Exchange Rate Regime Research Articles

Explaining Monetary Spillovers: The Matrix Reloaded

AbstractThis paper relies on a high‐frequency identification approach to provide new insights into monetary policy spillovers by major central banks. Our long and broad sample (1999–2019, from four major economies to 47 advanced and emerging market economies) allows us to accurately identify the properties of spillovers and to shed light on different transmission channels. We find that spillovers by the Fed to foreign interest rates are economically large, but more surprisingly, document an intensification of spillovers by the European Central Bank over time. Spillovers are more significant to bond yields in advanced economies than they are to those in emerging markets. Differentiating across key spillover channels, we find strongest support for a financial links channel, but weaker evidence for the macroeconomic links channel and foreign exchange regime channel.

Time-Varying Exchange Rate Pass-through in Eastern Europe

Using quarterly data for the 1998-2021 period, and with the application of Kalman filter estimates it is shown that the incomplete exchange rate pass-through (ERPT) is somewhat stronger for countries with a floating exchange rate regime, especially for producer prices. Since the middle of 2000s, the ERPT to consumer and producer prices for 11 Central and Eastern European (CEE) countries, as well as for the Baltic States, seems to be stable in most of the countries. With the exception of the Czech Republic, Romania, Estonia and Latvia, there is a tendency for strengthening of the ERPT to producer prices in the wake of the world financial crisis of 2008-2009.

Effect of International Commodity Price Shocks on Public Finances in Africa

This paper empirically investigates the macroeconomic responses to commodity price shocks with a focus on fiscal variables in a sample of thirty-three African commodity-dependent countries. Using the heterogeneous panel structural vector autoregressive (SVAR) approach developed by Pedroni, we find that government revenues as well as government expenditures react to commodity export prices shock. However, there is a large degree of heterogeneity across countries. Following country characteristics, we find that the response of fiscal variables is higher for countries dependent on extractive commodities than those dependent on agricultural ones. We also highlight the benefits of flexible exchange rate regimes for accommodating external shocks and ensuring macroeconomic stability, which in turn is beneficial to government revenue mobilization. Our results suggest that the African government should seize commodities as an opportunity and increase their efforts in revenue mobilization during price booms and make a productive investment to isolate their finances from commodity price collapses.

Bank‐lending channel of monetary policy transmission in WAEMU: An estimated DSGE model approach

AbstractThis article examines the effectiveness of the banking‐lending channel in the transmission of monetary policy mechanisms in the West African Economic and Monetary Union. We estimated a Dynamic Stochastic General Equilibrium model with an incomplete credit market, where the financial system is based on an active banking sector and the central bank follows a fixed exchange rate regime, using quarterly data from 1985Q1 to 2020Q4. Findings reveal that, first, monetary policy induces an expansionary effect in the real economy when the banking sector loosens borrowing constraints. Second, we found that the banking sector is sensitive to the contraction of monetary policy via its effects on lending rates and deposit rates. Third, findings show that the bank‐lending channel amplifies and propagates monetary policy transmission mechanisms into the real economy. The counterfactual analysis demonstrates that the level of financial depth within the currency union enhances the efficiency of the bank‐lending channel of the monetary policy transmission mechanism. The macroeconomic outcomes and the financial implications of monetary policy via bank‐lending channels are more accentuated for the economies of the currency union with more financial depth than for those with shallow financial sector depth.

Exchange Rate Appreciations and the Distribution of Productivity: Is Importing Inputs Sustainable for Emerging Countries?

A static model is used to investigate how the exchange rate movement affect the distribution of productivity within an industry. Quantile regression is then used to empirically test the effects of RMB exchange rate appreciation on the distribution of labor productivity within industries. Based on China’s manufacturing micro-enterprise survey data from 1998 to 2007, we characterize how exchange rate changes affect the distribution of productivity through three mechanisms. We find that the exchange rate appreciation increases the dispersion of the productivity distribution and decrease the efficiency of resource allocation and aggregate productivity. The distribution of the import intensity may be the main cause for the increase in the productivity dispersion and the deterioration of the industrial resource allocation efficiency, which implies that foreign inputs improve the mean productivity of firms but decrease the resource allocation efficiency. China should tradeoff the gain in productivity and loss in allocation efficiency when it aims to implement a more elastic RMB exchange rate regime.

