Exchange Rate Target Research Articles

Made in Frankfurt? The Monetary Policy of the Swiss National Bank Since 1973

The paper investigates the monetary policy of the Swiss National Bank (SNB) in the post-Bretton Woods era, shedding light on the dynamics between the SNB and the Bundesbank and its successor, the European Central Bank, respectively. Our econometric analysis shows a high degree of synchronisation between the SNB’s interest rate changes and the decisions made in Frankfurt. The results also suggest a strong tendency toward direct exchange rate targeting before 1999, which coincides with a period of lower demand shock synchronization. This finding is supported by our analysis of the minutes of the Governing Board of the SNB for the period between 1982 and 1993. The discussions and decisions of the board show that Swiss monetary policy was largely guided by policy rate changes of the Bundesbank. The SNB routinely set the policy rate below the policy rate of the Bundesbank to enforce an implicit exchange rate target.

Commodity price shocks and monetary policies in commodity exporting African countries - A DSGE analysis

The study investigates alternative monetary policy rules in commodity-exporting African countries, by formulating, estimating and simulating a DSGE model for 5 African countries. We apply the Bayesian technique for our estimation and utilize impulse response functions to evaluate alternative monetary policy rules to commodity price shocks. Our results show that commodity price shocks influence business cycle fluctuations in African countries, whereas the results from alternative monetary policy rules are mixed. The findings show that nominal GDP targeting (NGDPT) is the best policy rule to minimize output volatility and price variations against positive commodity price shocks. However, if the objective is to minimize the effects of positive commodity price shocks on the exchange rate, the inflation targeting (IT) is the best policy rule. Further, the findings shows that IT and NGDPT are the best policy rules to stabilize output and prices against negative commodity price shocks while exchange rate targeting (ERT) is the best policy rule to stabilize exchange rate against negative commodity price shocks.

МЕТОДИ АНАЛІЗУ ЧАСОВИХ РЯДІВ В КОНТЕКСТІ ПРОГНОЗУВАННЯ ВАЛЮТНОГО КУРСУ

The proposed article is devoted to forecasting the exchange rate using time series analysis methods. This study was conducted in 2 stages. At the first stage, the theoretical basis for forecasting the exchange rate based on the views of scientists of the post-Keynesian economic school was considered. Representatives of this school developed the Quarterly Projection Model, which is used for small open economies with a floating exchange rate and inflation targeting. In the Quarterly Projection Model, the factors affecting the formation of the exchange rate are considered. Such factors are GDP growth, the state of the balance of payments, NBU FX interventions, and the inflation rate. We separately investigated the impact of these factors on the exchange rate of the USD/UAH currency pair. For example, changes in GDP can directly affect the relative value of the hryvnia. The Key Policy Rate is a key instrument of the NBU's monetary policy. An increase in the Key Policy Rate can strengthen the hryvnia, while its decrease can lead to its weakening. Another factor affecting the exchange rate is the current account of the balance of payments. A small imbalance of this indicator (2–5% of GDP) is considered a standard phenomenon for many countries. An excessive current account deficit increases the risk of devaluation of the national currency. High inflation forces hryvnia holders to abandon it and switch to other liquid means of preserving real wealth, such as foreign currency. Therefore, a rather strong, rapid and constant increase in prices becomes the reason for a significant increase in the exchange rate. It is worth noting that the influence of these indicators occurs with a significant time lag. We used the Granger causality test to empirically analyze the causal relationships between the exchange rate and influencing factors. Empirical analysis has shown that the volume of NBU interventions, the balance of payments and the Key Policy Rate are significant and influential factors in the formation of the exchange rate in Ukraine. At the second stage, exchange rate forecasting was carried out using the vector autoregression (VAR) model. The application of the VAR model made it possible to investigate the complex interrelationships between economic indicators. Also, this model made it possible to take into account time lags and exogenous variables. The obtained results indicate the high adequacy of the vector autoregression (VAR) model in forecasting the exchange rate in the short- and medium-term planning periods.

Monetary policy in practice: do central banks respond to movements in exchange rate and credit growth?

