi-structural New Keynesian Model, this paper highlights the role of oil prices and expectations for shocks transmission and underlines the relatively over-valuated UAE policy exchange rate between 2010 and 2019. The assessment of NIR shows that this over-valuation was not completely compensated, and in average the monetary policy was too accommodative than it had to be.

ANALYSIS OF INFLATION CONVERGENCE IN THE ECONOMIC COMMUNITY OF WEST AFRICAN STATES (ECOWAS) ZONE (1987-2021)

This study examines the convergence of inflation (country annual average inflation rate) through it determinants vis-?-vis the set convergence criteria in the Economic Community of West African States during the period 1987-2020. The study adopted ex-post factor design in order to answer the research questions. The study undertook unit root test employing Levin, Lin, and Chu (LLC) panel unit root method to check the stationarity of the variables, Auto Regressive Distributed Lag (ARDL) model and Error Correction Model (ECM) to determine whether or not they are co-integrated and a dynamic fixed effect panel data model covering 15 countries over the period under review. The study found that while West African Economic Monetary Union (WAEMU) countries inflation rates fall below the threshold, West African Monetary Zone (WAMZ) inflation rates are beyond the ECOWAS inflation convergence rate of less than or equal to 5 percent, that cross?country differences in inflation rates are attributed to the variation of the output gap, the increase in liquidity, the variation of exchange and interest rates, and the persistent increase in the price level. In the view of targeting the five percent (5 %) percent convergence criterion, the study recommended that Changes of traditional country monetary approaches to a supra-national monetary authority that compels compliance to a regional monetary and inflation targets, stimulation of economic growth, lowering of interest rates as well as adoption of a strong and efficient exchange rate mechanism becomes imperative for the ECOWAS member states

Specifics in Introduction and Functioning of the Currency Board in Bulgaria

The article studies two main aspects of functioning of the currency board in Bulgaria: its characteristics and its specifics and peculiarities.
 Concerning the characteristics of the currency board in Bulgaria, the attention is focused on several theoretical matters of the nature of the currency board: mechanism for introduction of the currency board; choosing the foreign currency, to which the local monetary unit is to be fixed; financing the initial currency reserve, in order for the currency board to start functioning; setting the fixed exchange rate to the reserve currency; establishing the amount of coverage of the quantity of cash in circulation by the currency reserves; administration of the currency board; implementation of the function “lender of last resort” in cases of liquidity crisis; supervision of the commercial banks’ operation.
 Each country is characterized by its specifics in terms of management of public finances, condition of the real (non-financial) sector, service sector, monetary and banking system. These specifics are reflected in the monetary boards, introduced in the individual countries.
 The article provides a detailed analysis of the specifics of the currency board in Bulgaria.
 The options for an independent monetary policy of the central bank are heavily restricted, and on the other hand, the currency board attained the goal of its policy – ensuring of price stability. As of the present moment, Bulgaria joined the exchange rate mechanism (ERM II) in 2020 and makes every effort to cover the criteria for real convergence.

Spillover Effect of American Monetary Policy on China After the Subprime Mortgage Crisis - Based on the Mundell-Fleming-Dornbusch Model

This paper uses the Mundell-Fleming-Dornbusch model to theoretically analyze the spillover effects of the American monetary policy on China after the subprime mortgage crisis. The research finds that the traditional American monetary policy has little impact on its economic revival. The implementation of a quantitative easing policy affected China’s macroeconomic development, capital flow, and import and export trade through the channels of interest rate, exchange rate, and trade flow. In the empirical part, this paper constructs a vector autoregressive model using data between the second quarter of 2007 and the fourth quarter of 2019. Based on the stability test, the Granger causality test preliminarily carries out the solution that exchange rate, interest rate, and trade mechanism all prominently show the spillover effect of US monetary policy on China. So do the macroeconomic variables. Through impulse response, it is found that the spillover of US monetary policy will cause overheating and strong liquidity in China's economy. In the future, China needs to adopt a prudent monetary policy, actively adjust its industrial structure, strengthen international cooperation, and continuously increase its international competitiveness to resist external shocks.

