Floating Exchange Rate Regime Research Articles

Exchange rate, external reserves and current account balance nexus in oil-dependent countries: A Toda-Yamomoto-based Panel Vector Autoregressive (PVAR) approach

The international monetary authorities have been consistently advising oil-dependent countries to change their exchange rate policy from a fixed to a floating exchange rate regime. While some of these countries including Nigeria have announced their adoption of a free-floating exchange rate system, evidence shows that the majority are suffering from “fear of floating”, hence operating an abridged exchange rate system. This study employs the Toda-Yamomoto-based Panel Vector Autoregressive (PVAR) model to use the causality approach to determine the exchange rate system that best explains the de facto exchange rate policy system operating in these countries. This is explained by the dynamic causality between exchange rates and foreign reserves. The dynamic causality between the exchange rate and current account balance also explains the potential effect of devaluation to improve the external trade balance, which implies the J-curve and Marshall Lerner condition. The results show that there is no significant causality from foreign reserves and trade balance to the exchange rate, suggesting that oil-dependent countries are more aligned to a fixed exchange rate regime than a floating exchange rate regime. We also find significant negative causality from the exchange rate to foreign reserves, while foreign reserves have a positive causal effect on the current account balance. This implies that the expected devaluation gains that may be prompting oil-dependent countries to stick to fixed exchange rate regimes are not there, as currency devaluation tends to worsen trade performance and foreign reserves rather than improve them. While oil-dependent countries are not benefiting much from a fixed exchange rate system, it is recommended that appropriate policy to boost private sector generation of foreign exchange should be put in place before the adoption of a full-fledged floating exchange rate system.

Spillover effects of multidimensional information in Fed statements on China's bond market

This paper shows significant information spillover effects of Fed statements on China's bond market. Regarding Fed monetary policy statements as external shocks, we extract both monetary policy information and narrative sentiment information from the statements, with the sentiment data measured using the text analysis method. Furthermore, it investigates spillover effects of the multidimensional Fed information on investors' trading behaviors in China's bond market, using the event study method. Our study emphasizes three key findings. First, both monetary policy and textual sentiment within Fed statements influence trading decisions of China's bond investors, generating international spillover effects. Importantly, the role of textual sentiments as an additional spillover channel of Fed statements has been overlooked in existing literature. Second, the US monetary policy information influences investors' expectations of China's short-term interest rates and their perceptions of risks associated with holding China's long-term bonds, while the Fed's negative and uncertain sentiments primarily impact investors' short-term rate expectations. Moreover, the spillover effects of Fed sentiments on China's yield curve cannot be blocked by China's managed floating exchange rate regime. Third, the heterogeneity test reveals that spillover effects of multidimensional information in Fed conventional monetary policy statements on China's bond market are stronger than those of Fed unconventional monetary policy statements. These findings suggest that Fed narrative sentiments should be incorporated into the research framework of international spillover effect of monetary policy, especially amidst the current period characterized by growing anticipation of federal funds rate cuts and enduring monetary policy uncertainty, providing valuable insights for trading decisions of China's bond market investors.

Fixed And Floating Exchange Rate Regimes

Fixed And Floating Exchange Rate Regimes

Effects of Economic Uncertainty on the Asset Quality of Banking Sector: Evidence from a Developing Country

ABSTRACT: Extant literature investigates on the determinants of NPL (non-performing loan) many a time, however, little is known on the relationship between economic uncertainty and NPL for any developing country. Historically, Bangladesh is suffering from high level of NPL in the banking sector. In addition to that, Bangladesh observes high level of macroeconomic uncertainty as characterized by high and volatile Gross Domestic Products and inflation, continuous exchange rate devaluations, and shallow financial markets. Motivated by this, we investigate the nexus between economic uncertainty and NPL for Bangladesh. Based on the data availability, we use the annual dataset covering 1990–2018. Furthermore, we use autoregressive distributed lag (ARDL) model considering its benefit accommodating both I(0) and I(1) variables. The empirical results show that there is positive relationship between economic uncertainty and NPL in the long run. The results are robust to the alternative measures of economic uncertainty and specifications. Consistent with the expectation, financial development carries a negative sign on the asset quality albeit the effect of economic uncertainty is actually pronounced (both the size and significance changes) in the augmented models. Key policy implication of this study is that government should formulate well anchored, rule-based policies to reduce inflation and interest related uncertainties. With a rule-based policy (for example, inflation targeting), people believe that central bank can achieve its targets. Government should adopt floating exchange rate regime that will adjust the external shocks well via exchange rates. In addition to this, government can monitor, and regulate stock market so that uncertainty in stock market is reduced. Finally, monetary and fiscal policies should be communicated well to the people. Thus, it is possible to reduce asymmetric information among the people, which may reduce economic uncertainty, and thus reduce NPL.

