Floating Exchange Rate Regime Research Articles

Impact of commodity price volatility on external debt: the role of exchange rate regimes

ABSTRACT This study explores the impact of commodity price volatility on external debt accumulation under fixed, managed, and floating exchange rate regimes. We estimate dynamic panel data models for 97 countries from 1993 to 2016. Our empirical findings show that commodity price volatility increases external debt accumulation for commodity-exporting countries. This impact is three-times higher for countries with fixed exchange rate regimes compared to managed floating exchange rate regimes. Under floating exchange regimes, the effect of commodity price volatility on external debt is statistically insignificant. Our results suggest that the adoption of a floating exchange rate regime by commodity-exporting countries is critical to mitigate the effects of commodity price volatility on external debt accumulation.

In search of lost time: Examining the duration of growth-reducing sudden stops

This paper investigates the duration of sub-par growth spells associated with sudden stops in private capital flows. Our key finding is that countries featuring floating exchange rate regimes experience shorter growth-reducing sudden stops than countries with more rigid regimes. The estimated effect is large: countries with flexible exchange rate regimes are at least 50 percent more likely to exit a growth-reducing sudden stop. Our results withstand a number of robustness checks, including: controlling for banking crises and initial levels of debt, and introducing unobserved heterogeneity. The paper revisits the heated policy debate of the 1990s on fixed vs. flexible exchange rate regimes from a different angle and uncovers another important shock absorber role of flexible exchange rates.

Attenuating international financial shocks: the role of capital controls

PurposeBy reinforcing monetary policy independence, reducing international financing pressures and avoiding high-risk takings, capital controls strengthen the stability of the financial system and then reduce the volatility of capital inflows. The objective of this study was to conduct an empirical examination of this hypothesis. This topic has received strong support in the theoretical literature; however, empirical work has been quite limited, with few empirical studies that provide direct empirical support to this hypothesis.Design/methodology/approachThis study analyzed quarterly data of 32 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital control actions. Using panel analysis, Autoregressive Distributed Lag and local projections approaches.FindingsThis study found that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond counter-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. We also found that capital controls on inflows are more effective for reducing the volatility of capital inflows compared to capital controls on outflows.Originality/valueThis study contributes to the question of the effectiveness of capital controls in attenuating the effects of international shocks and reducing the volatility of capital flows. Previous studies have mostly focused on the role of macroprudential regulation; however, there is a lack of systematic effects of capital controls on monetary and exchange rate policies. To our knowledge, this is the first preliminary study to suggest that capital controls may buffer monetary and exchange rate shocks and reduce the volatility of capital inflows. This study investigates the novel notion that capital controls allow for a notable counter-cyclical response of monetary and exchange rate policies to international financial shocks.

Dollarization and Foreign Exchange Reserve: Debate on the Effectiveness of Monetary Policy in Democratic Republic of Congo

The high degree of dollarization combined with low foreign exchange reserves obstruct the management of monetary policy. The debate is launched on the effectiveness of monetary policy in this context of dollarization and meager reserves. To restore the effectiveness of monetary policy in the Democratic Republic of Congo, we advocate for fiscal discipline (that is to say, eradicate fiscal dominance) that is constant and sustainable, a guarantee of sustainable macroeconomic stability. Monetary targeting should remain the adopted strategy until proven otherwise and the choice of a floating exchange rate regime is better for good macroeconomic management in the case of the Democratic Republic of Congo. However, changes in the nominal exchange rate should be implicitly included in the implementation of monetary policy.

The global financial cycle: Notion, empirical evidence and policy implications

The article deals with the notion of the global financial cycle proposed by H. Rey and her co-authors. The driving forces of the global financial cycle are discussed along with the findings of the empirical papers testing this concept. It is shown that recognizing US monetary policy shocks as a major driver of the global financial cycle does not undermine the validity of the well-known “trilemma”: using the floating exchange rate regime still partly cushions developing and emerging market economies from external shocks. Its effect can be reinforced if macroprudential policy measures or partial restrictions on capital mobility are also applied. The review concludes by discussing possible extensions to the concept of global financial cycle.