How Well Do Contemporary Theories Explain Floating Exchange Rate Changes in an Emerging Economy: The Case of EUR/PLN

The purpose of this paper is to investigate how well contemporary exchange rate theories explain fluctuations in exchange rates of emerging economies, before and after the Global Financial Crisis (GFC). As an example, the EUR/PLN exchange rate in 1999–2015 was selected as the currency pair that was the most liquid in the region; it had a stable exchange rate regime in the given period. The whole analysis was performed within the selected linear vector error correction (VEC) model framework. VEC models incorporate such well-known theories as purchasing power parity (PPP), the uncovered interest rate parity (UIP), the Harrod–Balassa–Samuelson (HBS) effect, the terms of trade (TOT), the net financial asset (NFA) theory and risk premium. The results indicate the greater importance of external factors—in particular, the Euro Area (EA) short-term interest rates and EA price shocks after the GFC. The main sources of EUR/PLN variability were found to be exchange rate shocks, terms of trade shocks and foreign and domestic short-term interest rate shocks, as well as foreign price shocks. These results are of particularly high importance for our own exchange rate shocks and indicate that a large part of exchange rate fluctuations in EUR/PLN still remains unexplained.

Promoting Counter-Cyclical Fiscal Policy: Fiscal Rules Versus Institutions

We explore under different exchange rate regimes how fiscal rules and institutions can reduce the procyclical stance of fiscal policy (i.e. how government spending responds to GDP fluctuations). We construct a fiscal rules index which is a composite index measuring the overall strength of fiscal rules in a country at a given time. We use it in a dynamic model with a GMM estimator, for a panel of 153 countries over the period 1993-2015. We find that under fixed exchange rate regimes, while better institutions can reduce procyclicality, rules increase it or do not affect it. This result suggests that under fixed exchange rate regimes, a focus should be put on stronger institutional quality rather than on the adoption of fiscal rules. However, under flexible exchange rate regimes, we find that institutions and rules are complementary in reducing procyclicality. Rules help reduce procyclicality and are more effective, in particular, when institutions are stronger. Our results are robust to different specifications as well as to the use of alternative variables of institutional quality.

Changing anchor of the renminbi: A Bayesian learning approach to the decade-long transition

China’s exchange rate reform, initiated in 2005, had the goal of switching from a fixed U.S. dollar (USD) peg to a floating mechanism with reference to a trade-weighted currency basket. Over a decade of gradual transition, the renminbi (RMB) has gained importance in the international monetary system and has shown higher flexibility in its dollar value. However, previous studies have demonstrated the inertia of the RMB in maintaining a de facto dollar peg, with little evidence of the up-to-date effectiveness of the official currency basket. We present a Bayesian time-varying coefficient regression on the currency peg or basket weight suitable for studying transition process. We show that the exchange rate policy reform in 2015 triggered an eventual anchor switching, driving down the dollar weight from 1 to around 0.3. Since 2016, the weight of the official basket has been double that of the USD. SVAR and TVP-VAR analysis, controlling for endogeneity, provide consistent evidence of this regime change, which has important implications for China and the global economy. • China’s exchange rate regime had a strong inertia in keeping up a de facto dollar peg. • Little is known of the role of the official currency basket in RMB value formation. • We use Bayesian learning approach to evaluate the RMB’s changing anchor process. • The “8.11” reform in 2015 triggered an eventual departure from the dollar peg. • Since 2016, the weight of the official CFETS basket has been double that of the USD.

Target2 imbalances and poverty in the eurozone

This paper aims to investigate the relationship between external imbalances and poverty in the Eurozone. The former are registered through the Target2 (T2) settlement mechanism and can be assimilated into changes in official reserves to cover the balance of payments disequilibrium in a fixed exchange rate regime. The presence of T2 discrepancies has led to differences in interest rates and increased distances in general living conditions inside the Eurozone. An empirical investigation implemented in 11 Eurozone countries reveals that T2 is negatively correlated with poverty, therefore allowing for an interpretation that approximates balance of payment crisis models. Results that appear to be robust to several control variables suggest that the policy framework of the Eurozone—in the absence of a compensatory mechanism—should be revised towards centralised fiscal instruments and anti-speculative monetary interventions.

Assessment of the volume and material container influence on juice cooling process

The quality of bottled beverages depends on the thermal process they undergo during the bottling process. The thermal history of the bottled beverage impacts the conservation of the product itself indeed. The temperature variation is related to specific aspects, such as the thermophysical properties, the heat exchange regime, and the possible simultaneous presence of more phases in the beverage itself. For instance, the behavior of the fluid inside the container might change according to the percentage of solid phases (e.g., pulp for juices). The present work addresses the cooling process on a processing line for beverage containers. This process aims to reduce the fluid temperature to preserve organoleptic characteristics and allows a stable and safe storage phase. The analysis has been carried out with a purpose-designed test bench to mimic the cooling process. Two juices with different percentages of solids (15 % and 50 %) are investigated for two container volumes (250 ml and 330 ml) and two container materials (glass and aluminum). The results show the influence of the pulp content on the cooling performance. The changes in the heat transfer performance determine different outlet temperature values and a different sensitivity to the container characteristics.