PurposeThis study examines the importance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand. To this end, the authors construct a small open economy New Keynesian dynamic stochastic general equilibrium (DSGE) model. The model encompasses several essential characteristics, including incomplete financial markets, incomplete exchange rate pass-through, deviations from the law of one price and a banking sector. The authors consider generalized Taylor rules, in which policymakers adjust policy rates in response to output, inflation, credit growth and exchange rate fluctuations. The marginal likelihoods are then employed to investigate whether the central bank responds to fluctuations in the exchange rate and credit growth.Design/methodology/approach This study constructs a small open economy DSGE model and then estimates the model using Bayesian methods.Findings The authors demonstrate that the monetary authority does target exchange rates, whereas there is no evidence in favor of incorporating credit growth into the policy rules. These findings survive various robustness checks. Furthermore, the authors demonstrate that domestic shocks contribute significantly to domestic business cycles. Although the terms of trade shock plays a minor role in business cycles, it explains the most significant proportion of exchange rate fluctuations, followed by the country risk premium shock.Originality/value This study is the first attempt at exploring the relevance of exchange rate and credit growth fluctuations when designing monetary policy in Thailand.

Overview of the foreign exchange market of Ukraine in the conditions of martial law

The paper examines the peculiarities of the functioning of the currency market of Ukraine in the conditions of martial law and takes into account the aspect of economic and political components. The data of the study of the currency market of Ukraine during the war period are presented and their content is analyzed. The causes and factors influencing the formation and activity of the foreign exchange market are identified, and proposals are given for carrying out stabilization measures and minimizing currency risks in conditions of stress and uncertainty caused by the war. The main elements of the NBU's regulatory easing policy on the currency market of Ukraine in wartime conditions are outlined. One of the first steps taken by the National Bank of Ukraine in times of macroeconomic and military-political instability were the measures of strict currency regulation aimed at minimizing currency risks. In order to maintain financial stability, the NBU had to introduce strict currency restrictions and fix the exchange rate of the hryvnia to the US dollar. Such administrative intervention helped to balance the foreign exchange market in conditions where it would have been impossible to do so by market methods. The temporary fixation of the exchange rate, strict restrictions on currency transactions, restrictions on withdrawals from currency accounts and other measures became a reliable basis for stabilizing both the currency market and the financial system of Ukraine. Of course, administrative restrictions smooth out temporary distortions in the foreign exchange market, but over time they can lead to the accumulation of imbalances, since the market mechanism of balancing the demand and supply of currency in search of exchange rate equilibrium ceases to operate, which sooner or later can lead to or to sudden major crises, or to endless stagnation. Therefore, long-term regulation of the foreign exchange market by strict administrative measures can have negative consequences. This prompted the NBU, in accordance with the new strategy of gradually abandoning the fixed exchange rate of the hryvnia, to switch to the strategy of easing currency restrictions and returning to flexible exchange rate formation and targeting. This strategy is one of the structural beacons of the memorandum with the IMF, which will determine the sequence of steps to liberalize currency restrictions and return to a more flexible exchange rate regime. If such mitigations are not made even in the conditions of a brutal war, the consequences for the country's financial system and the functioning of business can be negative.

Can one hear the shape of a target zone?

We develop an exchange rate target zone model with finite exit time and non-Gaussian tails. We show how the tails are a consequence of time-varying investor risk aversion, which generates mean-preserving spreads in the fundamental distribution. We solve explicitly for stationary and non-stationary exchange rate paths, and show how both depend continuously on the distance to the exit time and the target zone bands. This enables us to show how central bank intervention is endogenous to both the distance of the fundamental to the band and the underlying risk. We discuss how the feasibility of the target zone is shaped by the set horizon and the degree of underlying risk, and we determine a minimum time at which the required parity can be reached. We prove that increases in risk beyond a certain threshold can yield endogenous regime shifts where the “honeymoon effects” vanish and the target zone cannot be feasibly maintained. None of these results can be obtained by means of the standard Gaussian or affine models. Numerical simulations allow us to recover all the exchange rate densities established in the target zone literature. The generality of our framework has important policy implications for modern target zone arrangements.