The Impact of Floating Egyptian Pound on Agricultural Sector in Egypt

This research aimed to estimate the impact of applying flexible exchange rate on the Egyptian agriculture sector. Egypt applied floating exchange rate regime three times during the period 1991-2018. This research is based on some analytical approaches to achieve its objective such as robust regression and vector error correction model (VECM).It concluded that floating of Egyptian pound was not a good decision and it had a negative impact on Egyptian agricultural sector. The positive relationship between real Egyptian agricultural gross domestic product and real agricultural imports as well as the positive relationship between real agricultural imports and dollar exchange rate in Egypt which are not apply the economic logic, proof that the floating exchange rate regime and the macroeconomic policies applied during the study period were not effective as Egypt imports good and service with high prices due to the devaluation of Egyptian pound. So, the growth in agricultural gross domestic product was not real. The Egyptian government should pay more attention on the agricultural sector.

JAPAN’S STOCK MARKET PERFORMANCE: EVIDENCE FROM TODA-YAMAMOTO AND DOLADO-LUTKEPOHL TESTS FOR MULTIVARIATE GRANGER CAUSALITY

This paper empirically examines the causal linkages of Japan's stock market (proxied by Nikkei 225 index) performance with selected key macroeconomic fundamentals. Relatively recent Toda-Yamamoto and Dolado-Lutkepohl, multivariate Granger causality tests are implemented. Monthly time series data from September 1974 to February 2017 with a large sample size of 510 monthly observations covering the floating exchange rate regime were utilized. The study documents some interesting and some unexpected results. Bi-directional causality is evidenced only between the stock market and the industrial production. Somewhat counterintuitively, unidirectional causality runs from stock market to money supply. Furthermore, unidirectional causality flows from interest rate (bond yield) to stock market. Not so surprisingly, no causality is detected between the stock market and the general price level. This is also true for stock market and exchange rate. The above findings may aid Japanese policy makers to formulate appropriate financial, monetary and exchange rate management policies. Japan should give second thought on the efficacy of its over reliance on monetary policy with interest-rates targeting and should prepare itself for launching a pragmatic fiscal stimulus program.Keywords: Stock Market; Macroeconomics Fundamentals; Granger CausalityJEL Classifications: E44, F41, G15DOI: https://doi.org/10.32479/ijefi.11262

Impact of Capital Movements on Sterilization and Monetary Policies in Pakistan: Evidence from Multiple Specifications

This paper aims at evaluating the effectiveness of central bank of Pakistan’s sterilization policy to neutralize the impact of capital movements on domestic monetary conditions. We also estimate how the sterilization efforts are frustrated/offset by fresh capital inflows. Sterilization coefficient and offset coefficients are estimated through Monetary Policy Reaction Function and Capital Flow Equation respectively. To check robustness of our results, we apply three different econometric techniques including Vector Error Correction Method, Two Staged Least Squares and Generalized Method of Moments. Using monthly data, we use one full sample: from 1982M1 to 2018M12 and two subsamples: i.e. from 1982M1 to 2001M09 and from 2001M10 to 2018M12. The results from the two equations from all specifications show that sterilization coefficients are relatively smaller than the offset coefficients implying that it is difficult for Pakistan to sterilize the impact of foreign capital inflows on domestic money base. Larger offset coefficients, on the other hand, particularly for the second subsample, indicate that Pakistan cannot conduct independent monetary policy under the free float exchange rate regime adopted in 2000. Our results from both equations are robust to all specifications and for all samples and subsamples. Major implication of our finding is that Pakistan cannot conduct independent monetary policy in after resorting to free float exchange rate regime.

