Exchange Rate Shocks Research Articles

SENSITIVITY OF MACROECONOMIC VARIABLES TO EXCHANGE RATE SHOCK IN NIGERIA AND SOUTH AFRICA: A STRUCTURAL VECTOR AUTO REGRESSION APPROACH

This study investigates the sensitivity of macroeconomic variables to exchange rate shocks in Nigeria and South Africa between 1982 and 2018. Specifically, the study investigated the response of Foreign Direct Investment (FDI), Gross Domestic Product growth rate (GDPGR), Import rate (IMPORTR), Export rate (EXPORTR) and Inflation rate (INFR) to exchange rate shock in these Countries. The data used for analysis is secondary by nature and was obtained from the World Development Bank Indicators. The estimation technique employed was structural Vector autoregression (SVAR), impulse response function (IRF), and variance decomposition function (VDF). The Structural Var result revealed that exchange rate shock had negative effect on FDI in the countries but insignificant. The result on GDPGR revealed that the effect is only positive in South Africa but insignificant in both economies. For IMPORTR and EXPORTR, the effect is positive in all the zones but significant only in Nigeria. For INFR, the effect is significantly positive in South Africa at 5% significant level but insignificantly negative in Nigeria. Impulse response result revealed that in Nigeria and South Africa, all the variables were negatively sensitive to exchange rate shock but temporal except INFR that was positive and permanent in South Africa. However, the variance decomposition function for the zones revealed that apart from own shock, exchange rate shock had relatively high contributions to variations in IMPORTR, EXPORTR, and INFR in Nigeria. Also, in South Africa, exchange rate shock contributed the largest variations in EXPORTR and INFR. Based on the findings, this study concludes that the macroeconomic variables of the countries are sensitive to exchange rate shock more in the short run but undecided in the long run. Moreover, the permanent response of INFR to exchange rate shock in South Africa calls for serious attention by the regulatory authorities in this economy. Therefore, this study recommends that conscientious effort be made by policy makers in ensuring exchange rate management in the zones for better performance of the macroeconomic variables.
 
 JEL: F31, F41, N1, N10, N17
 
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Exchange Rate Pass-Through and Historical Decomposition of Inflation in Turkiye

The main purpose of this paper is to examine the effects of macroeconomic shocks in particular exchange rate shocks on Consumer Price Index (CPI) and 12 main subgroups of CPI. Our empirical model is a seven variable Vector Autoregressive (VAR) model, incorporating pricing along a distribution chain proposed by McCarthy (2007). The results of historical decomposition and impulse-response anaysis show that contribution of exchange rate shocks and domestic producer prices shocks to headline inflation is more significant in respect to other macroeconomic shocks.

The effect of exchange rate volatility on economic growth

This study aimed to investigate the connection between exchange rate volatility and economic growth in Ghana. The study applied descriptive statistical analysis, regression analysis, and correlation analysis to analyze the data spanning from the year 2000 to 2020. The study discovered that the actual exchange rate exhibits clustering volatility, which means that a period of large (small) fluctuations in the exchange rate shock is followed by large (small) fluctuations over a longer time. Negative correlations were found between exchange rate volatility and trade openness, government expenditure, money supply, foreign direct investment (FDI), output, and domestic credit to the private sector, among others. It was determined that exogenous variables such as terms of trade, domestic money supply, government expenditure, and capital flows affected exchange rate volatility over the long term, which was consistent with the findings of other studies (Rasheed, Ishaq, & Malik, 2022; Barguellil, Ben-Salha, & Zmami, 2018). The study also indicated that exchange rate volatility had a negative effect on economic growth. In all, most of the effects are felt at the end rather than in the short run. The government should encourage the diversification of industries by encouraging industrialization to boost export as a way of offsetting our huge imports. There must be a tightening of the monetary policy through raising interest rates to keep inflation at bay.

