Exchange Rate Movements Research Articles

Drivers of Turkish inflation

This paper investigates the drivers of Turkish inflation by using a structural vector autoregression model, where monthly data on global oil prices, unemployment rates, inflation rates, policy rates and exchange rates are used. The empirical results show that Turkish inflation increases following a negative policy rate shock, a positive exchange rate shock, or a positive global oil price shock. The volatility of Turkish inflation is mostly explained by global oil prices and exchange rate movements in the long run, while the contribution of exchange rate shocks to Turkish inflation has continuously increased over time. As additional empirical results show that exchange rate depreciation can be reduced by positive policy rate shocks, it is implied that a conventional monetary policy increasing policy rates following an increase in inflation or a depreciation of Turkish lira would be optimal to achieve and maintain price stability in Turkey, which is the primary objective of the Central Bank of the Republic of Turkey.

Financial stability and monetary policy reaction: Evidence from the GCC countries

This paper investigates the interaction between monetary policy and financial stability in the Gulf Cooperation Council (hereafter GCC) countries by introducing a new composite financial stability index to monitor the financial vulnerabilities and crisis periods. To this end, the study estimated monetary policy reaction functions for each GCC country (namely, Bahrain, Kuwait, Saudi Arabia, and the United Arab Emirates) using the Nonlinear Autoregressive Distributed Lag Model (NARDL) over the period from 2006-Q4 to 2020-Q2. Empirical findings indicate that monetary authorities' response to the deviation of inflation from their target level, output gap, or exchange rate movement differ in magnitude, sign, and significance across the GCC countries. The results further explain that monetary authorities react significantly to negative or positive shocks to financial stability, but they react differently in the short or long term. Overall, an augmented Taylor rule including financial stability as an additional monetary policy target is more appropriate for the GCC countries.

Currency hedging behavior for stock returns uncertainty in Ghana

ABSTRACT This article investigates the dynamic interaction between stock market returns and exchange rate movement and their implication for portfolio risk management in Ghana. To do so, and considering the Covid-19 crisis, the Dynamic Conditional Correlation Multivariate GARCH estimation technique was employed on daily data for Ghana Stock Exchange (GSE) Composite Index and the Ghana Cedi to USD, Euro, and GBP exchange rates from 3 January 2012 to 26 November 2021. The results revealed that: (i) the GSE market has no significant exposure to the USD, Euro, and GBP exchange rates in the full sample and periods before the crisis but was significantly exposed to the Euro rates during the crisis, (ii) the returns on holding foreign currencies were relatively higher but riskier compared to returns on stocks for the full sample and periods before the crisis, and (iii) while the Euro rates act as the most efficient hedge currency for stock returns uncertainty the correlations between stock returns and exchange rate movement were generally low and therefore, forming a portfolio of stocks and currency pairs improved an investor’s daily returns and risk. Based on the findings, relevant policy suggestions are offered to guide investors and policymakers.

Exchange Rates, Optimization of Industrial Resources Allocation Efficiency, and Environmental Pollution: Evidence from China Manufacturing

The impact of exchange-rate fluctuations on resource reallocation is of particular interest to researchers and policymakers with China’s further opening to the international market and the transformation of economic growth. With high-speed growth, pollution issues have become an international concern. This paper examines how RMB exchange-rate movements affect resource allocation efficiency within industries at different pollution levels, based on the data of Chinese industrial enterprises during 1998–2007. Unlike previous studies, we analyze how within-industry productivity dispersion reacts to exchange-rate appreciation from the perspective of the heterogeneity across firms in their exposure to foreign competition in each industry. Our findings suggest that appreciation causes an increase in productivity dispersion, which implies a decrease in resource allocation efficiency. The increased dispersion of industries with higher pollution levels is more diminutive than lower levels. The productivity dispersion is intended to shrink for high-polluting industries due to the real exchange-rate appreciation. Appreciation plays a positive role in efficiency for pollution-intensive industries.

Determinants of Exchange Rate Movement in Ethiopia

Determinants of Exchange Rate Movement in Ethiopia

THE COVID-19 INFORMATION IMPACT ON MOVEMENT AND VOLATILITY OF ASEAN-5 CURRENCY

The rapid and massive spread of COVID-19 has a major impact on a country's economy, including ASEAN countries. This research aims to examine the impact of the COVID-19 outbreak information on exchange rate movements and currency exchange rate volatility of ASEAN-5 countries. This study employs data on the number of infection cases to measure COVID-19 information. The research period begins with the first case that occurred in each ASEAN-5 country until December 31st, 2020, using the GARCH research method. The results indicate that the COVID-19 outbreak information had a significant effect on exchange rate volatility but had no effect on the movement of the ASEAN-5 exchange rate in one day. Meanwhile, in five days, the COVID-19 information did not significantly affect the movement and volatility of the exchange rates of ASEAN-5 countries. The influence of COVID-19 outbreak information on the ASEAN-5 exchange rate, which is stronger in one day than five days supports the theory of exchange rate dynamics. This finding implies that COVID-19 information affects the exchange rate volatility of ASEAN-5 countries in the short term. For this reason, investors can be wiser in managing their investment portfolios, and regulators can implement policies to reduce volatility in the foreign exchange market.