IDENTIFICATION AND ASSESSMENT OF CURRENCY CRISES IN THE REPUBLIC OF SERBIA

The aim of the paper is to identify the episodes of currency crises in the Republic of Serbia using the exchange market pressure (EMP) index. The country's resilience to currency crises prevents the collapse of the currency and the transfer of negative effects to the entire financial and real sector, so the research and assessment of the factors of currency crises is extremely important. The survey shows that the strongest strikes on the Serbian dinar were in the period of the global financial crisis in 2008, so that adjusting to shocks from abroad is crucial for the sustainability of the applied managed floating exchange rate regime. On the other hand, the stability of the national currency depends mainly on the achieved macroeconomic results, which are presented globally using the misery index.

Buffering monetary and exchange rate shocks: are capital controls effective?

ABSTRACT We demonstrate that capital controls can considerably mitigate the effects of monetary and exchange rate shocks and reduce the volatility of capital inflows to emerging countries. This study analyzed quarterly data of 32 emerging economies over the period between 2000 and 2019, and proposes two methods to identify capital control actions. Using panel analysis, Autoregressive Distributed Lag (ARDL), and local projections approaches, this study found 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. We also found that capital controls on inflows are more effective for lowering the volatility of capital inflows compared to capital controls on outflows.

The Global Financial Cycle and US monetary policy in an interconnected world

We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macro-financial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.

A new look at the oil price-exchange rate nexus: Asymmetric evidence from selected OPEC member countries

In the present article, we contribute to the literature by applying a nonlinear autoregressive distributed lag (NARDL) method by Shin et al. (2014) to assess whether oil price fluctuations asymmetrically influence real exchange rates for oil-exporting countries, specifically selected six OPEC member countries. We discover that the price of crude oil seems to have an asymmetric effect on real exchange rates for the OPEC members with a floating exchange rate regime in both the long-and short-run. However, there is no evidence of the oil price asymmetry for the OPEC members with a fixed exchange rate regime in the long- and short-run. Thus, we conclude that asymmetry impacts appear to vary depending on the different types of exchange rate regimes in each of OPEC members.

Exchange rate pass-through in the Caucasus and Central Asia

This article estimates the extent and speed of exchange rate pass-through (ERPT) in seven Caucasus and Central Asia (CCA) countries using monthly data over the January 1995–May 2020 period. The estimations are performed using the local projections method. We find that the average pass-through in the CCA is about 10% on impact and about 25% after 12 months. There is no evidence of asymmetric ERPT with respect to the size and the sign of exchange rate changes. The pass-through is broadly unchanged in fixed versus floating exchange rate regimes. There has been a downward shift in the speed of ERPT in the aftermath of the global financial crisis as CCA countries have entered a relatively low inflation environment. The pass-through estimates could be used by the CCA monetary authorities for inflation projections. The absence of nonlinearities in the pass-through with respect to the exchange rate regime suggests that transition from fixed to floating exchange rate regimes in the region is not likely to impose additional inflationary costs.

Can International Monetary Policy Coordination Improve Welfare Under Conditions of Zero Lower Bound?

I explore international monetary policy coordination and its welfare effects under a two-country macroeconomic model with the Zero Lower Bound (ZLB) on nominal interest rates in a floating exchange rate regime. Under the model, I find that monetary policy coordination does not improve total welfare for the model countries. When the ZLB exists in both countries, each country’s monetary policy becomes powerless in adjusting output gaps and the inflation rates. I also find that when the ZLB exists in one country or in all countries, each country’s outcomes in pursuing its own welfare may be better than the outcomes of monetary policy coordination.