Ukraine’s economy has yet to show signs of recovery

Significance All-out war has brought economic devastation unprecedented in both scale and depth. More than a year later, its extent is readily apparent in every major part of Ukraine’s economy. Yet it seems past the worst and to have achieved relative stability, albeit with questions whether that stability is sustainable and when more-or-less-lasting upward trends may follow. Impacts Resumed economic growth should help ease inordinate fiscal pressures and so reduce the government’s dependence on external financing. Further contraction would probably not hurt the government politically, absent a parallel relapse into full financial or currency crisis. The IMF will pester the central bank to return to a floating exchange rate and inflation targeting, unless new shocks cause destabilisation.

A Comparative Analysis of Selected Monetary Policy Indicators in Northern Macedonia and Albania in the Last Decade

This paper intends to explore and describe some of the main monetary policy indicators in the Albanian economy and Northern Macedonia. The countries under study have some general similarities as follows: both are countries with a transition economy operating in the open market economy for no more than 30 years; both countries have been part of communist regimes for a very long time; both of these countries are a potential candidate to be part of the European Union. The target exchange rate strategy is the monetary policy pursued by the Central Bank of Northern Macedonia in fixing the local currency exchange rate within the Euro to maintain a certain level or within a specific interval the exchange rate of that country. According to the economist, one of the most important reasons a country has financial stability is the efficiency of monetary policy instruments in the short and long run. In the international economic sphere, both countries under analysis are exposed to the risks of appreciation or devaluation of the exchange rate, trade barriers, and any other risk related to financial crises that may affect the region's countries.

ДИНАМІКА КУРСОВОЇ ПОЛІТИКИ НАЦІОНАЛЬНОГО БАНКУ УКРАЇНИ В УМОВАХ ВІЙНИ ТА АКТУАЛЬНА СТРАТЕГІЯ КУРСОУТВОРЕННЯ

The article is devoted to the analysis of the measures of the exchange rate policy of the National Bank of Ukraine regarding the optimal order of formation of the exchange rate, which have been taken since the beginning of the full-scale war and the justification of the reasons and feasibility of the transition to the regime of managed flexibility of the exchange rate as an actual and most optimal concept of exchange rate formation. The relevance of the research is beyond doubt, because the choice of a successful strategy for the formation of currency rates using effective traditional and innovative tools will allow balancing the currency market, ensuring financial security and general economic development. The research methods used in the work are: analytical method, graphical method, methods of comparison and detailing. Basic theoretical aspects of the essence of foreign exchange policy have been highlighted, its object, subjects and key tasks have been defined. Operational actions of the National Bank of Ukraine to prevent the rapid depreciation of the national currency due to the impact of the war have been determined, the first of which was the immediate transition to a fixed exchange rate regime, with the aim of adapting to difficult conditions, avoiding panic, ensuring the stable operation of the financial system, curbing inflation and maintaining macroeconomic stability In addition to the fixed exchange rate, directive currency restrictions have been established, including: restrictions on the operation of the foreign exchange market, restrictions on the issuance of cash in the national currency, a ban on the issuance of cash in foreign currency, and others. The advantages of the fixed exchange rate policy, as a temporary stabilization tool, as well as the disadvantages of its long-term use, which put pressure on the economy and are a threat to the state’s financial system, have been analyzed. The advantages, rationality, and prerequisites for introducing the system of managed exchange rate flexibility by the National Bank of Ukraine as a transitional stage before returning to the regime of currency exchange rate formation that operated before the start of a full-scale war, namely: a floating exchange rate and inflation targeting, have been argued.

