Exchange Rate Regime Research Articles

The effect of a currency board arrangement on subjective assessments of a country's economic performance

We present a novel approach to evaluating the effect of a monetary exchange rate regime on economic performance, focusing on countries with a currency board arrangement (CBA). This approach is designed to evaluate the impact of the regime on the perceptions and expectations of a population. We utilise seemingly unrelated regressions to analyse data from large-sample surveys conducted by the Austrian National Bank over the period 2007-2016 in ten European transition economies. The analysis indicates that the probability of the economic situation in a country being perceived as good by its citizens is lower in countries with a currency board arrangement. However, this negative effect almost disappears among respondents who do not trust their government and when there is a significant recession in the country. These findings suggest that a CBA should be maintained for its stabilising effects: 1) when the economic situation is unfavourable, although it might not be beneficial once the situation is stabilised; 2) in countries with low levels of trust in government.

Determinante deviznih rezervi i optimalni nivo deviznih rezervi u Bosni i Hercegovini

The research answered the question of what affects BH foreign exchange reserves and what is the lower limit of the optimal level of foreign exchange reserves of the Central Bank of Bosnia and Herzegovina (CBBH). We defined excess foreign exchange reserves as the difference between the balance of foreign exchange reserves and the lower limit of the optimal level of foreign exchange reserves. In most of the analyzed period, foreign exchange reserves are significantly above the lower limit of the optimal foreign exchange reserves. In 2022, the banking sector had the largest excess of foreign exchange reserves in the scenario of a floating exchange rate, without considering the degree of euroization. The excess is the lowest in the fixed exchange rate regime, in which, through the money supply, we allowed a high impact of euroization on optimal foreign exchange reserves. Even under this most conservative scenario, the excess foreign exchange reserves amount to 1.9 billion KM or about 4% of nominal GDP in 2022. Changes in BH monetary regime, enabling the CBBH to lend to residents and a possible transition to a floating exchange rate, are possible while maintaining a satisfactory level of foreign currency liquidity of the CBBH.

Globalna dominacija dolara na izmaku?

The paper points out that the relatively slow development of RMB as a reserve currency is taking place in parallel with the expansion of trade invoiced in the renminbi. It is argued that, even in the absence of financial liberalization, the renminbi could still become a global currency. Namely, the leading status in world trade creates the potential for creating demand and supply of renminbi. Additionally, in the same direction is working an increase in the number of central banks with which The People's Bank of China has agreements on swap lines for foreign exchange, as well as the accelerated development of the offshore Yuan market. An important moment will be the expected changes in the Chinese exchange rate regime, since the end of pegging RMB to a basket of currencies and the transition to an inflation-targeting regime could lead to a larger part of Asia following China that is using its currency more intensively. Additionally, although currently exclusively for domestic use, China's central bank's digital currency will eventually facilitate the international use of the renminbi. Consequently, it can be concluded that in the coming decades, the dollar will continue to play a predominant, but not, as it has been, an exclusive role in the international monetary order.

Exchange Rate Management: Implications For Trade In Nigeria

This study examines the effects of exchange rate management and its implication for trade in Nigeria. Annual data from 1981 to 2018 on Nigeria’s GDP, Global GDP, Exchange rate, Net non-oil trade, and Net commodity trade were spliced into quarterly series using the quadratic sum match method in EViews. The Markov switching model methodology was adopted to capture the impact of regime transitions on trade. The study suggests that a devaluation of the naira would lead to a further decline in net non-oil trade, suggesting that domestically produced goods are giffen in nature, (i.e., demand falls when prices fall), signaling inferior quality of non-oil exports, which therefore require value addition to compete internationally. Furthermore, the study finds that when oil exports are included in the net commodity trade, the giffen nature of Nigerian exports is concealed giving a normality to the nature of all goods exported from Nigeria. The results also show that fixed regimes are less detrimental to net trade. Though a flexible exchange rate enhances the Nigerian net position associated with the depreciation of the naira, the own income and foreign income impact on net Nigerian non-oil and total goods trade is more distortive. Policy recommendations include the adoption of a managed float exchange regime as well as the strengthening of standard agencies together with collaborations between exporters and research institutes towards improving the quality of non-oil exports.

Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan


 
 
 
 
 The exchange rate is one of the most important channels of monetary policy transmission to the real economy. However, the effectiveness of this channel depends on the extent of exchange rate flexibility, degree of international capital mobility, and inflation expectations. Like other emerging economies, Pakistan is typically characterised by weak fiscal and monetary institutions, currency substitution, liability dollarisation, and vulnerability to sudden stops of capital flows. These features compel emerging economies to follow managed exchange rate regimes by restricting the mobility of capital flow. All these factors weaken the effectiveness of the exchange rate channel of monetary policy transmission. This study estimates the effectiveness of the exchange rate channel in monetary policy transmission in Pakistan and explores the impact of exchange rate regimes on the channel’s strength. The study benefitted from the widely used structural VARs methodology and found that the exchange rate channel is less effective in transmitting monetary policy shocks to the real economy. In recent years, however, greater flexibility in the exchange rate has improved the effectiveness of this channel.
 
 
 
 

Liquidity Regulation and the Transmission of Lending Shocks Across Borders

We investigate how liquidity regulation affects the transmission of negative wholesale funding shocks from the largest OECD global banks to the lending of their foreign subsidiaries across 98 countries. Controlling for adverse solvency shocks, which we argue is very important for identification, we find that, surprisingly, liquidity regulation exacerbates the transmission of adverse wholesale shocks. These findings suggest that liquidity regulation has a destabilizing effect for the host market. The effect is driven primarily by countries with floating exchange rate regimes and less so by countries with currency boards and other exchange rate management arrangements, such as dollarization. The results from our global study provide important lessons for Bulgaria in its transition from a currency board to a euro area membership.

The Multi-horizon Exchange Rate Exposure of Consumer Products and Services Sector in Malaysia

After the abolishment of fixed exchange regime under the Bretton Woods System in 1970s, the issue of foreign exchange risk expecially among multinational corporations operating under small and open economies of Malaysia remains relevant till today. According to Abdul Wahab et al. (2017) and Adler and Dumas (1984), exchange rate exposure refers to the extent of firm's sensitivity to exchange rate fluctuations. While there has been growing interest in examining foreign exchange risk incidence under Malaysia market, however limited studies have been focusing on single sector of consumer products and services in Malaysia. Under Bursa Malaysia, the sector consists of several sub-fields including agricultural products, automotive, food and beverages, household goods, personal goods, retailers and travel and leisure services. Given the wide range of products and services, the corporations under the sector have been involved in vigorous cross-border trading activities. The consumer products and services equities become the second largest sector in Bursa Malaysia which constitues 15.89% of total stocks in main market of Bursa Malaysia in July 2021 with a 265.02 billion of total market capitalization. In terms of methodological issue, the study addresses on the bias in exchange risk pricing in previous studies. Specifically, majority of past studies assume homogeneity of exchange risk across time domains which seems to be unrealistic. Capital market contains wide range of participants with heterogenous investment holdings and expectations. To address time domain bias, the study adopts Maximal Overlap Discrete Wavelet Transformation (MODWT) in foreign exchange risk pricing to decompose a single time domain series into multiple time domains. Given this, the primary objective of the study is to examine the extent of multi-horizon foreign exchange exposure of consumer products and services sector in Malaysia from January 2000 till December 2020. Keywords: Currency Exposure, Wavalet Technique, MODWT, Malaysian Consumer Sector

Exchange Rate Risk Premium in Vietnam

This study characterises the exchange rate risk premium in the context of a small open economy with a controlled floating exchange rate regime. The empirical analysis applies the time-varying coefficients Bayesian structural vector autoregressive (TVC-BSVAR) model on data from the Vietnamese economy over a sample period from February 2012 to February 2019. The evidence shows that the risk premium varies over time, and increases with inflation and foreign direct investment capital inflows, but decreases with output growth and credit growth. The TVC-BSVAR model displayed highly accurate forecasting performance, accounting for nearly 94% of risk premium in a case study using the US dollar forward selling contract.

Exchange Rate Behaviour after Recent Float: The Experience of Pakistan

Exchange rate is a price of traded goods in the world market. To maintain the commodities competitive in the market, exchange rate should be adjusted according to the change in prices. If it is adjusted accordingly, then we say that purchasing power parity (PPP) holds in that country. However, phenomenon of PPP is completely kicked out under floating exchange rate regime in the short run [see for example, Rogoff (1999); Mark and Choi (1997); MacDonald (1999); Obstfeld and Taylor (1997); Coleman (1995); O’Connel (1998) and Michael, et al. (1997)]. Recent statement by the President of the National Bank of Pakistan, that the exchange rate and the interest rate are two faces of the same coin [Bokhari (2004)], shows that the changes in the exchange rate is strongly associated with the changes in the interest rate differential.1 It is also argued that under free float the value of currency is determined by demand and supply of foreign exchange and to control the value of currency using open market operations interest rate is used as the key monetary policy tool. Moreover, deterioration of trade balance leads to deprecation in exchange to make the exports competitive in the market and vice versa.