SAM1 domain of SASH1 harbors distinctive structural heterogeneity

The sterile alpha motif (SAM) domains are among the most versatile protein domains in biology, and the variety of the oligomerization states contribute to their diverse roles in many diseases. A better understanding of the structure and dynamics of various SAM domains will provide a scientific basis for drug development targeting them. Here, we used SEC-MALS, HPLC, NMR, and other biophysical techniques to characterize the structural features and dynamics of the SAM1 domain in SASH1. SASH1 is a scaffold protein belonging to the same family as SASH3. Unlike the dimerization seen in SASH3′s SAM domain, our SEC-MALS and SE-HPLC showed that SAM1 exists primarily as a less compact monomer with a minor oligomer. NMR assignment, relaxation, and exchange experiments revealed the presence of both a disordered monomer and a more structured oligomer with multiple timescale exchange regimes in solution. Mutagenesis and SE-HPLC showed that D663A/T664K substitutions in SAM1 increased its oligomerization. In sum, this study is the first to characterize a disordered structure for a SAM domain, provides additional evidence and framework for the diversity of SAM domains, and identifies a region in SAM1 as a potential starting point to further characterize the structural mechanism of oligomerization of the domain.

Exchange Rate Volatility Effect on Economic Growth under Different Exchange Rate Regimes: New Evidence from Emerging Countries Using Panel CS-ARDL Model

This paper analyzes the impact of exchange rate volatility on economic growth under various exchange rate regimes. It empirically examines this issue in 14 emerging countries from 1990 to 2020. This study has three particularities: First, we use the GARCH model to generate the conditional variance, which will be used as a proxy variable for the exchange rate volatility. Second, to address our issue, we employ the Panel CS-ARDL model, one of the most recent models for handling panel cases. Third, we apply the Dumitrescu and Hurlin Granger non-causality test to capture the potential indirect effect that exchange rate volatility can have on economic growth through the channel of its determinants. The results of our study demonstrate that exchange rate volatility costs emerging countries both directly and indirectly in terms of growth. However, by controlling our countries according to the adopted exchange rate regime, we find that the magnitude of this impact tends to be stifled in the case of countries adopting intermediate exchange rate regimes. Through their combination of rigidity and flexibility, intermediate exchange rate regimes appear to be more effective in mitigating the direct effects of exchange rate volatility on economic growth.

ЕКОНОМІЧНІ ТРАНСФОРМАЦІЇ У ПЕРІОД ВОЄННОГО СТАНУ: ТАКТИКА ЕВОЛЮЦІОНІЗМУ І МОДЕРНІЗАЦІЯ

В умовах воєнної економіки забезпечення стабільності цінової динаміки через регулювання грошової пропозиції стикається з рядом фундаментальних перешкод, які суттєво знижують ефективність традиційних монетарних інструментів. Під час війни порушуються ринкові засади функціонування економіки, монетарні трансмісійні механізми адекватно не працюють, зростає роль держави в забезпеченні функціонування товарно-грошових відносин. Це потребує перегляду макростабілізаційної ролі монетарної політики. З урахуванням зазначеного узагальнено підходи до формулювання напрямів монетарної політики під час воєнного стану, обґрунтовано релевантні рекомендації для поточних умов України з використанням теоретичних джерел, консультативних і дослідницьких матеріалів міжнародних організацій і національних макроекономічних регуляторів, а також статистичних баз даних. За результатами узагальнення теоретичних засад і світового досвіду обґрунтовано дизайн монетарного режиму воєнного періоду, який передбачає модифікацію таких аспектів, як: цільова спрямованість монетарної політики; композиція відсоткових ставок за базовими операціями центрального банку; гармонізація рішень монетарної політики з пріоритетами фіскальної політики; встановлення режиму фіксованого обмінного курсу; запровадження посиленого контролю за транскордонним рухом капіталів. Зроблено висновок, що в умовах воєнної економіки основний внесок монетарної політики в досягнення умов макроекономічної стабільності слід робити через ефективну взаємодію з урядом у напрямах забезпечення стабільного функціонування ринку державних запозичень, контрольованості руху капіталів, підтримки створення нових робочих місць і осередків генерування нової доданої вартості для ефективного замкнення нової грошової маси.

