Exchange Rate Regime Research Articles

Improving Macroeconomic Management: Experiences and Lessons

The relationship between growth and macroeconomic stability is a wellestablished phenomenon. Long-term growth requires a higher level of investment and a stable economic environment contributes in promoting saving and investment. Good macroeconomic policies help attract foreign saving. Sound fiscal and monetary policies create a conducive climate for private investment and economic growth. So, the policymakers need to redress the problems of domestic and external financial imbalances by designing and implementing an appropriate mix of policies for achieving higher growth, lower price uncertainty, reduced external imbalances, and other macroeconomic vulnerabilities. So, the important issues facing the policymakers are designing sound exchange rate arrangement, making current account sustainable, and promoting financial and macroeconomic stability. In order to promote sound macroeconomic environment for attaining sustained economic growth, there is a need to pursue more flexible exchange rate regime and make progress toward adopting inflation targeting in addition to improving the financial sector soundness, strength and stability.

Democratic facades, authoritarian penchants: post-communist monetary restructuring in the Baltic states

ABSTRACT This paper argues that the paths taken by Estonia and Latvia in their departure from the rouble zone are illustrative of authoritarian neoliberal governance. By challenging the widely assumed simultaneity of ‘democratic’ and ‘market’ revolutions, it critiques institutionalist literature on Baltic exchange-rate regimes and sheds light on the various methods employed to curtail democratic political discourse and participation. The paper delves into the origins of the Baltic neoliberal historical blocs and identifies the social forces that influenced the development of monetary reform initiatives. It then explores the construction of exchange-rate systems through the lens of power struggles within the state bureaucracy, as well as the restructuring of state apparatuses to limit public oversight of monetary policy formulation and implementation. Finally, the paper demonstrates how Baltic currency boards effectively facilitated the establishment of externally-oriented capital accumulation regimes.

Determinants of economic resilience response in sub-Saharan Africa to a common exogenous shock: roles of demographic differences, exchange rate regimes and institutional quality

Determinants of economic resilience response in sub-Saharan Africa to a common exogenous shock: roles of demographic differences, exchange rate regimes and institutional quality

The “real” exchange rate regime in China since 2015′s exchange rate reform

Moving away from a fixed exchange rate in 2005, China has gradually enlarged the band of fluctuations of Renminbi (RMB) and implemented various reforms on its central parity to have a more flexible exchange rate regime. This paper studies the nature of the exchange rate regime in China since the exchange regime reform of August 2015. Relying on the self-exciting threshold autoregressive (SETAR) model, it identifies endogenously the band of inaction beyond which the People's bank of China (China's central bank) starts to intervene in the foreign exchange market to restrict further fluctuations. Based on the comparison of the estimated threshold with the official band, this paper shows that the RMB/USD exchange rate followed an intermediate regime similar to the crawling band but with only one single threshold of intervention which is much lower than the upper boundary of the announced band.

Role of the choice of exchange rate regime on real exchange rate misalignments in South Sahara African countries

Role of the choice of exchange rate regime on real exchange rate misalignments in South Sahara African countries

International reserves, economic crisis and monetary autonomy in Asia: a panel data analysis

ABSTRACT A country cannot simultaneously have an independent monetary policy, fixed exchange rate and freely mobile capital. This paper uses data from 10 Asian economies in recent years to investigate the macroeconomic trilemma. It makes special reference to the role of exchange rate regimes, capital controls, economic crisis, and international reserve holdings to analyse how interest rate changes in the centre country affect peripheral countries’ interest rates. The main findings support the existence of a macroeconomic trilemma. Moreover, we find that international reserves help to provide monetary autonomy with a buffer even under a fixed exchange rate and free capital mobility regime.

Vulnerability of Food Security in the Presence of Deteriorating Exchange Rate Regime in Pakistan

This study aims to investigate the relationship between Food Security and Exchange Rate in Pakistan. The Augmented Dicky Fuller and Zivot Andrew tests of stationarity and the ARDL approach to cointegration have been used. The Gregory Hansen test of cointegration is applied to confirm the ARDL Bounds Test outcomes in the presence of Structural Breaks in the series. In Pakistan, the Exchange Rate has a significant deleterious influence on Food Security in the long run. For GDP growth, Arable Land and Agriculture Value Added, there is a significant positive long run association with Food Security. But, only Arable Land has a short run significant positive impact on food security in Pakistan. Therefore, amassed Arable Land is worthy for improving the food security situation both in the short and long runs. The flagging exchange rate in Pakistan is not advantageous for food security, as the country is a net importer.