ПРАВИЛО ТЕЙЛОРА В РОССИИ В ПЕРИОД ИНФЛЯЦИОННОГО ТАРГЕТИРОВАНИЯ

Since 2014, the Bank of Russia has switched to a floating exchange rate and inflation targeting. From that moment the key interest rate, that is, the interest rate of the interbankmarket, became the main instrument of monetary policy in Russia. At the same time, the question arises: does the policy of the Bank of Russia really contribute to stabilizing inflation? In otherwords, it is important for policy makers, as well as private economic agents, to understandwhether the rate changes sufficiently to stabilize the deviation of inflation from the target. Thus, the task is reduced to the study of the monetary policy rule: the Taylor rule in Russia duringthe period of inflation targeting. Estimates of the Taylor rule allow us to see the nature of both the systematic reaction of the regulator and the discretionary one. Thus, the task of the studyis to consider the systematic anddiscretionary reaction of the Bank of Russia in response to the deviation of inflation from the target and the output gap based on the Taylor rule. The work is also motivatedby the fact that, based on the results of recent research, the basic least squares method can be used to solve the problem. So, to analyze the systematic reaction of the regulator, we evaluate the standard formulation of the Taylor rule using OLS. To analyze the role of the discretionary component, we consider monetary policy shocks as innovations of the Taylor rule. Using the local projection methodology, we estimate the impulse responses of the inflation components of consumer and industrial goods to identified monetary shocks based on the Taylorrule. The results of the assessment indicate the implementation of the Taylor rule in Russia during the period of inflation targeting. The findings indicate an active stabilizing systematic reaction of the regulator in response to the deviation of inflation from the target. Estimates of impulse responses show a decrease in the inflation components of consumer and industrialgoods in response to the restraining shock of monetary policy.

Comparative analysis of bank lending to non-financial corporations under the conditions of inflation targeting

The influence of the interest policy of the National Bank of Ukraine on the dynamics of lending to non-financial corporations during the period of using the monetary regime of fixed exchange rate and inflation targeting is considered. It has been proven, that the use of the symmetric corridor of the interest policy of the National Bank of Ukraine has a negative effect on the volume of lending to non-financial corporations, since high rates on deposit certificates of the National Bank of Ukraine create a risk-free and highly profitable instrument for the placement of bank assets, which discourages lending to the real sector of the economy. The absence of a connection between the interest rate policy and the dynamics of the consumer price index and the money supply during the period of inflation targeting is substantiated, which made it possible to prove the low level of effectiveness of the chosen monetary regime.
 The aim of the article is to study the problems of bank lending to non-financial corporations of Ukraine in the conditions of inflation targeting and to develop proposals for its stimulation, taking into account foreign experience.
 Methods. The methodological basis of the work is the dialectical method of cognition, the position of the theory of monetary policy and credit. The work uses methods of economic and mathematical statistics and methods of correlation analysis to analyze the features of lending to non-financial corporations and the impact of inflation targeting on the dynamics of bank lending; generalization methods for formulating research conclusions.
 Results. The monetary regime of inflation targeting is quite often recommended by the International Monetary Fund for implementation in countries with emerging markets as a basic set of central bank tools for regulating inflation and ensuring price stability. However, in conditions of import dependence of the national economies of countries with emerging markets, in addition to changes in the money supply and credit activity of banks, the dynamics of export-import operations and the volume of official reserve assets, which determine the level of the exchange rate, have a decisive influence on the dynamics of the consumer price index, and it, in turn, determines the level of prices for imported goods and services. Neglecting the non-monetary factors of supply inflation during the implementation of the interest policy leads to the limitation of bank lending to non-financial corporations, which in turn reduces the ability of enterprises to increase capital investments at the expense of bank loans, as well as to develop domestic production with high added value and to implement the policy of import substitution. Therefore, for this purpose, it is necessary to use the asymmetric corridor of the central bank's interest policy and stimulate targeted bank lending to non-financial corporations.

Globalization of Economics and Politics of Antiinflation

 We can conclude that, in understanding of the essence of inflation, preference must be given to the conception according to which the inflation is the violation of the money turnover law, the violation that shows itself in the surplus of money stock compared to its real demand, or in the exchange depreciation followed by price increases without enriching the production quality. Among various monetary and non-monetary factors causing the inflation, the main ones are the growth of demand and the growth of costs (of shipping). In fact, mostly, the monetary and non-monetary factors of the price increases act simultaneously in economy. For the moment, there is no any perfect classification of inflation types in the economic literature. The expanded scheme of classification given in the paper is approximative and needs to be supplemented by inflation types which appear during the integration processes in the world. The low efficiency of the monetary model of anti-inflation regulation, applied in most of the countries in the world, made it necessary to use a new strategy against inflation, i.e. inflation targeting. It appeared as an intersection of new classical and new Keynesian theories, as a reaction to the weakening of results of monetary aggregates and exchange rate targeting.