The impacts of foreign exchange reserves intervention under the case of capital control in China

This paper studies the impacts of foreign exchange reserves intervention under the economic structures of China that feature capital controls, managed floating exchange rate and partially sterilized intervention. The central bank transacts government bonds to sterilely intervene the foreign exchange market in order to maintain a managed float regime. The results show that under the managed float regime, compared with capital account liberalization, a higher degree of capital controls may increase output and consumption and stabilize exchange rate and foreign exchange reserves in the short term. But under the case of the fixed exchange regime and capital controls, the impacts of full sterilization intervention and non-sterilization intervention are almost the same. Relative to the full floating exchange rate regime, the implementation of a managed floating exchange rate for the China’s central bank may stabilize the fluctuation of the nominal exchange rate, but it may expand the economic fluctuations, fluctuations in the scale of foreign assets held by the central bank and the scale of government bonds held the private.

Liquidity Traps in a World Economy

This paper studies a New Keynesian model of a two-country world with a zero lower bound (ZLB) constraint for nominal interest rates. A floating exchange rate regime is assumed. The presence of the ZLB generates multiple equilibria. The two countries can experience recurrent liquidity traps induced by the self-fulfilling expectation that future inflation will be low. These “expectations-driven” liquidity traps can be synchronized or unsynchronized across countries. In an expectations-driven liquidity trap, the domestic and international transmission of persistent shocks to productivity and government purchases differs markedly from shock transmission in a “fundamentals-driven” liquidity trap.

異端派におけるMMT批判の懐疑的検討 / A Skeptic Analysis of the Criticism of MMT from Heterodox Economics

日本語要約 [Japanese Abstract]： 本稿では、異端派/非主流派によるMMT批判を「中央銀行と政府の連結に関する議論」、「金融政策と金融不安定性に関する議論」、「国際経済に関する議論」の3つにカテゴライズし、それぞれを懐疑的に検討した。 中央銀行と政府の連結に関しては、MMT派は政府と中央銀行を協同的な通貨発行体として整理しているのに対し、異端派は、建前上の財政と中央銀行の制度的分離を強調している。しかしMMT派的な”統合”的な認識はあくまで理論的に通貨制度を捉えるものであり、建前上・制度上の区別をどれだけ強調しても反論にはならない。また、財務省と中央銀行の分離、その制度的制約を精緻に分析し織り込んだとしてもMMT派の示した通貨観とその含意に支障は生じない。そもそも、表券主義/租税貨幣論に基づけばむしろ通貨と財政を切り離そうとする営為こそがナンセンスとなる。 金融政策と金融不安定性に関しては、MMT派は金融政策に概して批判的であり、金利政策の不確実性、不安定性、不平等性を論難した上で、低金利ないしゼロ金利での政策金利固定を提言している。異端派/非主流派は、低金利政策それ自体が金融不安定性を惹起すると批判するが、そのことは実証的には決して明らかではなく、また金利を変動させてファイン・チューニングしようとする政策スキームは、却って金融不安定性を惹起し得る。 国際経済に関する議論に関しては、まずMMT派が政策スペースの最大化を根拠に相対的に変動相場制を支持する傾向にあることを確認した。エプシュタインは、変動相場制によっても国際金融市場の影響を抑制しきれないと批判するが、これはかなり掛け離れた論点であり、また氏が引用する文献はいずれも変動相場制がある程度隔離効果を有することを示している。別途、金融規制・資本規制も必要となりうるが、それはMMT派も明示的に留保しているポイントである。そもそも、途上国が有する問題は実物的ないし構造的なものが大きく、為替レート単体の問題には留まらない。 異端派によるMMT批判は、全体を通してMMT派の文献や主張への緻密な検討が不十分であることが少なくないように思われ、相互の建設的な対話が一層求められる。 English Abstract: This paper categorizes the criticism of MMT from Heterodox/Non-Mainstream economics into three categories: the debate on the of the central bank and the government, monetary policy and financial instability, and the international economy, and examines each of them skeptically. Concerning the of the central bank and the government, the MMTers organize the government and the central bank as cooperative issuers of money, while the heterodox economists emphasize the institutional separation of public finance and the central bank. However, the MMT view of consolidation is a theoretical view of the monetary system, and no amount of emphasis on the distinction between the two will refute it. Moreover, even if the separation of the Treasury and the central bank and their institutional constraints are carefully analyzed and incorporated, it will not hinder the MMTers' view of currency and its implications. In the first place, the attempt to separate currency from public finances is nonsense based on Chartalism/Tax-Driven Monetary View. Concerning monetary policy and financial instability, the MMTers are generally critical of monetary policy, arguing against the uncertainty, instability, and inequality of interest rate policy and proposing that policy interest rates be fixed at low or zero. Although the heterodox/non-mainstream economists criticize the low-interest rate policy itself as causing financial instability, this is not empirically evident, and the policy scheme of fine-tuning by fluctuating the interest rate can cause financial instability. As for the debate on the international economy, this paper first confirmed that MMTers tend to support the floating exchange rate system relatively based on maximizing policy space. Epstein criticizes the inability of floating exchange rate regimes to control the effects of international financial markets, but this is a rather far-fetched argument, and the studies he cites all show that floating exchange rate regimes have some isolation effects. Financial and capital controls may also be necessary, a point that the MMTers explicitly reserve. In the first place, the problems of developing countries are largely real and structural, and are not limited to exchange rate problems alone. Criticisms of MMT by the heterodox economics often seem to be based on inadequate examination of the literature and arguments of the MMTers, and more constructive dialogue between the two groups is required.