AN ANALYSIS OF EXCHANGE RATE PASS-THROUGH AND IMPACT ON DOMESTIC INFLATION IN SRI LANKA

Continuous depreciation of the Sri Lanka Rupee and huge inflation caused by skyrocketing of fuel and food prices Sri Lanka is now experiencing an external imbalance as well as instability in the domestic economy. Policy makers are confronting enormous challenges due to these external and domestic shocks that would hinder to effective policy implementation. Therefore, an analysis of external shocks and the exchange rate pass-through has now become timely area to understand the size and the degree and its real impact on the economy. Therefore, this paper examines the effectiveness of exchange rate pass-through to import price, producer price and consumer price and impact on the inflation in Sri Lanka. For this purpose, the analysis is based on a Vector Auto Regression (VAR) approach for the period of 2010Q1 -2021Q4.The findings of this study confirms that the pass-through effect of external shocks on exchange rate and exchange rate on import price, producer price and consumer price are incomplete. The impact of change in the exchange rate on the import price shows that the one percent depreciation of Sri Lanka rupee results man increase in the import price index by 0.31 percent in the first quarter and 0.42 percent in the second quarter. The pass-through effects of exchange rate on consumer price is also incomplete across all the periods. The consumer price increases by 0.22 percent when the domestic currency depreciates by one percent. However, in the fourth quarter, it shows a negative response confirming that consumer price decrease by 0.36 percent when the nominal effective exchange rate increases by one percent. The estimated results suggest that the pass-through effects of international oil price shocks and exchange rate shocks appear to be quite ambiguous and provides puzzling results for some periods.

The Role of Expectations in the Inflation Process in a Period of Exchange Rate Shock

The Role of Expectations in the Inflation Process in a Period of Exchange Rate Shock

Current Account Dynamics: On Income and Trade Balance

We investigate the dynamics of Japan's income and trade balance between 1996:Q1 and 2019:Q4 via a structural VAR model. The two most important constituents of the current account (trade balance and income balance) and seven other macroeconomic variables are entered in our VAR model. We implement a shadow rate for the measure of monetary policy under the unconventional monetary policy regime, including a zero lower bound interest rate. By using a standard SVAR model from the literature, we find that world shocks dominate and rule the dynamics of Japan's current account. Through additional short-run zero restrictions, we also find that exogenous exchange rate shocks affect the current account.

Evaluation of Hot Money Drivers in China: A Structural VAR Approach

This paper investigates the drivers of hot money in China. It develops a model based on expectation‐variance utility theory in the theoretical analysis section. The model considers a foreign investor who faces the question of how to distribute his wealth between foreign and domestic assets. The model’s analysis suggests that economic variations, such as expected domestic currency appreciation, rise in domestic asset return, drop in foreign asset return, domestic economic growth, decrease in domestic inflation, and rise in foreign asset risk will cause foreign investors to distribute more wealth in domestic assets. Therefore, hot money flows in, and vice versa. In the empirical analysis section, the paper estimates structural VAR models using data from 2000 to 2019 in China. The impulse response functions are consistent with the theoretical predictions: when there is a positive domestic inflation shock, hot money outflows increase (inflows decline) in the current period, but the response is not significant. When there is a positive domestic growth rate shock or positive domestic asset return rate shock, hot money inflows increase (outflows decline) in the current period, and the response reaches its peak in the next period. Furthermore, when there is a positive expected exchange rate shock, hot money outflows increase (inflows decline) in the current period. Of these drivers, the expected exchange rate has the largest impact on hot money, and the domestic growth rate has the most enduring effect.

THE EFFECT OF EXCHANGE RATE UNCERTAINTY ON DOMESTIC INVESTMENT IN ETHIOPIA

There is no yet clear theoretical and empirical consensus on the relationship between exchange rate uncertainty and domestic investment. The main purpose of this study, therefore, is to examine the effect of real effective exchange rate uncertainty on domestic investment for the Ethiopian economy over the sample period 1992Q1- 2016Q1. To address this objective, Jordà’s (2005) local projection method is employed and generalized impulse response functions are generated in this study. The impulse response functions exhibit that one standard deviation shock in exchange rate uncertainty stimulates domestic investment for the Ethiopian economy. In response to one standard deviation shock in exchange rate uncertainty, domestic investment increases to around 4 percent at the second quarter. This may indicate the existence of risk neutral or insensitive domestic investors to exchange rate uncertainty in Ethiopia. As to the effects of other control variables, domestic investment also increases in response to real income and real effective exchange rate shocks. The effect of inflation shock on domestic investment is positive and statistically significant up to the eighth quarter, and negative and significant afterwards.

