Foreign Exchange Gap Research Articles

The Influence of The Asean Regional Capital Market on Asean-5 Countries' Foreign Exchange Reserves

The capital market sector is one area of economic activity that is expected to grow significantly following the adoption of the ASEAN Economic Community (AEC). As a result, integrating capital market activity in the ASEAN area must be a top priority in AEC implementation. The essential criterion for creating a seamless flow of cash and investment is the integration of ASEAN countries' capital markets. The total worth of all outstanding shares based on their normal closing price is reflected in the stock market capitalisation. A rise in the value of market capitalization indicates that the capital market is expanding. Capital flows into and out of the capital market are thought to have altered the value of foreign exchange reserves. Foreign capital market investment contributes to a balanced balance of payments. Foreign capital not only serves to cover the deficit in domestic capital that domestic savings cannot fill, but it also helps to fill the emptiness in the foreign exchange gap through asset sales.

The Nexus between Savings Gap, Foreign Exchange Gap, and Foreign Direct Investment Inflows into Asia: Two Gap Model Analysis with Panel Data Approach

The study analyses the nexus between Savings (Savings- Investment), Foreign Exchange (Import- Export) Gap and net Foreign Direct Investment (FDI) inflow into Asian Countries. Economies for this analysis are taken from Newly Industrialised Countries (NICs) based on the valuation of GDP of the respective countries. Six countries, such as, China, India, Indonesia, Thailand, Malaysia and Philippines are considered for this study over a period 1982-2016. Using Panel Data Approach, the analysis has been able to find out a long run cointegration between Savings Gap and FDI as well as Foreign Exchange Gap and FDI. As proposed by Two Gap Model, the influence of FDI has been found on both the variables. Whereas the effect of savings gap on net FDI inflow is positive and significant for the said period with a negative Error Correction Term which proves the movement from short run disequilibrium to long run stable equilibrium. After proving the direction of causality, the short run joint influence of savings gap with its lagged values has been checked. Through Wald Test, the result is proved to be significant. On the other hand, the effect of Foreign Exchange Gap on FDI is not significant in nature. Finally, from the study, it is suggested that if domestic savings for all the six countries together are given importance from the level of respective Governments, the Savings Gap may be reduced which will indicate less dependence on foreign investments into these countries. Being NICs, self-funding of future investments is always preferred which is only possible if countries are contended with adequate capital accumulation on their own in previous periods.

Saving-Investment or Foreign Exchange Gap: What Hinders Fiscal Stability in Pakistan?

Macroeconomic stability is a major objective to be achieved for sustainable economic growth. However, fiscal stability has been prone to instability in dual-gaps in a developing country like Pakistan. This study examines the impact of the saving-investment gap (SI), foreign exchange gap (XM), and the mediating impact of output on fiscal deficit using the time-series data from 1973 to 2018 in Pakistan using Autoregressive Distributed Lag (ARDL). The results show that an increase in the saving-investment gap and output lower the fiscal deficit. However, an increase in the foreign exchange gap increases the fiscal deficit. While considering the interaction effect, SI and output negatively but XM and output interaction positively affect the fiscal deficit. Since SI and output stabilize the fiscal position while the XM destabilizes the latter, the government should strategize to increase savings, investment, exports, and national output and reduce unnecessary imports.

Isolated Twin Model and Nigeria Economic Growth: Bridging Them Together with Corrective Measures in Less Developed Countries

The isolated twin gap model has always been treated separately in all economy. We realized that the two-gap model exist simultaneously. They are either affecting an economy positively or inversely. This implies that most nation will either have the two gaps positively influencing the economy or inversely to the growth of the nation. The graphical illustration shows that once a model is occurring in an economy, its impact influences the other model in the same direction. The ADF shows that all the variables are stationary at level 1[0] and one 1[1]. The ARDL shows there is short run relationship between the variables at 1% and 5%. The research work also shows that irrespective of revenue from the exportation of crude oil, backwardness of the economy highlights the inverse relationship between the twin model and the growth of the economy. Corruption couple with macroeconomic objective management affect less developed economic to block the wide gaps of the economy. For the economy to be save from the lower saving habit which results saving gaps and foreign exchange gap, the government activities in the economy should not be purely profit oriented.