Spillover effects of RMB exchange rate among RCEP member countries: Empirical evidence from time-frequency domain approach.

This study employs time-frequency domain approach to investigate the spillover effects of renminbi (RMB) exchange rate among the Regional Comprehensive Economic Partnership (RCEP) member countries. Utilizing daily data spanning from August 2010 to August 2022, we find that currencies in the RCEP region demonstrate significant interaction, which is primarily driven by short-term spillover, and ascend in response to major economic and political events. With respect to the influence of RMB, it displays frequency bands heterogeneity. Specifically, RMB tends to be a net receiver in the short term, but it primarily functions as a net transmitter in the long term. Notably, our analysis of time-varying spillover effects indicates that both domestic exchange rate regime reforms and external political and economic shocks amplify the net spillover effects of the RMB, which may be reflected in short-term connectedness or captured by long-term connectedness.

Capital flow volatility regimes and monetary policy dilemma: Evidence from New Zealand

Mundell–Fleming’s trilemma underlines tradeoffs among three things: stable exchange rates, independent monetary policy, and free capital mobility. Rey (2015) finds that the global financial cycle has transformed the “trilemma” into a “dilemma” that constrains monetary policy independence, regardless of the exchange rate regime. Complementary to the existing literature on this framework, we concentrate on the importance of the volatility regimes of capital flows. We estimate a structural Bayesian threshold vector autoregression (TVAR) on New Zealand quarterly data from 1997:I to 2020:IV. Having allowed for different volatility regimes, we find that the “dilemma” will always bind a small open economy like New Zealand. Not only does the amount of capital flow matter, but its volatility also causes substantial impacts. We also find that a contractionary monetary policy shock lowers capital flow volatility, but hinders real GDP growth in the high volatility regime.

Weather shocks and exchange rate flexibility

AbstractThis paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Does greater exchange rate flexibility help an economy's adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium‐term adverse growth impact of a 1°C increase in temperature under a pegged regime is about −1.4 percentage points on average, while under a flexible regime, the impact is less than one half that amount (−0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. Importantly, there is evidence of nonlinear effects, whereby greater exchange rate flexibility can be more beneficial for EMDCs with hotter climates. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers.

Studying micro to millisecond protein dynamics using simple amide 15N CEST experiments supplemented with major-state R2 and visible peak-position constraints.

Over the last decade amide 15N CEST experiments have emerged as a popular tool to study protein dynamics that involves exchange between a 'visible' major state and sparsely populated 'invisible' minor states. Although initially introduced to study exchange between states that are in slow exchange with each other (typical exchange rates of, 10 to 400s-1), they are now used to study interconversion between states on the intermediate to fast exchange timescale while still using low to moderate (5 to 350Hz) 'saturating' B1 fields. The 15N CEST experiment is very sensitive to exchange as the exchange delay TEX can be quite long (~0.5s) allowing for a large number of exchange events to occur making it a very powerful tool to detect minor sates populated ([Formula: see text]) to as low as 1%. When systems are in fast exchange and the 15N CEST data has to be described using a model that contains exchange, the exchange parameters are often poorly defined because the [Formula: see text] versus [Formula: see text] and [Formula: see text] versus exchange rate ([Formula: see text]) plots can be quite flat with shallow or no minima and the analysis of such 15N CEST data can lead to wrong estimates of the exchange parameters due to the presence of 'spurious' minima. Here we show that the inclusion of experimentally derived constraints on the intrinsic transverse relaxation rates and the inclusion of visible state peak-positions during the analysis of amide 15N CEST data acquired with moderate B1 values (~50 to ~350Hz) results in convincing minima in the [Formula: see text] versus [Formula: see text] and the [Formula: see text] versus [Formula: see text] plots even when exchange occurs on the 100μs timescale. The utility of this strategy is demonstrated on the fast-folding Bacillus stearothermophilus peripheral subunit binding domain that folds with a rate constant ~104s-1. Here the analysis of 15N CEST data alone results in [Formula: see text] versus [Formula: see text] and [Formula: see text] versus [Formula: see text] plots that contain shallow minima, but the inclusion of visible-state peak positions and restraints on the intrinsic transverse relaxation rates of both states during the analysis of the 15N CEST data results in pronounced minima in the [Formula: see text] versus [Formula: see text] and [Formula: see text] versus [Formula: see text] plots and precise exchange parameters even in the fast exchange regime ([Formula: see text]~5). Using this strategy we find that the folding rate constant of PSBD is invariant (~10,500s-1) from 33.2 to 42.9°C while the unfolding rates (~70 to ~500s-1) and unfolded state populations (~0.7 to ~4.3%) increase with temperature. The results presented here show that protein dynamics occurring on the 10 to 104s-1 timescale can be studied using amide 15N CEST experiments.