Analysis of Capital Account of India's Balance of Payment from 2010 to 2020

The management of the capital account in India's balance of payments has become increasingly important in recent years as the economy has become more integrated into the global financial system. Systematic capital account studies have been lacking, and the current study is an attempt in that direction. Using annual data from 1970-71 to 1998-99, a moderate-sized simultaneous equation model containing significant constituents of the capital account as well as other macroeconomic sectors is estimated. The model is then used to run multiple counter-factual simulations, encompassing various scenarios. Changes in global income and non-interest domestic government spending are the two key factors influencing the Indian capital account. Monetary policies like the CRR or increases in bank rates appear to have modest implications for the capital account, as does a proactive strategy of real exchange-rate targeting. During 2011-12, the BOP's current account began to spread to alarming levels, reaching US $ 78155 million, with a 4.2 percent ratio to GDP. India's merchandise trade was also expanded, and its contribution to GDP climbed to 10.3 percent. Again, India's Bop position was unfavorable during 2011-12 and 2012-13 due to the dangerous level of increase in CAD and merchandise trade balance; during 2011-12, the Bop stood at US $ 78155 million and the ratio to GDP was 4.2; in 2012-13, a small surplus of US $ 3826 million was recorded in India's Balance of Payments position, but the merchandise trade deficit increased to 10.7 percent of GDP. In 2014-15, India's BOP position increased over the previous year..

Institutional aspects of monetary policy formation: russian and foreign practice

In the article, the authors consider the issues of monetary policy as one of the main components of the economic policy of the state. A key role in the formation of monetary policy belongs to Central banks, which focus their activities on ensuring price or monetary stability, stability of the purchasing power of the national currency. The authors analyze the intermediate targets of monetary policy and its regimes carried out by economically developed countries of the world: monetary targeting, exchange rate targeting, inflation targeting or inflation targeting. An assessment is given of the Central Bank of the Russian Federation inflation targeting policy, which uses interest rate policy as the main instrument of monetary regulation, as one of the main channels of monetary policy impact on the economy, namely, changing the conditions for financing the real sector of the economy through the financial market.

ANALISIS MEKANISME TRANSMISI KEBIJAKAN MONETER JALUR NILAI TUKAR DENGAN PENDEKATAN VECM PERIODE 2005:1-2012:12

This thesis discusses about analysis of transmission mechanism of monetary policy through exchange rate channel in Indonesia, during the period 2005:1 - 2012:12. By using variables such as PUAB Interest Rate, Exchange Rate, Total Export, National Income and Price lndex. The method's try to used in this thesis is a method of Vector Error Correction Models (VECM). This research aims to know the effectiveness of transmission mechanism of monetary policy through exchange rate channel within respect to see the influence of the operational targets (PUAB Interest Rate) to the intermediary target (Exchange Rate), as well as the final goals of monetary target (national income and price level). 
 The results of this research show the transmission mechanism of monetary policy through exchange rate channel path deserves to be researched further, it is based on the significant value of the t-test, f-test, and Adj R2. Meanwhile, the results of the analysis of the "Impulse Response" found that the influence of shock caused by PUAB Interest Rate will cause the depreciation of Exchange Rate and also increasing of total export, we can visible to see the direct mechanism from Interest Rate to Exchange Rate (monetary sector) and after that transmitted to the real sector through the Total Export. As seen from the analysis of Variance Decomposition can be stated that during the period 2005:1-2012:12, the National Income variance contribution donated by Total Export and Exchange Rate, While Price Level variance contribution rate donated by Exchange Rate and PUAB Interest Rate

Financial stability and monetary policy reaction: Evidence from the GCC countries

This paper investigates the interaction between monetary policy and financial stability in the Gulf Cooperation Council (hereafter GCC) countries by introducing a new composite financial stability index to monitor the financial vulnerabilities and crisis periods. To this end, the study estimated monetary policy reaction functions for each GCC country (namely, Bahrain, Kuwait, Saudi Arabia, and the United Arab Emirates) using the Nonlinear Autoregressive Distributed Lag Model (NARDL) over the period from 2006-Q4 to 2020-Q2. Empirical findings indicate that monetary authorities' response to the deviation of inflation from their target level, output gap, or exchange rate movement differ in magnitude, sign, and significance across the GCC countries. The results further explain that monetary authorities react significantly to negative or positive shocks to financial stability, but they react differently in the short or long term. Overall, an augmented Taylor rule including financial stability as an additional monetary policy target is more appropriate for the GCC countries.

