Pegged Exchange Rate Research Articles

Pegged exchange rate regime and its impact on inflation in BRICS nations: Country-wise evidence

During the 1990s and 2000s, many developing nations accepted fixed exchange rate regimes to sustain price stability. By pegging their currencies to an anchor currency (i.e. US dollar), developing countries could bring credibility and confidence into their economies. The study tries to analyse the impact of the pegged exchange rate regime on inflation in BRICS countries for the period spanning from 2003 to 2022. The result points to the loss of monetary policy autonomy due to the ‘impossible trinity’ coming into play with a steady increase in capital inflows. The country’s large trade surpluses and extensive trade relationships may buffer the impact of exchange rate fluctuations on domestic prices, as changes in the exchange rate may be absorbed by changes in trade volumes or pricing strategies. Other factors like demographic trends or government interventions in markets could overshadow the influence of the exchange rate regime on inflation. The impact of changes in the exchange rate regimes on inflation may operate with lags, meaning that any effects may not be immediately observable in the data. The analysis in this study proposes that exchange rate regimes choice and money supply influence the inflation dynamics in the BRICS countries. It merely reflects the success of the central bank in neutralizing its very effort of maintaining the pegged rate, which gives rise to inflationary growth of the money supply.

The Implication of Political Risk and Specific Macroeconomic Variables on Total Revenue in Tourism Industry

Political risk is one factor that influences tourism performance as a tourist is more sensitive to the hosting country’s political environment. In addition, to the effect of country risk on the tourism industry, the global economy has recently experienced severe shocks due to high inflation rates, political risk, and currency volatility. This paper aims to investigate the implications of political risk, inflation, and exchange rate volatilities on tourism revenue in South Africa. A sample of 144 monthly data was used to assess both long-run and short-run relationships amongst the study variables using the ARDL cointegration and error correction model approaches to achieve the study objective. Results indicated that political risk, inflation rate, and exchange rate volatility influence long-term revenue changes in the tourism industry. In contrast, real effective exchange rates and inflation significantly impact total revenue in the tourism sector. The findings also indicated that political risk has no short-term effect on tourism revenue. Based on these findings, the study recommends that the country's political stability increase, increasing the number of tourist arrivals and resulting in growing revenue for the tourism industry in S.A. Additionally, the South African reserve bank should revise its exchange-rate pegging, monetary targeting, and inflation targeting to reduce the effects of inflation on tourism revenue.

The choice of monetary regimes in emerging market economies: Inflation targeting versus its alternatives

This paper examines the macroeconomic, financial, and institutional factors that affect the adoption of inflation targeting vis-a-vis alternative monetary policy strategies for 44 emerging market economies during 1990–2017. We employ a multinomial logistic regression with inflation targeting and exchange rate pegs as treatment groups, and intermediary monetary strategies as the baseline group. The main findings from our study are as follows: higher average inflation is associated with lower probability of adopting inflation targeting; while both output growth and its volatility make the adoption of inflation targeting less likely. Concerning the effects of the control variables, financial sector development, central bank independence, greater exposure to capital flows, and the level of economic development are all associated with higher likelihood of adopting inflation targeting, whereas higher public debt, trade openness, and money growth have the opposite effect. Macroeconomic conditions seem to have different impact on the choice of inflation targeting and exchange rate pegs, whereas similar institutional conditions are conducive to the implementation of both regimes. Finally, the effects of macroeconomic and institutional conditions do not depend on the type of inflation targeting.

Exchange Rate Changes and Trade Flows in East Asia

This study investigates the impact of exchange rate changes on trade flows among East Asian countries spanning 1990–2021, using pooled mean group estimator, within the framework of panel data analysis. Findings indicate that world income, trade openness, and the real effective exchange rate strongly affect trade balance, and that the real depreciation of exchange rate exerts strong positive benefits on trade flows in the long run. The study also infers that trade openness and real effective exchange rate had strong influence on exports and imports for Hong Kong, Japan, and South Korea in the short run. However, the depreciation of their currencies discouraged imports in the long run. More so, world income strongly affects the exports and imports of Hong Kong and Japan, while trade openness is advantageous for all the countries. The study recommends the continuation of the prevailing trade-growth pattern, and the existing bilateral pegged exchange rate policy with their trading partners.

The external financial spillovers of CBDCs

We set up a DSGE model to study the macroeconomic consequences of a foreign central bank digital currency (CBDC) available to residents in a small open economy. We find that a gradual and permanent increase in the domestic households' preferences toward the foreign CBDC leads to a structural reduction in economic activity, especially if the CBDC is designed to be similar to domestic deposits. Imposing capital flow management measures on outflows, relaxing macroprudential policy, or selling foreign reserves can smooth the transition. A Taylor rule that targets PPI inflation is more effective in limiting the disruptive effects than a CPI targeting or an exchange rate peg. A central bank's liquidity facility available to commercial banks is able to avoid the long-run GDP loss, at the cost of a larger short-run consumption fall. We also show that an economy with a large stock of foreign CBDC is better shielded from exogenous increases in the interest rate on foreign debt, if the CBDC remuneration remains constant.