Exchange Rate Pass-through to Consumer Prices in Pakistan: Does Misalignment Matter?

This study investigates the impact of exchange rate changes on consumer prices (commonly known as exchange rate pass-through (ERPT)) in Pakistan for the period 1995M1 to 2009M3. The study estimates short-run and long-run ERPT in Pakistan while taking into account the existing real exchange rate misalignment (RERM). The results suggest that the ERPT to consumer price inflation in Pakistan is very low (close to zero). The impact of the previous periods’ misalignment on inflation is found significant in managed exchange rate regime. However, the overall sample misalignment does not affect inflation. The impact of foreign inflation on domestic inflation is positive and statistically significant. JEL classification: F31, F41, E31 Keywords: Pass-through, Misalignment, Inflation

Instrument of Managing Exchange Market Pressure: Money Supply or Interest Rate

Exchange market pressure (emp) reflects disequilibrium in money market. The traditional approaches used to examine the disequilibrium in money market include the monetary approach to balance of payments and monetary approach to exchange rate. Under the former approach the variation in foreign reserves helps restore the equilibrium while under the latter one the change in exchange rate does the needful.1 The idea of this study stems from the fact that under the managed float exchange rate regime, changes in foreign reserves or changes in exchange rate in isolation are not a sufficient guide to characterise the external account situation of an economy. For example, exchange rate depreciation can be partially avoided or at least delayed if the central bank injects foreign currency in the forex market by letting its foreign reserves deplete. Alternatively, central bank can build up foreign reserves by purchasing foreign currency from the market against domestic currency. Such intervention would curb the exchange rate appreciation demanded by fundamentals. Therefore, focus on either of the two, that is, movement in exchange rate or variation in foreign reserves, to the complete exclusion of the other, is bound to portray a misleading picture of the external account situation. Given the foregoing a composite variable, that incorporates changes in exchange rate as well as variation in foreign reserves, over a certain period, is needed to characterise the condition of external account. The requisite composite variable has been developed by Girton and Roper (1977) as ‘simple sum of exchange rate depreciation and variation in foreign reserves scaled by monetary base’. They refer to it as exchange market pressure (emp).

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.

Russian economy in the face of new sanctions challenges

The year 2022 was characterized by a number of significant processes and events that made it possible to reveal the stability of the Russian and world economies. Thirty years ago Russia started moving to the market that marked the beginning of radical changes and transformations of the Russian economy and laid the basis for long-term trends that we are still observing. The liberalization of prices and the subsequent introduction of a single exchange rate regime, large-scale entry into the global financial system, and the strengthening of market principles of interaction of economic agents determined the contours of further development of the Russian economy. This was followed by a real test of strength — through a period of local and global crises, and in the sanctions of 2022, this “testing” has reached its apogee. The pandemic shock was replaced by a large-scale geopolitical tension due to the events in Ukraine. Russian assets were frozen, the existing system of world economic relations was massively deformed, and the Russian economy is forced to rebuild the mechanisms and foundations of its domestic and international development. At the same time, RF has the potential for forming new points of support, and it should be used more actively.

Modelování rovnovážných odchylek měnových kurzů od parity kupní síly na datech pro 34 zemí v letech 2000-2020

We construct a simple model of exchange rates stemming from the methodology of behavioural equilibrium exchange rate (BEER) models on annual panel data for 34 countries with a floating exchange rate regime during the period 2000-2020. The basic building block of the model is the absolute version of purchasing power parity theory (the ratio of domestic and foreign price levels), further extended by other variables rooted in economic theory. A complementary interpretation of our approach could be a measurement of exchange rate deviations from purchasing power parity caused by variation in economic fundamentals. The results suggest that purchasing power parity is an appropriate reference point for exchange rate models. Furthermore, national currencies tend to be stronger against the euro with higher GDP per capita, interest rates, investment freedom, urbanization rate and terms of trade, and with lower inflation. The presented deviations of exchange rates from the model equilibrium are significantly lower than those implied by a naïve model based on purchasing power parity alone.