Policy space index: Short-term response to a catastrophic event

What policy space does a country have for a short-term response to a catastrophic event? To quantify this space, the paper proposes a policy space index. The index combines a quantitative, albeit relatively limited and narrow, fiscal space concept with the indicators of nominal monetary space and reserve space. Each nominal policy space indicator is then adjusted for individual country’s institutional features, such as the status of its currency, income group, access to capital markets, debt distress level, and the exchange rate regime. The final policy space index is derived as a composite of the three nominal policy space indicators, each adjusted for five institutional features. This index is different from the approach to measure fiscal space at the IMF and requires more work before it can be used operationally. The proposed index allows measuring the overall policy space in each country directly in percent of GDP. By way of illustration, the paper applies the index to the Covid-19 crisis.

Switching in Exchange Rate Regime: Impacts and Exposure to Sectors in Malaysia

Switching in Exchange Rate Regime: Impacts and Exposure to Sectors in Malaysia

Exchange rate pass-through and inflation targeting regime under energy price shocks

The global surge in energy costs poses a significant obstacle for the attainment of price stability by the central banks across the world. This obstacle is further magnified for the economies that adopt an inflation-targeting framework and a flexible exchange rate regime. To overcome this challenge, our study attempts to answer whether inflation targeting can achieve price stability if an exchange rate pass-through exists, especially in the presence of energy price shocks. The study uses secondary data from twenty-one inflation-targeting economies for the period 1997-2020 and applies the non-linear autoregressive distributive lag (NARDL) model to test the hypotheses empirically, considering the possible asymmetries. The results confirm that exchange rate depreciation increases domestic price levels, while exchange rate appreciation reduces them in the long run. The study also finds that rising energy prices contribute to higher inflation in inflation-targeting economies. These findings suggest that inflation-targeting economies face a serious challenge in maintaining their core price stability goal due to exchange rate pass-through especially during energy price shocks. The results invite authorities of IT economies to re-evaluate their policy framework that conveniently ignores exchange rate pass-through by requiring a mandatory floating exchange rate regime.

Do sovereign credit rating events affect the foreign exchange market? Evidence from a treatment effect analysis

AbstractWe estimate the effect of sovereign credit rating events on the foreign exchange market. Using entropy balancing—a treatment effect methodology that properly addresses the possible self‐selection and endogeneity biases related to rating events—we find robust evidence that a positive (negative) sovereign credit rating event significantly increases (decreases) on average exchange rates, with a larger magnitude for negative events. This effect remains significant under flexible (but not under fixed) exchange rate regimes, and displays asymmetries related to the size of the rating event: in particular, only negative large (i.e., above one notch) rating events trigger a significant response of exchange rates. Lastly, we unveil important nonlinearities related to the initial value of the rating, suggesting a possible amplification mechanism: the impact of positive (negative) rating events is stronger in absolute value if ratings are initially high (low).

The trade-off between inflation and unemployment in an ‘MMT world’: an open-economy perspective

This paper is focused on modern monetary theory’s (MMT) treatment of inflation from an open-economy perspective. It analyses how the inflation process is explained within the MMT framework and provides empirical evidence in support of this vision. However, it also makes use of a stock–flow consistent open-economy model to underline some limits of the theory when it is applied in the context of a non-US (relatively) open economy with a flexible exchange-rate regime. The model challenges the contention made by MMT-ers that measures such as the job guarantee programme can achieve full employment without facing an inflation–unemployment trade-off.