Dollar beta and stock returns

Abstract The financial channel of exchange rates operates through changes in risk-taking by investors and is reflected in the response of financial conditions to exchange rate movements. We show that stock returns also reflect the financial channel of exchange rates, with higher local currency stock returns associated with a weaker dollar. The broad dollar index emerges as a global factor, consistent with the financial channel operating through swings in risk-taking by global investors. We introduce the ‘dollar beta’ as the sensitivity of stock returns to swings in the broad dollar index and show that emerging market stock indices that have a higher dollar beta tend to have higher average returns, implying that the dollar beta is a cross-section risk factor that is priced.

Asymmetrical Effects of Real Exchange Rate Volatility during Covid-19 Pandemic on the Demand for Money in Zimbabwe

The understanding of symmetrical or asymmetrical effects of exchange rate volatility improves the effectiveness of macroeconomic management policies. This study examines the long-run asymmetrical effects of exchange rate volatility on real demand for money in Zimbabwe, using monthly data from January 2018 to September 2020. Exchange rate shocks are calculated by decomposing exchange rate volatility measure into positive and negative components to examine their short-run and long-run effects and to determine whether the long-run effects of the components of exchange rate movements are symmetrical or asymmetrical. The linear ARDL and the non-linear ARDL models are estimated. The study employs the F-bounds test to confirm the longrun relationship and the Wald test for the asymmetrical effect. The results show that exchange rate depreciation in Zimbabwe has symmetrical effects on real demand for money. Thus, exchange rate policies in Zimbabwe should assume linearity in the passthrough effects on real demand for money.
 JEL Classification: E41; E52; E6

Market structure and exchange rate pass‐through in the Turkish manufacturing industry: Evidence from sectoral data

ABSTRACTIn this paper, we study the impact of market share on exchange rate pass‐through to Turkish manufacturing sector prices using four‐digit industry level disaggregate data. Our findings provide evidence that exchange rate pass‐through in the manufacturing sector has an asymmetric U‐shape with respect to market share, implying that highly competitive and concentrated industries pass‐through exchange rate movements in both directions (appreciation and depreciation) to local producer prices more than moderately concentrated sectors. However, when directional asymmetries of exchange rate movements are added to the models, results become more revealing, that is, highly monopolized industries pass‐through exchange rate depreciation at higher rates than highly competitive industries. We also find that the size of the exchange rate movement has an impact on the asymmetry and the curvature of the U‐shaped Exchange Rate Pass‐Through (ERPT) curve with respect to the market share.

The determinants of inflation volatility: a panel data analysis for US-product categories

ABSTRACT Some macroeconomic dimensions like the economic business cycle, the exchange rate movements when the degree of country openness is significant, or the level of inflation are often considered to explain measured-inflation dynamics. However, inflation volatility may also be affected by statistical agencies methodological changes. This paper explores both potential explanations in a panel data for 100 United States CPI-U subcategories. Using both unconditional and conditional variances, we find that crucial changes in how agencies consider quality adjustment in products, together with the macroeconomic variables help to understand CPI volatility over time, both in the short-run and in the long-run.

Wavelet coherence analysis and exchange rate movements

Wavelet coherence analysis and exchange rate movements

Impact of Export Diversification on Economic Growth in Nigeria

The main objective of this study is to examine the impact of export diversification on economic growth in Nigeria. Annual time series data on GDP per capita, Theil export diversification index, gross fixed capital formation (for domestic investment), exchange rate and openness of the economy were the variables collected for the analysis for the period 1980-2017. Dummy variable for democracy was also constructed to test for the impact of governance on economic growth in Nigeria. To estimate the data, Autoregressive Distributed lag model, applying bounds test was adopted. The empirical results show that export diversification has positive but insignificant impact on economic growth in Nigeria both in the short run and long run. Similarly, domestic investment has positive impact on economic growth both in the short run and long run. However, its impact is significant only in the short run. Exchange rate has negative impact on economic growth in the short run but its impact in the long run is positive, showing instability in the exchange rate movements in Nigeria. Openness of the economy has negative impact on economic growth both in the short run and long run. However, its impact is significant only in the long run. Democracy dummy has positive but insignificant impact on economic growth both in the e short run and long run. Based on the findings,, it is recommended that the earnings from the oil sector should be channeled to the development of non-oil sectors such as agriculture and manufacturing in order to diversify the export base of the economy.