Imported Capital Goods and Manufacturing Productivity: Evidence from Botswana's Manufacturing Sector

AbstractThis article examines the effects of imported capital goods on manufacturing productivity growth in Botswana. Despite consistent efforts aimed at diversification, Botswana's economy has remained heavily dependent on diamond exports, and the country's productivity remains a point of concern. The ability to apply foreign technologies to increase productivity and spur diversification is limited by the foreign exchange gap. This study uses an imported input growth model to analyse how the importation of capital goods contributes to enabling productivity growth and export diversification. With a panel of 340 manufacturing firms, the study also analyses the effects of imported capital goods on firm productivity growth and skills development. The results show that imported machines and equipment have increase manufacturing productivity after 1‐2 years following the investment. Additionally, foreign‐owned firms were found to enjoy more productivity growth than their domestic counterparts.

Capital Flows to India Since Nineties

Foreign capital supplements domestic savings and stimulates economic growth. Moreover, it enables countries to counterbalance fluctuations in income and attain smooth consumption flows. Capital inflows can help developing countries with economic development by providing them with necessary capital and technology. It relaxes two major constraints to economic growth i.e. resource gap and foreign-exchange gap. However, surge in capital flows have had associated problems as it may lead to exchange rate appreciation, excessive accumulation in foreign exchange reserves etc. Large and volatile capital flows may destabilize macroeconomic management. Since economic reforms India has undertaken various policy measures to liberalize capital inflows which has resulted in significant increase in amount of capital inflows and changed its composition. Capital inflows have undergone a compositional shift from predominantly official and private debt flows to non-debt-creating flows in the post-reform period. This paper focuses on various facets of capital flows to India and attempts to analyze the patterns and trends in capital flows to India since 1990s. The paper also discusses issues and challenges associated with surge in capital inflows.

Foreign exchange intervention and exchange rate volatility in Peru

Flexible exchange rate experience in Peru has been accompanied by frequent official interventions in the form of foreign exchange purchases or sales. Monetary authority pursues reducing excess volatility in the exchange rate through its direct intervention. However, in recent years, this intervention has concentrated on US dollar purchases, apparently signalling a bias towards defending a given exchange rate level (not necessarily fixed). For the period 1994 to 2007, this document assesses consistency of the empirical evidence with the goal of reducing exchange rate volatility. Thus, it uses univariate and multivariate time series models subject to stochastic shifts to study currency pressures. Results suggest consistency with the reduced-volatility goal. Nonetheless, in line with other studies, factors such as the foreign exchange gap with respect to its trend also induce foreign exchange intervention.

Preferential Price and Trade Tied Aid in Fiji: Implications on Price Stability, Certainty and Output Supply

The development of small developing states has long been influenced by foreign aid. Apart from the macro benefits of bridging the savings and investment gap and building the foreign exchange gap, it is also said to stabilise output price, provide price certainty and affect output price positively. In this paper I examine these three aspects in detail with respect to the price subsidy that Fiji’s sugar industry has been receiving over the last three decades. Price stability is measured by examining the conditional variance by estimating a GARCH (1,1) model and price certainty aspect is examined by testing if the forecast price is an unbiased and efficient predictor of the actual price. The price effect on supply response is examined by estimating the long and short run response equations. The price certainty analysis reveals that the forecast price is an unbiased and efficient predictor of actual price. The price stability test reveals that the world free market price is not volatile and therefore price stability is not a reason for preferential prices. Lastly, the supply response analysis reveals that in the long run, the price effect on output supply is transmitted via acreage change under sugarcane crop. In the short run, price has lagged effect on both sugarcane supply and acreage response. The inelastic price elasticities of output supply have important policy ramifications. Key words: Price Volatility, Price Subsidy, Supply Response, Error Correction Model