Investigating the Impact of Inflation and Other Macroeconomic Variables on Stock Returns in Nigeria

This study investigates the impact of inflation and other macroeconomic variables on the stock returns of listed firms across five sectors: In Nigeria. A GARCH model and multivariate panel analysis were used in this study. The results show that inflation negatively and significantly impacts stock returns in the short and long run on an aggregate and sectoral basis. Moreover, money supply has a negative impact on stock returns in the long run and a positive impact in the short run, while the exchange rate has a positive impact. In contrast, interest rate is inversely related to stock returns in the short-run. Therefore, the Nigerian Monetary Authority should introduce a contractionary monetary policy and a stable exchange rate regime in order to achieve moderate inflation commensurate with economic growth and development.

A VAR model for Fiscal Multipliers and the Future of Fiscal Policy in European Monetary Union

Abstract Fiscal multipliers have been a core issue for the effectiveness of fiscal policy. During the financial economic crisis of 2007–8 there has been a revival of interest in re-estimating the size of the multipliers. Empirical literature showed that fiscal multipliers are dependent either on structural characteristics of the economy (exchange rate regime, openness, etc.), or on business cycles or on fiscal characteristics (level of debt, the choice between expenditures and taxes, etc.) of the economies. The aim of this paper is to contribute to this discussion by developing a VAR model to compute the effects of fiscal policy to output for the 19 member states of EMU for the period 2002-2019. Controlling for size of the countries, level of Debt to GDP ratio and openness. Based on these findings we will discuss the difficulties of fiscal consolidation in EMU economies. We argue that EMU is facing a deadlock, the necessity of fiscal consolidation on the one hand and the unavoidable risk of uneven results of fiscal contraction in the member states due to different size of multipliers on the other hand. The only alternative for EMU is to take a step forward towards a fiscal union. In this case fiscal policy should be balance different political priorities and preferences and at the same time be timely and effective. JEL classification numbers: F35, O53. Keywords: Fiscal policy, European Monetary Union, debt, Fiscal cooperation, Fiscal multipliers.

A VAR model for Fiscal Multipliers and the Future of Fiscal Policy in European Monetary Union

Abstract Fiscal multipliers have been a core issue for the effectiveness of fiscal policy. During the financial economic crisis of 2007–8 there has been a revival of interest in re-estimating the size of the multipliers. Empirical literature showed that fiscal multipliers are dependent either on structural characteristics of the economy (exchange rate regime, openness, etc.), or on business cycles or on fiscal characteristics (level of debt, the choice between expenditures and taxes, etc.) of the economies. The aim of this paper is to contribute to this discussion by developing a VAR model to compute the effects of fiscal policy to output for the 19 member states of EMU for the period 2002-2019. Controlling for size of the countries, level of Debt to GDP ratio and openness. Based on these findings we will discuss the difficulties of fiscal consolidation in EMU economies. We argue that EMU is facing a deadlock, the necessity of fiscal consolidation on the one hand and the unavoidable risk of uneven results of fiscal contraction in the member states due to different size of multipliers on the other hand. The only alternative for EMU is to take a step forward towards a fiscal union. In this case fiscal policy should be balance different political priorities and preferences and at the same time be timely and effective. JEL classification numbers: F35, O53. Keywords: Fiscal policy, European Monetary Union, debt, Fiscal cooperation, Fiscal multipliers.

Constraints on currency market movements – Implications for the RMB exchange rate regime

AbstractThis paper reveals the inherent characteristics behind the statistical phenomena of exchange rate interactions and co‐movements, corroborated empirically by exploring a range of currencies with varied degrees of flexibility. It then studies purposely the historical evolution and development prospects of the RMB exchange rate regime. The RMB exchange rate behaviour and statistical patterns are contrasted with the freely floating currencies in this context. Taking up alternative policy positions, the expected developments in RMB characteristics are deliberated, projecting a trajectory for further RMB regime reforms. How the RMB would fulfil the significant role on the global currency market as signified by its position in the SDR basket is contemplated, beyond a conventional policy shift and under the paradigm that the global currency market tends to be tri‐polar.