How do exchange rates affect the Big One? An empirical analysis of the effect of exchange rates on RCEP exports using the gravity model

The often disparate and conflicting effects of exchange rate on bilateral exports reported by previous literature necessitate a further study of the relationship between monetary and trade variables. This study contributes to the stream of literature by analyzing monetary variables such as exchange rate volatility, exchange rate misalignment, exchange rate regimes, and real effective exchange rates with bilateral aggregate exports through a sample of 15 nations comprising the Regional Comprehensive Economic Partnership (RCEP) region for the years 1996 to 2017 using Ordinary Least Squares and Poisson Pseudo-Maximum Likelihood panel fixed effects regression. Results indicate that a country’s real effective exchange rate ratio and the exchange rate volatility for countries under a floating exchange rate regime reduce aggregate exports.

Inflation and unemployment, new insights during the EMU accession

In the process of EU integration, toward the EA accession, we try to understand, how changes in exchange rate regime, attributed to the switch through the ERM-II and to the EA accession, influence the dynamic between inflation and unemployment, that is, swings on the Phillips curve coefficient. We look at a panel of EA countries, before and after their EA entry, over the last twenty years, using a recent work from McLeay and Tenreyro (2020) , to clarify the impact of losing the monetary autonomy. Accession to the Eurozone leads to a non-significant inflation/unemployment relationship. Accession to the Eurozone induces a non-significant inflation/unemployment relationship. We link this result to the fact that the small economies of the Eurozone do not have sufficient weight to influence the single monetary policy. This is corroborated by the fact that within the Eurozone, what we call the “economic leaders” maintain a significant trade-off between inflation and unemployment.

Evaluating Monetary Policy Effectiveness in North Macedonia: Evidence from a Bayesian Favar Framework

Abstract This paper has adopted a Bayesian FAVAR approach to examine the monetary transmission mechanism in North Macedonia. The model is based on a broad data set that encompasses 140 monthly time series spanning between January 2010 and January 2019. In particular, the impact of policy on bank portfolio variables, and the impact of policy on economic activity variables have been evaluated. Our findings show that monetary tightening, causes a fall in output, inflation rate, employment, bank lending, the stock of government securities held by banks, and equity prices. On the other hand, it increases short-term money market rates, lending rates, deposits, and only in the immediate aftermath of the key policy rate rise, the share of non-performing loans in the loan portfolio. The study is expected to provide useful input to monetary policy implementation in North Macedonia. The study as well enriches the literature in this domain by discussing the challenges facing monetary authorities of small open economies with fixed exchange rate regimes in understanding how their policy instrument work through the economy.

Taxa de equilíbrio da conta-corrente na Colômbia (2000-2020)

ABSTRACT Using estimations by Bresser-Pereira et al. (2021), this paper analyses the misalignment between the real exchange rate and the current account equilibrium exchange rate in Colombia in the last two decades (2000-2020). Evidence suggests that the commodity boom and bust cycle in this period is important to explain (i) the main trend of the misalignment, (ii) the deterioration of the current account in recent years and (iii) the general macroeconomic performance of the Colombian economy. A discussion about macroeconomic development and stability is also provided in the context of the Colombian financial configuration, characterized by a flexible exchange rate regime, central bank independence and inflation targeting. Ideas in this paper are consistent with key elements in the New Developmentalism Theory.

Supply shocks and monetary policy responses in emerging economies

Supply shocks bring about important dilemmas for monetary policy in emerging economies. We compute monetary policy responses to supply shocks using quarterly data and a Bayesian panel VAR for 24 emerging economies during the period 2004–2019. In this framework, we identify supply shocks as unexpected and temporary total factor productivity innovations which are orthogonal to demand related shocks. We highlight three results from this econometric exercise. First, monetary policy is, in average, procyclical in emerging economies after temporary supply shocks. Second, monetary policy is more procyclical in fixed than in flexible exchange-rate regimes. Third, monetary policy is more procyclical in economies with a higher degree of financial openness. The latter result is a central dilemma for emerging economies during supply shocks, since it implies that financial openness prevents less procyclical monetary policy reactions due to the trade-off between exchange rate and income volatility.

Does income inequality really matter for credit booms?

AbstractThis paper addresses the question whether income inequality is associated with credit booms, alongside other macroeconomic factors. We distinguish between the different types of credit booms—real estate credit booms, household credit booms, firm credit booms and credit booms that turn into crises. Furthermore, our analysis of a sample of 70 countries between 1990 and 2016 does not provide any evidence of credit booms driving income inequality. We observe that capital inflows increase the likelihood of credit boom occurrence, while countries experiencing high economic growth tend to have more credit booms. Finally, we note that credit booms are more frequent in countries with fixed exchange rate regimes.