Floating Exchange Rate Regimes and Macroeconomic Indicators: Evidence from Mena Region and Outlook for the Moroccan Case

Many emerging economies have significantly changed their economic policies by adopting floating exchange rate regimes. In this sense, we examine their effect on the Middle East North African (MENA) region, and based on similarities and differences in macroeconomic structure and fundamentals, the potential effect on the Moroccan economy would be projected. The study provides an overview of the MENA region's experience with exchange rate regimes, looking at their historical development and effects on regional economic stability and growth. If the adoption of floating exchange rate regimes for the emerging economies in the MENA region has benefits including enhanced flexibility, decreased vulnerability to external shocks, and increased competitiveness; however, the considered countries recognize difficulties in setting them up and running them, as well as the requirement for supportive policy measures. This paper underlines the significance of additional research to examine the effects of floating exchange rate regimes on other MENA economies, mainly Morocco, and to determine the most efficient policy measures to maximize the advantages of this regime.

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.

European monetary regimes after the fall of Bretton Woods: a political economy approach

Abstract After the fall of the Bretton Woods system, the EU initiated an original path towards monetary integration which led to the establishment of the European monetary system (EMS) in the 1980s and the economic monetary union (EMU) in the 1990s. This path was an alternative to the floating exchange rate regime which many other countries decided to follow. Adopting a political economy approach, in this paper we reconstruct the main phases of this process, from the 1970s up until today, arguing that they cannot be explained only in terms of costs and benefits of alternative exchange rate configuration, but should consider political as well as economic factors—both domestic and international ones—and the interaction between European monetary and real integration. Ultimately, the predominance of political factors led to an underestimation of the economic difficulties generated by the coexistence of irrevocable exchange rates and full capital mobility. We suggest that new policy instruments and institutional changes are needed to make the common currency workable in the long run. The mandatory path should be towards a more deeply integrated Europe. Such integration is essential to enable the European monetary union to confront with future challenges.

Currency risk and the dynamics of German investors entry and exit in Russia

Using a complete manually collected set of 3435 Russian firms with German capital in 2003–2020, we examine the effect of currency risk on the dynamics of German investors' entry and exit into the Russian market via foreign direct investment. We document that German investors were relatively tolerant towards currency risk before 2014, and became highly sensitive post 2014. We conclude that, along with geopolitical factors, the free floating exchange rate regime adopted by the Central Bank of Russia in 2014 affected the incentives of German investors. We discuss various mechanisms to explain these findings.

Currencies of greater interest for central Asian economies: an analysis of exchange market pressure amid global and regional interdependence

Central Asian Economies (CAEs) have diverse exchange rate policies. They have recorded higher volatility in the foreign exchange market since inception. High volatility of the transition era has drifted these economies towards partial dollarization. Monetary authorities in CAEs, (already have a challenge of maintaining monetary policy autonomy) have a gigantic task of price stability and stopping the spread of dollarization. This study is directed towards assessing the drivers and the determinants of foreign exchange market pressure in CAEs. The results, based on panel data analysis and the System GMM model, have provided useful insights about the exchange market pressure determinants particularly USD, Euro, Ruble, and Renminbi. The results show that China and Russia exchange market pressure has a negative effect on the exchange market pressure of CAEs. While the dollar index shows a positive impact on the exchange market pressure of CAEs. Overall, the findings imply that China and Russia currency appreciation results in a trade deficit across CAEs. The policy implication suggests that the floating exchange rate regime (inflation targeting regime) is not in favor of CAEs, and they must use managed-float to reduce their trade deficits.

Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

The choice of a foreign exchange regime hinges primarily on whether the real exchange rate acts as a shock absorber or reverberator for macroeconomic fluctuations. This policy choice is considered central especially prior to joining currency areas such as the Eurozone. We investigate whether Albania’s current floating exchange rate regime contributes to macroeconomic stability, or generates volatility. Using three different structural vector autoregression techniques, and an expanded five-variable model, we show that the real exchange rate has played a shock absorbing role, buffering the Albanian economy primarily from real demand shocks. The analysis reveals that monetary shocks and supply-side shocks have modest contributions in real exchange rate volatility. This evidence in favor of the “shock absorbing” view of exchange rates lends support to Albania’s policy choice of a flexible exchange rate system. If in future Albania considers joining a currency area, its monetary authority will need to pay attention to real currency misalignments as well as the availability and flexibility of alternative adjustment mechanisms.

Liquidity Regulation and the Transmission of Lending Shocks Across Borders

We investigate how liquidity regulation affects the transmission of negative wholesale funding shocks from the largest OECD global banks to the lending of their foreign subsidiaries across 98 countries. Controlling for adverse solvency shocks, which we argue is very important for identification, we find that, surprisingly, liquidity regulation exacerbates the transmission of adverse wholesale shocks. These findings suggest that liquidity regulation has a destabilizing effect for the host market. The effect is driven primarily by countries with floating exchange rate regimes and less so by countries with currency boards and other exchange rate management arrangements, such as dollarization. The results from our global study provide important lessons for Bulgaria in its transition from a currency board to a euro area membership.

Exchange Rate Risk Premium in Vietnam

This study characterises the exchange rate risk premium in the context of a small open economy with a controlled floating exchange rate regime. The empirical analysis applies the time-varying coefficients Bayesian structural vector autoregressive (TVC-BSVAR) model on data from the Vietnamese economy over a sample period from February 2012 to February 2019. The evidence shows that the risk premium varies over time, and increases with inflation and foreign direct investment capital inflows, but decreases with output growth and credit growth. The TVC-BSVAR model displayed highly accurate forecasting performance, accounting for nearly 94% of risk premium in a case study using the US dollar forward selling contract.

Modelování rovnovážných odchylek měnových kurzů od parity kupní síly na datech pro 34 zemí v letech 2000-2020

We construct a simple model of exchange rates stemming from the methodology of behavioural equilibrium exchange rate (BEER) models on annual panel data for 34 countries with a floating exchange rate regime during the period 2000-2020. The basic building block of the model is the absolute version of purchasing power parity theory (the ratio of domestic and foreign price levels), further extended by other variables rooted in economic theory. A complementary interpretation of our approach could be a measurement of exchange rate deviations from purchasing power parity caused by variation in economic fundamentals. The results suggest that purchasing power parity is an appropriate reference point for exchange rate models. Furthermore, national currencies tend to be stronger against the euro with higher GDP per capita, interest rates, investment freedom, urbanization rate and terms of trade, and with lower inflation. The presented deviations of exchange rates from the model equilibrium are significantly lower than those implied by a naïve model based on purchasing power parity alone.

How do exchange rates affect the Big One? An empirical analysis of the effect of exchange rates on RCEP exports using the gravity model

The often disparate and conflicting effects of exchange rate on bilateral exports reported by previous literature necessitate a further study of the relationship between monetary and trade variables. This study contributes to the stream of literature by analyzing monetary variables such as exchange rate volatility, exchange rate misalignment, exchange rate regimes, and real effective exchange rates with bilateral aggregate exports through a sample of 15 nations comprising the Regional Comprehensive Economic Partnership (RCEP) region for the years 1996 to 2017 using Ordinary Least Squares and Poisson Pseudo-Maximum Likelihood panel fixed effects regression. Results indicate that a country’s real effective exchange rate ratio and the exchange rate volatility for countries under a floating exchange rate regime reduce aggregate exports.

Time-Varying Exchange Rate Pass-through in Eastern Europe

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

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

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

Inflation Spill-overs from BRIC to SADC Economies: The Impossible Trinity Theory Analysis

This paper examined the potential inflation spill-over effects from BRIC to five SADC countries (Angola, Botswana, South Africa, Tanzania and Zambia) by using data collected for the period 1985-2020. Thirty-six (36) observations were used to obtain more reliable results with greater precision. Studies conducted on the impossible trinity argue that, in the case of highly financially integrated economies, domestic interest rates are tightly linked to the international interest rates if it is impossible to manipulate domestic interest rates. Specifically, interest rates for open economies tend to be influenced by international interest rates if these economies opt for free capital flows with a fixed exchange rate regime. Fisher's effect theory asserts that domestic interest rates trend positively with inflation rates. The principal method of research used is that of quantitative analysis. Given the empirical nature of the research, the paradigm employed is positivist. This paper employed the generalised method of moments (GMM) model, the Johansen cointegration procedure, and the Granger causality test in a vector error correction (VEC) model. The findings indicated that the fixed-exchange-rate regimes (soft pegs and hard pegs) are associated with high responsiveness of the domestic inflation rate to the foreign countries’ inflation rates, rather than to floating exchange-rate regimes (free-floating and managed floats). The policy implications for control of inflation in SADC economies are that, because of the financial market integration increase between SADC and BRIC economies, monetary authorities in SADC countries should consider floating exchange rate regimes (managed-floats or free-floating).