Market expectation management and renminbi exchange rate policy under depreciation pressure

ABSTRACT Motivated by the capital outflow episode after the 8/11 renminbi exchange rate reform, we establish formal models to study renminbi exchange rate policy under depreciation pressure with a focus on its effect on market expectations. In an economy where capital controls are imposed, a central bank aims both to discourage speculative capital outflows and to reduce exchange rate misalignment. We find that (i) both capital controls and speculators’ uncertainty about the central bank’s exchange rate target can effectively discourage capital outflows; (ii) Any action taken by the central bank will send a signal to speculators about the central bank’s exchange rate target, causing a change in speculators’ expectations and subsequently in capital flows. This explains large capital outflows triggered by the 8/11 reform. A key takeaway is that exchange rate policy should take into account its effect on market expectations to avoid unnecessary exchange rate and capital flow volatility.

Managing macroeconomic fluctuations with flexible exchange rate targeting

We show that a monetary policy rule that uses the exchange rate to stabilize the economy can outperform a Taylor rule in managing macroeconomics fluctuations and in achieving higher welfare. The differences between the rules are driven by: (i) the paths of the nominal exchange rate and the interest rate under each rule and (ii) external habits in consumption, which leads to deviations from uncovered interest parity. These differences are larger in economies, which are very open, which are more exposed to foreign shocks, or in which domestic and foreign goods are highly substitutable.

Impact of Exchange Rate Threshold Level on Stock Market Performance-Evidence from Ghana

Exchange rate plays a vital role in an economy and the purpose of this study is to investigate the impact of exchange rate threshold level on the capital market performance. The study employed a Threshold Autoregressive model introduced by Tong (1978) and Hansen (1996). The study used secondary quarter-time series data for thirty-years from 1990 to 2019. The capital market performance was measured by the value of shares traded; market turnover; market capitalization and all-shares index. However, the results revealed the following estimated threshold level of exchange rate for each performance indicator: 7.94%; 25.33%; 25.33% and 7.80% respectively. In all, the threshold level of the exchange rate estimated was 8 and 25 per cent. The findings suggest that low exchange rate is performance-enhancing. In addition, the exchange rate above the threshold level is detrimental to the capital market performance. The findings of this investigation might be helpful to the government of Ghana and policymakers as they settle on an exchange rate target to adopt to avoid the detrimental effects of high exchange rate while obtaining the growth benefits of the low exchange rate. It has indicated that the exchange rate impacts the economy more than inflation in the Sub Saharan Africa but, not much works in the subject area in Sub Saharan Africa. Therefore, I recommend that more threshold studies have to be carried out on the exchange rate in the other sectors of the economy to ascertain its impact on the economy.

Deindustrialization, economic complexity and exchange rate overvaluation: the case of Brazil (1998-2017)

We analyze the determinants of the deindustrialization of the Brazilian economy in the period between 1998 and 2017. This is a typical example of ‘premature deindustrialization’ in the sense that the major reason for the fall in the manufacturing share has not been the increase in per-capita income but rather real exchange rate overvaluation. In the Brazilian case, real exchange rate overvaluation results both from an appreciation of the real effective exchange rate, and an increase in the equilibrium value of the real exchange rate, the “industrial equilibrium exchange rate” of the new developmentalist literature. The elimination of the real exchange rate overvaluation requires not only the adoption of a macroeconomic policy regime in which some kind of real exchange rate targeting is adopted, but also industrial policies designed for increasing the economic complexity of the Brazilian economy and, hence, to reduce the equilibrium value of the real exchange rate. JEL codes : O11, O14, O24