Manufacturing sector performance in México, under balance of payments-constrained growth

Entre 1998 y 2006 se estima una gran baja en la productividad del capital restringida por la balanza de pagos de la industria maquiladora, mientras que la no maquiladora decreció ligeramente. Las dos no han establecido la cadena del valor agregado de las actividades productivas; sin embargo la productividad de ambas está restringida por la reserva de divisas. La liberalización comercial, particularmente la promoción de la importación temporal para la reexportación, no ha contribuido al crecimiento dirigido por la exportación de México.

Impact of Foreign Aid on Fiscal Behaviour: A Case Study of Pakistan (1980-2000)

Economists have been trying to study the linkages between aid inflow and government activities in developing countries. With the passage of time, the analysis has become more sophisticated. The development of two-gap models [for example, Chenery and Bruno(1962); and Chenery and Adelman(1966), among others] was an important contribution to the literature. More recently, two-gap models have been extended into threegap models. Iqbal (1995) added a fiscal constraint to the traditional saving and foreign exchange gap. In such cases, the fiscal constraint is intended to reflect potential limitations to finance public investment that may be required to support a given level of output.

Trouble in Paradise? Savings and Growth in Fiji, 1970-2001

This article reviews Fiji's macroeconomic performance and assesses the relative significance of foreign exchange, domestic savings and public sector resources on Fiji's economic growth by formulating and estimating a three-gap model. The foreign exchange gap equation indicates a sharp tradeoff between investment and capacity utilization. The government savings constraint also appears to be binding. The model is then simulated for the period between 1997 and 2001 underfourgrowth path 'scenarios' that make differing assumptions concerning Fiji's output, exports and capital flows. The results suggest that the external financing required to achieve a 'socially desirable' growth path is modest, amounting to an average of 3.5 per cent of potential output.

The Foreign Exchange Constraints to Economic Adjustment: The case of Iran

While a great deal of work has been devoted to the assessment of the effects of structural adjustment programmes, little is known about the relative importance of external financing and its contribution to the success of these adjustment programmes. This paper examines this question, using Iran's recent experience with an orthodox structural adjustment with its limited access to medium- and long-term external financing. Using the annual data for 1963-94, a three-gap model of growth is formulated and estimated in which economic growth is constrained by domestic saving, foreign exchange and public sector resource availability. The resulting foreign exchange-gap equation demonstrates a sharp trade-off between investment (capacity generation) and the capacity utilization rate. The model is simulated over the period 1995-99 under three growth path scenarios. The size of the foreign exchange gap under these growth path scenarios illustrates quite vividly the centrality of the foreign exchange constraint to the achievement of a modest growth rate in the medium-term.

Turkish Economy in the 1990s: An Assessment of Fiscal Policies, Labor Markets and Foreign Trade

Turkey entered the 1990s under conditions of a truly “open economy”–a macroeconomic environment where its capital account was completely liberalized and the process of financial de-regulation was completed. In this setting, many of the instruments of macro and fiscal control have changed in nature, as the constraints of macro equilibrium have undergone major structural change.In the early 1990s, the domestic economy witnessed a massive inflow of (mostly short-term) foreign capital. Furthermore, the so-called foreign exchange gap which had constrained the growth potential of Turkey for more than three decades seemed to have been alleviated. The ready availability of foreign exchange enabled the Turkish Lira to appreciate against the major currencies in real terms and led to a rapid expansion of import demand. Moreover, it made possible the financing of both the rapidly growing fiscal deficit of the public sector and the sudden rise of wage costs in the labor market.