Asymmetric long-run effect of exchange rate on bilateral trade balance between USA and China

Purpose This paper aims to investigate asymmetric long-run effects of bilateral exchange rate on US trade imbalances with China and to examine if the effects are the same under China’s fixed and managed floating exchange rate systems. Design/methodology/approach The authors estimate both linear autoregressive distributed lag (ARDL) model assuming symmetric effect and nonlinear ARDL model assuming asymmetric effect of exchange rate on US trade deficit with China. The authors use data from 1994Q1 to 2005Q2 (under Chinese fixed exchange rate system), from 2005Q3 to 2021Q3 (under Chinese managed floating exchange rate regime), and from 1994Q1 to 2021Q3 (overall data). Findings The Chow test indicates 2005Q3 is a structure break point. Further, the results suggest the effects of bilateral exchange rate on US trade deficit with China are not the same under different exchange rate systems. The asymmetric long-run effect of bilateral exchange rate does exist. The results also demonstrate the depreciation of Chinese currency will not significantly affect US trade imbalances with China. Research limitations/implications Based on the results, the Chinese Government should embrace a more transparent and flexible exchange rate system. It will not significantly hurt Chinese trade balance, but it will help to reduce the tension between the USA and China. Originality/value All previous literature (except two papers) related to the effect of Chinese exchange rate on US trade deficit with China assume the effect is symmetric, and all (except one) use data under different Chinese exchange rate systems. To the best of the authors’ knowledge, this is the first paper that studies the possible asymmetric long-run effect of bilateral exchange rate under different Chinese exchange rate regimes.

On the economic desirability of the West African monetary union: Would one currency fit all?

This paper investigates whether the West African nations will benefit from forming the ECO currency union. Using data from 15 countries over the 1999–2018 period, we assess heterogeneity between economies in terms of equilibrium exchange rates —i.e., the level of exchange rates consistent with the absence of macroeconomic disequilibria. Then, we address the sustainable exchange rate regime issue by evaluating whether the ECO should be pegged, freely floating, or something in between. We identify two homogenous groups of economies and find that neither a single currency peg nor a freely floating exchange rate regime would be preferable for any country or group of economies. Overall, our findings argue in favor of two ECOs, one for each of the two identified zones. Each ECO would serve as a virtual anchor for the considered group and would be determined by a basket of currencies mainly composed of euro and US dollar.

The Dynamic Impact of COVID-19 Pandemic on Stock Returns: A TVP-VAR-SV Estimation for G7 Countries

The COVID-19 pandemic has profoundly and negatively impacted the global stock markets. Hence, we investigated the time-varying impact of the COVID-19 pandemic on stock returns during the period from January 27, 2020 to December 23, 2021 using the TVP-VAR-SV model and used G7 countries as our research sample. Our results imply that (i) the spread of the COVID-19 pandemic has a significant negative impact on stock returns, but the impact decreases as the time window increases; (ii) the timeliness, compulsoriness, and effectiveness of anti-epidemic policies implemented by governments are the important adjustment factors for stock returns; (iii) the impact of the early stage of the COVID-19 pandemic on the stock market trend gradually weakens as the intermediate time interval increases. In addition, over time, the duration of the negative impact of the COVID-19 pandemic on the stock returns became shorter, and the recovery rate of the impact became faster; (iv) under the managed floating exchange rate regime, the stock returns changed synchronously with the pressures of exchange rate appreciation and depreciation, and under the free-floating exchange rate regime, the effect of the exchange rate on stock returns was almost zero, while the impact of exchange rate channels in eurozone countries was related to the characteristics of national economies. Thus, governments should make greater efforts to improve the compulsion and effectiveness of epidemic prevention policies and strengthen their control over exchange rate fluctuations to alleviate the negative impact of the COVID-19 pandemic on the stock markets.