Forecasting US dollar exchange rate movement with computational models and human behavior

Our research investigates the potential benefits of adding the Behavioral Finance approach to the Machine Learning and Big Data framework applied to the challenging problem of forecasting the US Dollar exchange rate. More specifically, we show how to improve existing voting-based ensemble models trained to predict the next-day exchange rate trend with no need for retraining or other costly computational tasks. We assume that calendar effects would constrain investors’ actions; furthermore, their constrained individual actions would collectively induce deterministic patterns in the financial time-series movement. Hence, financial time-series forecasting models could be prone to monthly repeat their performance patterns, and we could use this information to obtain better predictions and consistently achieve profit. To verify the effectiveness of our methodology, we predicted the sign of the US Dollar to Brazilian Real rate variation. Our proposed models generated a profit metric value 24% higher than the original voting-based ensemble models with 16% lower volatility, gathering two positive elements: higher return with lower risk. The experiments’ outcomes supported the hypothesis that there are considerable improvements with almost no extra computational effort by taking into account behavioral patterns in foreign exchange predictions.

Exchange rate misalignments, capital flows and volatility

This study investigates the effect of three dimensions of exchange rate misalignments—(i) distance (absolute misalignments), (ii) direction (overvaluation or undervaluation), and (iii) degree (small or large misalignments)—on the overall as well as short-cycle exchange rate volatility. Using data from 1988 to 2014, we find that relative PPP-based exchange rate misalignments increase exchange rate volatility. For developed and developing countries, this increase in volatility is driven mainly by large undervalued misalignments of the U.S. dollar. This finding might be linked to interventions targeting the loss in domestic producers’ competitiveness in global markets. Interestingly, in the case of developed countries, we find this adverse effect on exchange rate volatility also for small absolute misalignments; exchange rate movements close to equilibrium may be associated with ambiguity with respect to future movements in developed countries, which can result in higher exchange rate volatility. Further, the results suggest that, when the dollar is highly undervalued, capital flows have a stabilizing effect on exchange rate volatility in developed countries but a destabilizing effect in developing countries. The finding is consistent with investors’ strategy of taking exchange rate overvaluation and undervaluation into account when engaging in cross-border investments.

Study of Exchange Rate Volatility and Its Effect on Indonesian Economic Indicators With Potential Exchange Rate Crisis

Exchange rate volatility occurred when exchange rate movement was wildly fluctuating which could depict uncertainty. Since Indonesia used an open economy, exchange rate fluctuation became important to be maintained due to crisis potential. This research was conducted to analyze the effect or impact of exchange rate volatility on the Indonesian economy in general and few related case using time series analysis. ARIMA (Autoregressive Integrated Moving Average) and EGARCH (Exponential Generalized Autoregressive Conditional Heteroscedasticity) were used for measuring the volatility in the period between 1997-2021. Then, regressions were applied to analyze the impact of exchange rate volatility on few macroeconomic indicators. The result shows that exchange rate volatility yielded a significant negative effect on GDP Growth rate, export, and import. Logistic regression was used to analyze the factors that were affecting the crisis potential. The result showed only a negative GDP growth rate and high volatility that gave more risk which could lead to crisis. Therefore, it is important to keep exchange rate volatility stable.

MACROECONOMIC DETERMINANTS OF EMPLOYMENT IN NIGERIA’S SERVICES SECTOR: DO FOREIGN DIRECT INVESTMENT AND EXCHANGE RATE MATTER?

The study employs the ARDL modeling technique to investigate the determinants of employment generation in Nigeria’s services sector, focusing mainly on the roles of foreign direct investment and exchange rate movements during the 1991-2019 period. The study finds that in the short-run, FDI positively affects employment generation in the services sector while currency depreciation adversely affects it with a one-year lag. The long run employment generation effect of the FDI in the services sector remains positive, but loses its statistical significance, while the effect of currency depreciation on services sector employment is positive and significant. It is also found that economic growth positively affects service sector employment generation in the short-and long-run, though the effect is only significant in the short-run. The effect of trade openness is positive and significant in the short-run, but also turns out to be non-significant in the long-run. Financial sector development favours employment generation in the services sector in the short-and long-run. Based on the evidence it is recommended that the government make effort to enhance the attractiveness of various sectors of the economy to FDI and guard against undue appreciation of the nation’s currency. It is also recommended that economic growth and the development of financial system be prioritized. In view of the transience of the effect of trade openness on employment generation in the services sector, caution must be exercised in implementing trade liberalization policies. These measures, if implemented, are expected to enhance job-creation in the nation’s services sector.