Foreign Exchange Pressure and Foreign Exchange Intervention in Nigeria: A Review of Literature

This paper conducts a comprehensive examination of the concepts of foreign exchange pressure and foreign exchange intervention within the Nigerian foreign exchange market. It delves into the theoretical foundations and empirical evidence underpinning these crucial elements of economic policy in Nigeria. To begin, the paper elucidates the various factors driving foreign exchange pressure in the Nigerian context, encompassing trade imbalances, external shocks, and economic fluctuations, which exert significant pressure on the exchange rate and foreign exchange reserves, necessitating effective strategies for policymakers and market participants. Furthermore, the paper sheds light on the theoretical frameworks and models that form the basis of foreign exchange intervention, emphasizing the substantial impact of central bank and government interventions on maintaining foreign exchange market stability, averting abrupt currency devaluations, and upholding macroeconomic equilibrium. Additionally, the paper reviews empirical literature, offering valuable insights into the practical implications of foreign exchange pressure and intervention in Nigeria, showcasing the Nigerian central bank's use of measures like capital controls, foreign exchange auctions, and exchange rate pegs. The effective management of foreign exchange pressure in Nigeria plays a pivotal role in ensuring economic stability, bolstering international trade, and fostering sustainable economic growth within the nation.

Understanding the global drivers of inflation: How important are oil prices?

This paper examines the global drivers of inflation in 55 countries over 1970–2022. The paper estimates a factor-augmented vector autoregression model for each country and assesses the importance of several domestic and global shocks, including oil price shocks. It reports three main results. First, global shocks have explained about 26% of inflation variation in a typical economy. Oil price shocks accounted for only about 4% of inflation variation, but they had a statistically significant impact on inflation in three-quarters of the countries. Second, global shocks have become more important in driving inflation variation over time. The share of inflation variance caused by oil price shocks increased from 4% prior to 2000 to roughly 9% during 2001–22. They also accounted for some of the steep runup in inflation between mid-2021 and mid-2022. Third, oil price shocks tended to contribute significantly more to inflation variation in advanced economies, countries with stronger global trade and financial linkages, commodity importers, net energy importers, countries without inflation-targeting regimes, and countries with pegged exchange rate regimes. The headline results are robust to a wide range of sensitivity exercises—including alternative measures of global factors and oil prices—and aggregation of countries.

Estimating fiscal multipliers for North Macedonia: a structural vector error correction model

The aim of this research is to evaluate the effectiveness of fiscal policy as a means of influencing output in North Macedonia. We apply a VEC model, and use quarterly data for the period 2000q1-2019q4. Our findings suggest that the possibility of fiscal policy to be used as a short-term stabilization tool was limited by the turbulent early phase of transition and several IMF arrangements; the exchange rate peg; and the scarcity of financial resources. The results of the baseline model suggest that a government spending shock is more effective as a stabilization fiscal tool in Macedonia, compared to a tax shock, although fiscal multipliers smaller than one suggest that the effectiveness of fiscal policy in boosting output is limited. The findings confirm the importance of structural characteristics, suggesing that not accounting for monetary policy reaction and debt dynamics will result in an overstatement of fiscal multipliers. In
 particular, the results suggest that the “crowding out” effect of fiscal policy due to interest rate pressure is absent and that monetary policy is accommodating an expansionary fiscal policy. The results of our investigation suggest that an increase in government expenditures will induce a significant increase in taxes. Moreover, although an increase in spending/taxes will result in a short-lived increase/decrease in public debt, as a priori expected, we find a long-equilibrium relationship between government spending and taxation suggesting that debt sustainability is not an issue in the case of Macedonia.

Macroeconomic tail risk, currency crises and the inter‐war gold standard

AbstractWe introduce macroeconomic tail risk into the canonical global game model of currency crises. The exchange rate peg is attacked if fundamentals reach a critical threshold, or if there is a sufficiently large public shock. Large shocks generate doubt amongst investors about both the state of the world and about what others know, giving rise to multiple equilibria. We find a non‐monotonic relationship between tail risk and the probability of (a fundamentals‐based) crisis and show how this effect depends on the magnitude and direction of public shocks. We consider the implications of policy intervention and identify conditions under which active intervention produces doubt about the level of fundamentals and, hence, how others will respond. Our analysis clarifies how financial contagion in Europe precipitated the sterling crisis of 1931.