A numerical scheme and real options modelling for evaluation of a hypothetical oil field under uncertainties

This paper uses real options for evaluation of a hypothetical oil field under uncertainties. We have supposed that this oil field is located in Saudi Arabia. Our evaluation includes uncertainties of oil price and exchange rate. The analysis is done both for the fixed exchange rate regime and for the floating exchange rate regime. The proposed approach enables us to take the advantage of real option valuation to overcome the shortcoming of the discounted cash flow (DCF) method which neglects uncertainties. This paper uses an explicit finite difference method (FDM) to approximate the solution of the resulting equation. The numerical experiments show that the impact of the exchange rate, oil price volatility and the correlation coefficient between returns of oil price and exchange rate on the value of an oil extracting project is significant. In addition, the behaviour of the project value is studied as a function of exchange regime. [Received: May 6, 2019; Accepted: September 17, 2019]

On-Linearity between Exchange and Prices in Brazil and Implications for an Economic Development Strategy: Perspective

Among the various monetary policy transmission channels, the exchange rate stands out as one of the most important, which has been widely documented in the Brazilian economic literature in recent decades? In fact, after the change to the floating exchange rate regime and the respective introduction of the Inflation Targeting Regime (RMI) in Brazil in mid-1999, the exchange rate showed considerable variability, reaching more than R $ 4.00, as in 2002 and 2015, for example, or even close to R$ 1.50, as occurred in the years 2007 and 2011. In response to domestic events with emphasis on changes in the basic interest rate in compliance inflation targets either due to external shocks, changing perceptions about the direction of the economy generally implied greater or lesser willingness for foreign capital to enter, especially in the short term, contributing to the volatility of this fundamental price of the Brazilian economy.

A numerical scheme and real options modelling for evaluation of a hypothetical oil field under uncertainties

This paper uses real options for evaluation of a hypothetical oil field under uncertainties. We have supposed that this oil field is located in Saudi Arabia. Our evaluation includes uncertainties of oil price and exchange rate. The analysis is done both for the fixed exchange rate regime and for the floating exchange rate regime. The proposed approach enables us to take the advantage of real option valuation to overcome the shortcoming of the discounted cash flow (DCF) method which neglects uncertainties. This paper uses an explicit finite difference method (FDM) to approximate the solution of the resulting equation. The numerical experiments show that the impact of the exchange rate, oil price volatility and the correlation coefficient between returns of oil price and exchange rate on the value of an oil extracting project is significant. In addition, the behaviour of the project value is studied as a function of exchange regime. [Received: May 6, 2019; Accepted: September 17, 2019]