Assessing the Effects of Real Exchange Rate Depreciation on the Moroccan Economy: Evidence based on SVAR Approach with Sign Restrictions

The purpose of this paper is to analyze the dynamic response of a small subset of variables to exchange rate shocks by using a new method based on a set of theory-consistent sign restrictions for the purpose of identifying shocks over time (1995Q1–2019Q1) in the Moroccan economy. It is important to note that the current account presents the so-called “J-curve” phenomenon. Additionally, Morocco entered into a period of deeper and longer recession and higher inflation following the dirham’s depreciation. Following a real depreciation, the output has little effect on improving the current account balance. Our results suggest that the monetary authorities reacted immediately to exchange rate shocks by raising their interest rates to prevent the economy from falling into deflation.

Is stock market in Sub-Saharan Africa resilient to health shocks?

PurposeThis paper aims to examine the impact of health and other exogenous shocks on stock markets in Africa. Particularly, the authors examined the resilience of the major stock markets in 12 African economies during the recent global pandemic.Design/methodology/approachThis paper uses the recent panel vector autoregressive model, which enables us to capture the response of stock markets to shocks in COVID-19, commodity markets and exchange rate. For robustness, the authors also analysed the panel Granger causality test. Data was obtained for the period ranging from 2 January 2020 to 31 December 2020.FindingsThe results show that the growth in COVID-19 cases and deaths do not have any substantial impact on the stock market returns of these economies. In terms of commodity markets, the authors find that gold price has a negative contemporaneous effect on stock returns, but the effect fizzles out around the fifth day while crude oil price, on the other hand, has a significant positive simult aneous impact on stock returns and also converges around the fifth day. The authors further find that the exchange rate has a contemporaneous and nonlinear effect on stock returns and seems to be more dramatic when compared with the other variables. Overall, the results show that stock markets in Africa appear to be flexible and resilient against the COVID-19 outbreak but are affected by other exogenous shocks such as volatile commodity prices and the foreign exchange market. The effect is, however, short-lived – between one to five days.Practical implicationsFollowing the study’s findings, policies should be put in place to support financial markets by way of hedging against commodity instability and securing domestic currency financing. Policymakers are also recommended to concentrate on managing the uncertainties around their exchange rate markets and develop robust and efficient domestic financial markets to encourage local and foreign investors.Originality/valueSeveral studies have been carried out on the effects of disasters (such as the COVID-19 pandemic) on stock markets, but only a few studies have examined the resilience of stock markets to health and other exogenous shocks. This study’s attempt is not only to examine the impact of COVID-19 health shocks on stock markets but also to analyse the resilience of the sampled stock markets. The authors also analyse the resilience of stock markets to commodity markets and exchange rates shocks.

Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks

This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.

Agriculture and inflation: Expected and unexpected shocks

This study assesses the inflationary role of agriculture in Brazil using procedures that measure these effects as unanticipated shocks. We focus on the effects of unexpected price shocks to three groups of commodities of the sector, understood as supply shocks, on the unanticipated changes in the IPCA, Brazil's official inflation index. Supply-side shocks related to the energy sector, the exchange rate and the international agricultural commodity prices are also considered. The theoretical basis is the hybrid New Keynesian Phillips Curve and the econometric procedures applied to the quarterly data from 2001 to 2019 are related to the analysis of autoregressive vectors – Impulse Response Functions (IRF), Forecast Error Variance Decomposition (FEVD), and Historical Decomposition of Forecast Errors (HDFE). We use two specifications: one that assumes that changes in domestic prices implicitly reflect the effects of both international dollar prices and exchange rate shocks and other which explicitly includes these two variables together with an aggregate agricultural price. The benefit of using of the two specifications is twofold: test the robustness of analytical context and examine the external components of the Brazilian inflation. The main results are: i) expected inflation, grains and diesel prices and the exchange rate stand out in explaining the variability of IPCA forecasting errors, and shocks in the IPCA itself are also relevant; ii) although of relevant magnitude, shocks to IPCA itself dissipate quickly, while supply shocks, because they are relatively large, even with small coefficients in IRF, have important impacts on inflation; iii) shocks to international prices and exchange rate affect domestic aggregate agricultural price; and iv) unanticipated supply shocks (from agriculture, energy, and exchange rate) plus inflation expectation jointly played a disinflationary role in 2018 and 2019.