The impact of economic sanctions and the Covis-19 pandemic on the efficiency of the Russian foreign exchange market

The article analyzes the effectiveness of the Russian currency market using the multi-fractal analysis of fluctuations without a trend (MF-DFA) of a time series composed of daily values of the US dollar (USD) to Russian ruble (RUB) (USD/RUB) exchange rate for the period time (01/01/2013 — 04/01/2022), during which events occurred that led to serious changes in the Russian foreign exchange market.
 Calculations showed that the time series made up of the daily values of the USD/RUB exchange rate showed the least efficiency after the introduction of the fiscal rule and the coronavirus pandemic, and the highest comparative efficiency after the introduction of the freely floating exchange rate regime.

Emerging influence of the RMB on currency markets in a transpiring tri‐polar international monetary system

AbstractThe up‐and‐coming influence of the RMB on currency co‐movements is examined in this paper, in the context of a transpiring tri‐polar international monetary system advocated in prior studies. The study is empirically conducted against the backdrop of a more variable RMB exchange rate regime, which enables the integration of the RMB into the international monetary system. The influence of the RMB is found most evident in Asia, being modest in Latin America while reaching Africa. The RMB co‐moves most with the currencies of countries that have large shares in trade with China considerably. Meanwhile, a residual‐based instrumental variables model is proposed in this study purposely for dealing with issues of common factor dominance, which prevails in currency co‐movements. The emerging influence of the RMB on currency co‐movements arises at the time when a multiple‐reserve currency system is coming, and the RMB is included as the third largest currency in the SDR basket. It is shored up by the improved infrastructure, strengthened central bank cooperation and expanded networks for cross‐border RMB payments and settlements. It is concluded that the RMB has increasingly integrated into the international monetary system as one of the major players, effecting currency market movements actively alongside the US dollar and euro.

Milton Friedman and the Road to Monetarism: A Review Essay

Milton Friedman and the Road to Monetarism: A Review Essay

Monetary policy spillovers: the impact of ECB conventional and unconventional monetary policies on the Swiss stock market

ABSTRACT We examine the impact of conventional and unconventional ECB monetary policies on the Swiss stock market. Our results show that Swiss stock returns respond significantly to conventional and unconventional monetary policy measures, with conventional monetary policy having an impact only before the financial crisis. The response to unconventional policy shocks is less strong after the introduction of a minimum exchange rate regime by the Swiss National Bank (SNB). Our results are robust to simultaneity and endogeneity problems.

Do Divisia monetary aggregates help forecast exchange rates in a negative interest rate environment?

This paper contributes to the literature as the first work of its kind to examine the role and importance of Divisia monetary aggregates and concomitant User Cost Price indices as superior monetary policy forecasting tools in a negative interest rate environment. We compare the performance of Divisia monetary aggregates with traditional simple-sum aggregates in several theoretical models and in a Bayesian VAR to forecast the exchange rates between the euro, the dollar and yuan at various horizons using quarterly data. We evaluate their performance against that of a random walk using two criteria: Root Mean Square Error ratios and the Clark-West statistic. We find that, under a free-floating exchange regime, superior Divisia monetary aggregates outperform their simple sum counterparts and the benchmark random walk in a negative interest rate environment, consistently.

Do Lagged Terms Affect Exchange Rate Volatility in India? An Analysis Using ARIMA Model

Under a flexible exchange rate regime, a stable exchange rate is considered a prerequisite condition to attract capital inflows into any economy. Consistency in the exchange rate has become a key objective of the economic policy of developing nations. However, more integration of financial markets under flexible exchange rate policy led to an increase in capital mobility affecting exchange rate volatility. This paper addressed the issue of variation in the exchange rate of the Indian rupee against the US dollar under a flexible regime using monthly data spanning from January 2005 to December 2020. By employing an autoregressive integrated moving average model, the study found that volatility in the exchange rate had the potential to affect the exchange rate for a duration of almost three years, which is quite a long duration. The study’s findings suggested that apart from other factors, the sharp changes in the exchange rate should be controlled by the economy because their effect will be reflected in the next period and thus create a chain event to bring further instability to the exchange rate.

Taking Money Seriously and Putting it Back into the Feldstein-Horioka Saving-Investment Nexus

Theoretically based on national income accounting identities, the Feldstein-Horioka hypothesis downplays, if not totally ignores, the influence of monetary factors on international capital mobility. Recognizing the historical development of economics and the institutional arrangements of the exchange rate regime, this study extends the theoretical framework by integrating the balance of payments and national income accounting equations to show that domestic investment is related to not only domestic saving and international capital flows but also changes in the domestic money supply and credit creation. Panel data regression results for the original Feldstein-Horioka sample – 20 OECD countries over the years 1960 – 1974 – empirically support the theory. In contrast to the Feldstein-Horioka findings, a lower saving-investment coefficient is found, suggesting higher international capital mobility though still with some degree of home bias. Overall, this study illustrates the importance of money, history of economics and economic institutions in understanding and resolving the Feldstein-Horioka puzzle.