An Analysis of the Information Content of Foreign Exchange Rate Movements

Few of us fail to realize foreign exchange rates are ratios rather than prices, but we almost universally use them as if they were in fact the prices of currencies. This paper converts FX rates into prices by defining the value of each currency as its spending power in its home country: the place where it can be spent. Each FX rate becomes the ratio of two such values. The value of the absolute spending power of one currency in relation to another is not considered. Instead, the changes in the spending power of each currency relative to its counterpart contained in daily FX movements are examined. To make this observable, a synthetic exchange rate series is generated from the ten floating currencies most frequently traded against the US dollar. In this series the change in spending power (value) of each currency each day is known. The spending power changes derived from these synthetic FX rates are compared with the information which can be derived from actual exchange rates. The results show changes in FX rates contain almost no useable information on changes in currency values and are in fact unintuitive and highly misleading. If market participants act on the assumption that, in the absence of price sensitive information, yesterday’s FX rate is the best estimate of today’s rate, they will trade in a manner that leads to FX volatility rather than mean reversion. A solution to this problem is proposed. All changes in the value of individual currencies can be made completely transparent by introducing a global benchmark currency to replace the US dollar as the vehicle currency in FX trades.

China-Us Trade War and Rmb Exchange Rate Movement

China-Us Trade War and Rmb Exchange Rate Movement

Effects of Exchange Rate Volatility on Economic Growth: Evidence from West Africa

The implications of exchange rate movement for economic growth have become a growing focus of attention in the recent policy debate and the debate concentrate on the degree of volatility in the exchange rate. Exchange rate volatility is usually a risk that will result in higher costs for risk-averse investors, who may adopt a wait-and-see policy until the uncertainty subsides, thereby leading to reduced employment opportunities and slower growth. Thus, in judging the desirability of exchange rate volatility, this paper studies the effects of exchange rate volatility on economic growth for twelve West African countries: The Gambia, Ghana, Cote d'Ivoire, Mali, Niger, Nigeria, Senegal, Togo, Benin, Burkina Faso, Guinea Bissau, and Sierra Leone. Furthermore, the almost complete neglect of the financial sector development in the growth prospect of West African countries is still rather surprising since economic intuition and theory suggest that the growth of the financial sector by means of indebtedness and credit expansion does provide an average GDP growth rate. However, the financial markets and institutions in the West African countries are narrow and shallow. Thus, these countries do not have the tools to hedge exchange rate risks. Hence, fluctuating exchange rates often generate uncertainty, which leads to a decline in economic activity. Therefore, this study also analyzes the role of financial sector development on the impact of exchange rate volatility on economic growth of the West African economies. The random-effects and the two-step difference Generalized Method of Moment GMM estimation techniques are used in this analysis. The “Ad hoc method” is employed by using the lagged term of exchange rate movements for a robustness check in the random-effects model. The results support that the depreciation of the real effective exchange rate volatility has a contractionary effect on economic growth in West African countries and this contractionary effect decreases with countries’ financial sector development. Our results are also support the random effect “Ad hoc methodology” and the GMM procedure implying that they are robust to the cross-section correlation and reverse causality considerations. We also showed that depreciation of real exchange rate is again contractionary for the West African countries in the short run as well as in the long run using GMM procedures. The study recommends that the authorities in the West African countries should speed up the development of their financial sector to decrease the negative effects of exchange rate volatility thereby encouraging economic growth.

Analisis pengaruh utang pemerintah terhadap perkembangan nilai tukar Negara Oman

The Oman Rial is the currency with the third highest exchange rate in the world. 1 Oman Rial - US$2.6 or Rp. 36,000. The exchange rate against the Omani USD was reported at 0.385 OMR/USD. With Oman's currency high, the government and the country's central bank had to issue banknotes in denominations of 1/4 and 1/2 rials to accommodate transactions of small value. This study aims to analyze the factors that influence the movement of the Oman riyal exchange rate, using secondary data sourced from the World Bank and IMF in 1984-2019. Data analysis using multiple linear regression through the Eviews application. From the analysis, it is known that interest rate, term of trade, public debt, and reserves affect the exchange rate. Interest rate, term of trade, and public debt have a negative effect on the exchange rate with a regression coefficient of -0.000295 , -0.008934 , and -0.000164, respectively. Reserves have a positive effect on the exchange rate with a coefficient of 2.13. The variables that have a very large influence on the exchange rate are reserves.