Uganda: Constraints on Economic Growth

: This paper utilizes a three-gap model to evaluate the three macroeconomic constraints, domestic saving, foreign exchange and public sector resource availability, faced by Uganda as it attempts to rehabilitate and reconstruct its war-shattered economy. Using 1987 as a base year, the resulting three-gap equations demonstrate a sharp trade off between investment (economic growth) and capacity utilization under foreign exchange constraint. The model is simulated over the period 1988–92–a period closely corresponds to the Uganda's structural adjustment facility program as well as for the period 1993–97. The size of the foreign exchange gap, $634 and $545 per year during the first and second five years period, illustrates quite vividly the centrality of the foreign exchange constraint facing the Ugandan economy. The results also show that fiscal balances are not going to be restored before 1993.

GROWTH-ORIENTED ADJUSTMENT TO EXTERNAL SHOCKS: AN APPLICATION TO TURKEY

GROWTH-ORIENTED ADJUSTMENT TO EXTERNAL SHOCKS: AN APPLICATION TO TURKEY

Foreign Exchange Gap, Structural Constraints, and the Political Economy of Exchange Rate Determination in Iran

Foreign currency transactions have come under stringent controls in postrevolutionary Iran. This is a relapse into the prevailing conditions in the years preceding 1974, before the increase in oil revenues eliminated the foreign currency gap. Initially, the Islamic Republic of Iran (IRI) imposed exchange controls to stop the postrevolutionary capital flight. Soon, however, exchange controls became an integral policy instrument of the government for rationing the existing supply of foreign currency in the face of a widening foreign exchange gap.

The foreign exchange constraint, suppression of the trade deficit and the shadow price of foreign exchange in a fix-price economy

The foreign exchange gap is analysed as a possible feature of a fix-price economy. The implications of closing the gap by means of import rationing are then discussed. Finally, a set of shadow rates of exchange is derived. These shadow prices are conditional on the prevailing regimes, and include the paradoxical possibility of a negative shadow rate of exchange.

A General Equilibrium Analysis of Foreign Exchange Shortages in a Developing Economy

An acute shortage of foreign exchange has been a recurring problem for many developing economies. This paper reexamines the foreign exchange gap issue and the debate between structuralists and neoclassicists by providing a quantitative assessment of the role of different assumptions about the values of key trade elasticities. It also seeks to complement the existing descriptive analysis of the consequences of alternative adjustment mechanisms with a quantitative analysis that indicates the relative importance of different behavioural assumptions and policy regimes. The empirical analysis is based on a computable general equilibrium model which is Walrasian in spirit and captures price mechanisms, market interactions, and structural interdependence in a non-linear multisector framework. The analysis lends support to the structuralist view that it is not sufficient to look at problems of adjustment only at the macroeconomic level.

Dual-gap analysis for the Sudan

The study is an exercise in dual-gap analysis with reference to the Sudan. Investment and import requirements are estimated for the Six-Year Plan period 1977/1978–1982/ 1983 and are then compared with forecasts of savings and export earnings. The results are compared with the Plan projections of the dominant constraint on growth. The conclusion is that the Plan understates the size of both the domestic savings-investment gap and the foreign exchange gap and that foreign resource flows would have to be approx. 50% higher than envisaged for the target growth rate of 7.5% to be achieved.

A model for national planning policies

This paper attempts to develop a multiobjective model to help policy-makers choose the most appropriate mix of economic policies concurrent with the elimination of serious gaps. Each individual policy attempts to achieve a specific goal or a set of subgoals; but it may hinder the achievement of some other subgoals. To differentiate between the importance of different objectives, the analyst assigns different priorities to each of the given set of subgoals. Three sets of results are provided by three separate computer runs of this model. Each set of results corresponds to one of the three priority structures, and each run indicates quite differing underachievements or over-achievements of individual subgoals. A detailed explanation for each of these deviations (gaps) from the targeted subgoals is attempted in an overall framework and some interactions between various gaps (savings gaps, foreign exchange gap, domestic growth gap, GNP gap, etc.) are also identified.