Wavelet-Based Analysis of the Comovement Between Exchange Rate and Stock Returns in Sacu Countries

ABSTRACT: The Southern African Customs Union is the oldest customs union in the world and the member states form a currency union with the South African Rand being the regional currency anchor. Therefore, currency movements amongst SACU member are dependent on the developments on the Rand which, in turn, can affect stock market development in the region. We examine the time-frequency relationship between exchange rates and stock market returns in SACU countries using continuous wavelet transforms. Our empirical analysis is two-staged. Firstly, we employ wavelet power spectrum to examine the time-frequency properties of the individual series. Secondly, we use wavelet coherence analysis and phase dynamics to examine the synchronization between the variables in a time-frequency space. Our findings show stronger (weaker) exchange rate-stock returns relations are found during periods of higher (lower) inflation whereas we observe a stronger (weaker) relationship during periods of lower interest rate environment. Moreover, we find more significant long-run relationships for countries with more independent monetary policy (South Africa and Botswana) whereas these relations are more prominent over the short-run for countries with pegged exchange rates (Eswatini and Namibia). We also observe that periods of oil and currency shocks impact the exchange rate-stock returns relationship in SACU countries with pegged exchange rates (Eswatini and Namibia). Our findings bear important implications for different stakeholders. For instance, this study has implications for exchange rate policy as it addresses the issue of whether the exchange rate can be used to improve market performance or exchange rate developments spillover into the stock market. Furthermore, corporate managers and stock market participants would be interested in our findings as it identifies periods of market inefficiency when exchange rates can be used to beat the stock market.

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Purpose: This research aims to investigate the presence of monetary policy trilemma in the Middle Eastern region and evaluate the spillover effects of US monetary policy on the region. Theoretical framework: Middle Eastern economies follow the dollar pegged exchange rate policy with open capital account and this poses a question about the autonomy of the monetary policy stance adopted by the regional central banks. In this context, current research considers variables such as domestic interbank interest rate, domestic liquidity, oil price and federal fund rate to test the monetary policy trilemma in the region Design/methodology/approach: To investigate the presence of monetary policy trilemma in the Middle Eastern region, this research employs the time - varying Bayesian panel vector autoregression approach and selects a panel of five Middle Eastern countries which include Saudi Arabia, United Arab Emirates, Qatar, Oman and Kuwait while considering the monthly data for the sample period 2009m10 until 2021m12. Findings: This research finds that a positive shock in US federal fund rate increases the domestic interest rates in the Middle Eastern economies. In addition, this research finds a negative relationship between oil price shocks and domestic interest rates. Whereas a positive shock in US federal fund rates induces a reduction in the oil price. Research, Practical & Social implications: Current research provides insights for policy makers to determine the autonomy of domestic monetary policy stance to achieve its broader macroeconomic objectives. . Originality/value:This research is unique as it examines the monetary policy trilemma while considering oil price as a control variable in the system under a time varying Bayesian panel vector autoregression specification.

Testing Monetary Policy Trilemma for Middle Eastern Economies Under a Bayesian Panel VAR Specification

Purpose: This research aims to investigate the presence of monetary policy trilemma in the Middle Eastern region and evaluate the spillover effects of US monetary policy on the region.
 
 Theoretical framework: Middle Eastern economies follow the dollar pegged exchange rate policy with open capital account and this poses a question about the autonomy of the monetary policy stance adopted by the regional central banks. In this context, current research considers variables such as domestic interbank interest rate, domestic liquidity, oil price and federal fund rate to test the monetary policy trilemma in the region
 
 Design/methodology/approach: To investigate the presence of monetary policy trilemma in the Middle Eastern region, this research employs the time - varying Bayesian panel vector autoregression approach and selects a panel of five Middle Eastern countries which include Saudi Arabia, United Arab Emirates, Qatar, Oman and Kuwait while considering the monthly data for the sample period 2009m10 until 2021m12.
 
 Findings: This research finds that a positive shock in US federal fund rate increases the domestic interest rates in the Middle Eastern economies. In addition, this research finds a negative relationship between oil price shocks and domestic interest rates. Whereas a positive shock in US federal fund rates induces a reduction in the oil price.
 
 Research, Practical & Social implications: Current research provides insights for policy makers to determine the autonomy of domestic monetary policy stance to achieve its broader macroeconomic objectives.
 
 Originality/value: This research is unique as it examines the monetary policy trilemma while considering oil price as a control variable in the system under a time varying Bayesian panel vector autoregression specification.

Milton Friedman and Exchange Rates: History and Controversies

This article investigates how Milton Friedman's views on exchange rates in emerging nations evolved through time. Early on he supported flexible exchange rates for most less developed countries. He endorsed several forms of flexibility, including auctions and the “crawling peg.” Starting in the early 1970s, he favored a system characterized by fixed rates and no central banks. From that point on he argued that while flexible rates were the preferred option for advanced nations, they were the second-best solution for (most) developing countries. This article helps elucidate Friedman's views on the use of pegged exchange rates during stabilization programs (Chile and Israel) and on exchange rates in socialist countries (China and Yugoslavia).