MONETARY AND FISCAL POLICY REDUX—THE MINI-BUDGET

Not so very long ago, I argued that it was possible to characterise modern monetary and fiscal policy in the UK as a function of three key events: exit from the European Exchange Rate Mechanism in September 1992, the election of ‘New Labour’ in May 1997 and the global financial crisis of 2007–2009. The first led to the adoption of a domestic inflation target in October 1992, the second to the operational independence of the Bank of England and the establishment of the Monetary Policy Committee and the third to the acceptance of the need for macro-prudential policies, extraordinary monetary interventions to augment a simple interest rate rule and formal budgetary oversight by a fiscal council. The latter was provided by the Office for Budget Responsibility, which was established in 2010.

50 Years of Capital Mobility in the Eurozone: Breaking the Feldstein-Horioka Puzzle

This paper assesses capital mobility for the Eurozone countries by studying the long-run relationship between domestic investment and savings for the period 1970-2019. Our main goal is to analyze the impact of economic events on capital mobility during this period. We apply the cointegration methodology in a setting that allows us to identify endogenous breaks in the long-run saving-investment relationship. Precisely, the breaks coincide with relevant economic events. We find a downward trend in the saving-investment retention since the 70s for the so-called “core countries”, whereas this trend is not so evident in the peripheral, where the financial and sovereign crises have had a more substantial impact. In addition, our analysis captures other economic events: the Exchange Rate Mechanism (ERM) crisis, the German reunification, the European financial assistance program, and the post-crisis period. Our results also indicate that the original euro design had some flaws that remain unsolved.

The Effect of Taxes, Exchange Rates, Leverage, and Bonus Mechanisms on Transfer Pricing in Manufacturing Companies Listed on The IDX

This research examines the impact of taxes, exchange rates, leverage, and bonus mechanism on transfer pricing. Tax is calculated by dividing deferred tax expenses taxable by profits. The exchange rate is calculated by dividing foreign exchange profit and loss by profit and loss before tax. Leverage is calculated by dividing total debt by total assets. Bonus Mechanism is calculated by multiplying net profit year t by net profit year t-1 by 100%. The population in this research included 54 manufacturing firms listed on the Indonesia Stock Exchange in 2017-2019, with 29 samples examined across three years. This study is quantitative since the data is numerical, and the data analysis technique is multiple linear regression. The exchange rate has a substantial impact on transfer pricing, according to the findings of this research. Based on the study, the Adjusted R Square value is 0.104, which indicates 10.4% of the independent factors, namely tax, exchange rate, leverage, and bonus mechanism, impact the dependent variable, transfer pricing. The remaining 89.6% is affected by another variable.

The Effect of Taxes, Exchange Rates, Leverage, and Bonus Mechanisms on Transfer Pricing in Manufacturing Companies Listed on The IDX

This research examines the impact of taxes, exchange rates, leverage, and bonus mechanism on transfer pricing. Tax is calculated by dividing deferred tax expenses taxable by profits. The exchange rate is calculated by dividing foreign exchange profit and loss by profit and loss before tax. Leverage is calculated by dividing total debt by total assets. Bonus Mechanism is calculated by multiplying net profit year t by net profit year t-1 by 100%. The population in this research included 54 manufacturing firms listed on the Indonesia Stock Exchange in 2017-2019, with 29 samples examined across three years. This study is quantitative since the data is numerical, and the data analysis technique is multiple linear regression. The exchange rate has a substantial impact on transfer pricing, according to the findings of this research. Based on the study, the Adjusted R Square value is 0.104, which indicates 10.4% of the independent factors, namely tax, exchange rate, leverage, and bonus mechanism, impact the dependent variable, transfer pricing. The remaining 89.6% is affected by another variable.

How to get in? Euro area entry criteria in books and in action

The article analyses the current euro area entry criteria with a special emphasis on their development resulting from the approach towards Bulgaria and Croatia on their way to the euro. Firstly, it is demonstrated that the convergence criteria set out in Article 140 TFEU have been amended over time by the Commission and the ECB in the process of examining the preparedness of Member States with a derogation. Secondly, the entry criteria have been extended in the course of the post-crisis EMU reform, inter alia through several intergovernmental agreements. Finally, the entry criteria have been substantially broadened recently, as the accession of Bulgaria and Croatia to the Exchange Rate Mechanism II has been made conditional on the fulfilment of many other requirements including joining the Banking Union. The article presents the full scope of the euro area entry criteria and identifies legal issues of their extension taking place without due Treaty amendment.