External Shocks and Inflationary Pressures in Argentina: A Post-Keynesian-Structuralist Empirical Approach

ABSTRACT We examine two external shocks that trigger inflationary pressures in Argentina. The first corresponds to a shock in international prices of agricultural commodities exported by this country. The second external shock affects the nominal exchange rate ($/U$S). Through the estimation of a quarterly VAR with directional quantiles model for the 2004–2019 period, we show how the pass-through from these external shocks to the inflation rate operates asymmetrically and mainly through increments in nominal wages. We estimate that an external shock in the international agricultural commodities prices exported by Argentina engenders a pass-through of 10 per cent, vis-à-vis a shock in the nominal exchange rate with a pass-through of 25 per cent. We explain these results highlighting the relevance of the class struggle as a key inflationary transmission mechanism, in line with Post-Keynesian-Structuralist conflicting claims models of inflation. These empirical results pose significant challenges for economic policy design, particularly pondering the adoption of measures that aim to decouple the potentially disruptive effects of these external shocks on inflationary pressures in Argentina.

Crude oil futures to manage the price risk of natural rubber: Empirical evidence from India

The trading of natural rubber derivatives in the Indian commodity exchanges was banned several times in the past. Hence, in India, the derivatives on natural rubber are not traded actively and regularly. We have examined the possibility of a forecast model and a cross hedge tool for the natural rubber price by using crude oil futures in India. Results of the Johansen cointegration test proved that there is no cointegration equation in the model; hence, there is no scope to develop long-run models or error correction models. We have developed a vector autoregressive [VAR(2)] model to forecast the rubber price, and we examined the possibility of a cross hedge for natural rubber further by using the Pearson correlation coefficient and Granger causality test. We have extended our research to a structural VAR analysis to examine the effect of crude futures and exchange rate shocks on the natural rubber price. Our results showed that there is a short-term relationship between the crude oil futures price, the exchange rates of the US dollar to the Indian rupee, the Malaysian ringgit to the Indian rupee and the Thai baht to the Indian rupee; and the natural rubber price in India. The effort of policymakers to cause the Indian rupee to appreciate against the Thai baht and Malaysian ringgit may increase the natural rubber price in India. Natural rubber traders, growers and consumers can use crude futures to hedge the price risk. The Indian Rubber Board can suggest the VAR(2) model to predict the short-run price for natural rubber.

Dominant-currency pricing and the global output spillovers from US dollar appreciation

We test for the empirical relevance of partial and asymmetric dominant-currency pricing (DCP), the hypothesis that large but not necessarily identical shares of economies’ export and import prices are sticky in US dollar. We first set up a structural three-country New Keynesian dynamic stochastic general equilibrium model which nests DCP, producer-currency pricing and local-currency pricing. Under partial and asymmetric DCP, the output spillovers from shocks that appreciate the US dollar decline with an economy's export-import US dollar pricing share differential, i.e. the difference between the share of an economy's export and import prices that are sticky in US dollar. Underlying this prediction is variation in an economy's net exports in response to US dollar appreciation that arises because the shares of export and import prices that are sticky in US dollar are different. We then provide evidence that this prediction from partial and asymmetric DCP is consistent with the data in a sample of up to 45 advanced and emerging market economies for the time period from 1995 to 2018. We moreover document that our findings are robust to considering US demand, US monetary policy and exogenous exchange rate shocks as a trigger of US dollar appreciation, zooming in on the responses of economies’ exports and imports, as well as to accounting for the role of commodity trade in US dollar invoicing.