Currency Crisis or Overproduction? A Marxian Analysis of the Exchange Rate Peg Collapse in Brazil

We revisit the recent past of the Brazilian economy in an attempt to present an alternative characterization of the nature of the late 1990s crisis. The theoretical basis of this analysis is Marxian political economy. This choice is justified by the contraposition between the Marxian theory of overproduction cyclical crisis and the most popular currency crisis theories, revealing that while the latter focus on the phenomenon’s appearance, the former analyzes it in depth. The analysis of capital accumulation during Brazil’s Real Plan shows that the examined crisis can be characterized as another manifestation of the aforementioned phenomenon: the overproduction cyclical crisis. JEL Classification: B51, E32, N16

How to foresee crises? A new synthetic index of vulnerabilities for emerging economies

We present a novel vulnerability index to monitor crises in emerging economies. To design the index, we identify the empirical regularities that precede sovereign, currency, and banking crises. Because we want to give policy makers the ability to react at an early stage, we focus on six-quarters before the onset of a crisis. We use data for 25 emerging economies and a new quarterly dataset of crisis events. The short-term interest rate is the unique variable that predicts all three types of crisis since it captures bank difficulties and sovereign and currency strains as monetary authorities use it to defend exchange rate pegs and to avoid capital flows. As the predictors of the three types of crisis generally differ, we define a different index for each type of crisis. The index, which is easy to update, outperforms the usual individual leading predictors of crises.

Sovereign debt responses to the COVID-19 pandemic

We utilize the global natural experiment created by the COVID-19 outbreak to identify sovereign borrowing capacity in time of need and its determinants. First, we demonstrate that the pandemic creates exogeneous shocks to sovereign borrowing needs—governments borrowed more when hit by more severe pandemic shocks. Second, we show that credible fiscal rules enhance sovereign borrowing capacity, while unsustainable debts in terms of high debt-to-GDP ratio, rollover risk, and sovereign default risk weaken it. Third, we find that, in response to the same pandemic shock, sovereign spreads increase more in emerging economies than advanced economies though the former borrow less during the pandemic. Finally, further analysis reveals that pegged exchange rate regimes, open capital accounts, and monetary dependence improve emerging economies' borrowing capacity.

Ruled by “fear of floating”. Mexico’s exchange rate policy during the interwar period, 1925-1936

This article argues that the Mexican exchange rate policy during the interwar years should be characterized asan archetypal case of “fear of floating”. Conventional accounts claim that Mexico escaped the Great Depressionbecause its policymakers deliberately repealed the gold standard ideology. Drawing on new archival data, Iargue that national policymakers remained conservative with respect to any regime change, and their preferencewas always for a fix or pegged exchange rate. Overall, this article claims that the monetary regime choicein Mexico was not driven by some new heterodox insights, and once the financial crisis of 1931 had forced adepreciation of the peso, the national monetary authority promptly rushed to join the dollar bloc.

Oil Price Shocks to Foreign Assets and Liabilities in Saudi Arabia under Pegged Exchange Rate

The Saudi economy ought to maintain a significant amount of foreign exchange reserves due to the pegged exchange rate regime. As a hydrocarbon economy, we measure the dynamic response of external assets and liabilities of banks to the international oil price in Saudi Arabia. In the presence of extreme observations, we apply sophisticated frameworks, including cross-quantilograms, quantile-on-quantile and TVP-VAR approaches, to analyze weekly time-series data from 1993 to 2021. Our results from the cross-quantilogram and quantile-on-quantile frameworks demonstrate that foreign assets and liabilities responded asymmetrically to the volatilities of international oil prices under the bullish and bearish states of the market over different memories. The TVP-VAR results indicate that, during the COVID-19 pandemic, the Saudi economy encountered negative net foreign assets, which occurred mainly as a significant plague of international oil prices. Our findings are robust under different estimators.

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.

Kingdom of Lesotho: 2022 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Kingdom of Lesotho

Lesotho has been simultaneously hit by the pandemic, declining transfers from the Southern African Customs Union (SACU), and the impact of the war in Ukraine. The pandemic exacerbated the impact of sluggish regional performance, climate shocks, and longstanding structural issues such as regulation, governance, political stability, financial inclusion, and diversification. Public expenditure has continued to increase, such that the decline in external transfers precipitated significant financing pressures and growing domestic arrears. With limited inflows to the private sector, the resulting public sector-driven external imbalances have continued to put pressure on international reserves needed to maintain the exchange rate peg.