Structural Changes in the Renminbi Exchange Rate Mechanism

AbstractThis paper examines structural changes in China's exchange rate mechanism. For this purpose, we propose a predictive model incorporating three factors that influence the central parity rate: a smoothing factor, a market factor, and a basket factor. We first apply the model to analyze the effects of 12 exchange rate reforms since 2005, treating these reforms as predetermined structural breaks. Among other results, we find that the main impact of introducing a “counter‐cyclical factor” is to weaken the role of the basket factor. We estimate structural breaks in data, assuming that the number and dates of breaks are unknown, and we find that, although the majority of estimated breaks occur within the neighborhood of exchange rate reforms, there are breaks due to other external shocks such as the escalation of the China–US trade conflict in May 2019. It is suggested that our model may be used to guide future currency reforms in China.

The regional innovations governance: Slovakia with regard to convergence criteria

The introduction of the euro in Europe is subject to several criteria. In 1979, the European Community created the «European Exchange Rate Mechanism» (ERM). On 16 April, 2003, Slovakia, together with nine other countries, signed the EU Accession Treaty in Athens. These countries promised to adopt the single currency (the euro). It has been 10 years since the introduction of the euro in Slovakia. It stands to highlight factors that have contributed to the economic, innovation development experienced in recent years regarding introducing a single currency. This article aims to briefly introduce the euro area and present each country's accession in historical order. the authors presented the general conditions for introducing the euro and then went on to the events related to the regional innovations governance of Slovakia. Using the data from the statistical site Eurostat, the Pearson correlation coefficient was used to indicate the closeness of relationships between the average values of inflation and government deficit and the average values of inflation and the public debt. The limitations of the research are that Eurostat's values are only indicative and, in the event of a possible accession, EU bodies would certainly use other, more reliable data. Furthermore, the ERM II criterion for joining the euro area cannot be examined due lack of statistics available on the Slovak koruna's value after the introduction. Another limitation is that the EU sometimes makes adjustments to calculating inflation and average nominal long-term interest rates. There is a lack of a significant relationship between the examined variables in the case of Slovakia. Based on the 2018 inflation rate, the introduction would not have been possible, as it was slightly higher (2.5 per cent) than the limit (2.23 per cent). Therefore, the authors assumed that Slovakia had adopted the euro on time, as if it had not done so on 1 January 2009, it would probably have had to wait a few years for the new opportunity. Although their results are only indicative and not decisive without taking ERM II into account, it is possible to do without specific indicators.

Is a New Asian Monetary Fund Emerging?

The plan initiated by Japan for forming an Asian Monetary Fund in a mode of ASEAN+3 countries after Asian financial crisis in 1997 was not realised due to opposition from USA, IMF and China and the plan was revamped through CMI multilateral currency swap and pacific nation’s joining with US Dollar hegemony but at present it is confronting Chinese supremacy over the region. Thus, in this paper the author thought of forming a new Asian bloc consisting of SAARC, ASEAN, GCC, China, Japan and Korea for which a new framework of Asian Monetary Fund can be set up with a view to not only supplying additional liquidity in crisis period as well as for developmental finance but also can function for issuing a common currency of the new Asian bloc that is a currency basket which will be formed by currencies of China, Japan and Korea and the currencies of blocs viz SAARC, ASEAN and GCC where unit of account of currency will be measured by gold or silver and the exchange of currency unit of Asia is primarily fixed with Chinese Yuan. The exchange rates of all currencies in the basket will be calculated daily through floating exchange rate mechanism in Asian bloc and common currency will also be floated in SDR basket if CUA is included in SDR basket. The exchange rates will be maintained by Asian Monetary Fund through target zone of ±2.5% fluctuation. The plan also requires monetary and trade integration as well as political integration with the implementation of Asian stock exchange institute, Asian Parliament, Asian Security council, Asian Central Bank and Asian Clearing Union respectively. The common barriers like Sino-Japan rivalry, US dollar hegemony, non-cooperation from IMF, premature OCA criteria and low capital market internationalisation may delay the process of Asian Economic Integration towards formation of a new Asian Monetary Fund.