Effectiveness of capital controls in dampening international shocks

This study is a contribution to the ongoing debate on whether capital controls are effective in buffering international shocks and reducing capital flows volatility. The author demonstrates that capital controls can considerably mitigate the effects of monetary and exchange rate shocks and reduce the volatility of capital inflows to emerging markets. This study analyses quarterly data of 28 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital controls actions. Using panel analysis, autoregressive distributed lag, and local projections approaches, this study finds that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond anti-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. The author also finds that capital controls on inflows are more effective for reducing the volatility of capital flows compared to capital controls on outflows.

VOLATILITY SPILLOVER OF INTRADAY EXCHANGE RATES ON SOME SELECTED ASEAN COUNTRIES

In this paper, we use hourly exchange rate data for selected ASEAN countries (Singapore, Indonesia, Malaysia, Thailand and the Philippines) to test the hypothesis that exchange rate own shocks dominate exchange rate volatility. We find strong evidence that own exchange rate volatility explains between 64% to 86% of their own exchange rate volatility movements. These results do not change when we include the Chinese CNY currency in the analysis. Moreover, we find that exchange rate shocks of ASEAN countries explain 36%, 24% and 23% of exchange rate volatility movements of Indonesia, Thailand, and Singapore, suggesting that for these countries are more synchronized.

The north-south divide, the euro and the world

The European north–south divide has been an issue of a long-standing debate. We employ a Global VAR model for 28 developed and developing countries to examine the interaction between the global trade imbalances and their impact within the euro-area framework. The aim is to assess the propagation mechanisms of real shocks, focusing on the interconnections among the north euro area and the south euro area. We incorporate theory-based long-run over-identifying restrictions and examine the effects of (i) non-export real output shocks, (ii) expansionary shocks and (iii) real exchange rate shocks. An expansionary policy of the north euro area and increased competitiveness in the south euro area could alleviate trade imbalances of the debtor euro area economies. From the south euro area perspective, internal devaluation decreases output but at the same time, it also reduces current account deficits. North euro area origin shocks to domestic output exert a dominant influence in the rest of the Europe and Asia.

Workforce size adjustment as a strategic response to exchange rate shocks: A strategy-tripod application to Chinese firms

How firms use workforce size adjustment as a strategic response to external shocks such as exchange-rate fluctuations is an important but not yet fully understood topic. To address the void in the literature, we apply the strategy tripod theoretical framework, which sees the external shocks as an industrial impact, the budget constraint as an institutional force, and the firm leverage as an organisational capability to examine the firms’ strategic response in terms of workforce size adjustment in the Chinese economy context. Based on longitudinal data of Chinese manufacturing firms, our analysis finds that facing exchange rate shocks, firms with hard budget constraint are more responsive in adjusting their workforce than firms with soft budget constraint. Furthermore, highly levered firms, with hard budget constraint, will adjust their workforce more aggressively than firms with less debt in their financial structure.

Does the Incomplete Exchange Rate Pass-through Exist in Sudan?

The purpose of this paper is to examine the nominal exchange rate pass-through to domestic prices in Sudan from 1978–2017. An autoregressive distributed lag (ARDL) approach to cointegration is employed. The analysis is based on impulse response functions (IRFs) and forecast error variance decompositions (FEVDs). The dynamics of the cointegrated system can be investigated via the variance decompositions and IRFs. The findings confirm that the degree of exchange rate pass-through in Sudan is incomplete, and the empirical results also show that the domestic price index is predominantly caused by foreign price in both the short and long runs, in addition to the import price index and the nominal exchange rate; the exchange rate shock has a negative effect on the domestic price. Furthermore, FEVDs analysis illustrates that the variation in domestic price is primarily determined by the import prices, while changes in the exchange rate are primarily determined by the exchange rate itself.