Foreign Exchange Rate Regimes Research Articles

The Macroeconomic Impact of Crude Oil Price Fluctuations in Nigeria

The main objective of the study was to determine the way fluctuations in the price of crude oil affected macroeconomic variables in Nigeria from 2000 Q1 to 2022 Q4. The data was analysed in the paper using Structural Vector Autoregressive (SVAR) models. According to the findings, Nigeria's current economic growth has been significantly impacted by lag GDP values. This indicates that economic growth in Nigeria was significantly impacted by one-period lag GDP by 3,791.7 units in the short-run and 7,430.4 units in the long-run. Also in the short-run, the current broad money supply was significantly impacted by both the one-period lag general price level (0.445 units) and the one-quarter lag broad money supply (757.7 units). According to the crude oil price fluctuation model, current crude oil price variations in Nigeria are significantly influenced by one-period lags in general price level (-64.9 units), crude oil price fluctuation (1,114.6 units), and fiscal budget deficits (0.65 units). All of the one-period lagged coefficients of macroeconomic variables, including real GDP, broad money supply, interest rates, general price level, inflation rates, and fiscal budget deficits, had a significant impact on current economic growth and broad money supply, respectively, as demonstrated by the long-run economic growth and broad money supply models. The real GDP's impulse response to fluctuations in crude oil prices fell during the first period, peaked during the second, and then increased to show a positive trend during the third. This study came to the conclusion that shocks or fluctuations in the price of crude oil are the main cause of macroeconomic policy instability in Nigeria. The study recommended that the government should control foreign exchange rate regimes, pursue expansionary monetary policy, general price level control and stabilisation measures.

Trade Elasticities and the Marshall Lerner Condition: Evidence from Sri Lanka

Sri Lanka is the pioneer in adopting market-friendly policies in South Asia and has gone through different foreign exchange rate regimes since 1977. Since then, the country has experienced rapid fluctuations in the trade balance and the exchange rate. The empirical studies on Marshall Lerner condition have suggested mixed results in the global context. However, this paper aims to estimate the import and export price elasticity to determine the validity of the Marshall Lerner condition in the Sri Lankan context. For this purpose, annual time series data for the period from 1980 to 2018 were used in estimating the elasticities. The results suggest that the addition of overall export price elasticity and overall import price elasticity as a ratio of export expenditure over import expenditure is less than one, which indicates that the trade balance of Sri Lanka deteriorates when the domestic currency depreciates against foreign currency. Hence, the findings of the study revealed that the Marshall Lerner condition is satisfied in the Sri Lankan context.

Evaluation of Sustainability of the Foreign Exchange Rate Regimes in Iran Based on Duration Models

Evaluation of Sustainability of the Foreign Exchange Rate Regimes in Iran Based on Duration Models

Foreign Exchange Risk Hedging, Corporate Governance and Financial Performance: Evidence From Kenya

Globalization, Kenya’s floating foreign exchange rate regime, and international trade have exposed Kenyan firms to foreign exchange risk. Empirical studies have demonstrated that hedging minimizes cash flow volatility, hence enhancing financial performance. The management of these risks is critical in overall financial management, since its helps increase the financial performance and the overall returns earned by investors. Understanding factors that influence foreign exchange risks hedging is a crucial step to the effectiveness of the overall risk management process. Against this background, this study sought to evaluate the effects of foreign exchange risk hedging, corporate governance and the financial performance of listed companies in Kenya. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, from 2011 to 2016. The study used longitudinal research design. Secondary data was obtained from financial statements of the listed firms. The data was coded and analysed using descriptive and inferential statistics—correlation and regression—with the aid of STATA software. The feasible generalised least square model was used to test the hypotheses. The results show currency hedging has a positive effect on financial performance. The study also revealed that corporate governance, moderates the relationship between foreign exchange risk hedging and financial performance. In the light of this findings, management should explore the whole repertoire of risk amelioration techniques, particularly those available in the roster of innovative techniques of hedging. In order to take full advantage of such techniques, however, the regulator and the securities exchange must lead from the front by introducing cutting-edge financial instruments. In addition firms should endeavor to strengthen corporate governance which enhances the effectiveness of risk management. Keywords: Foreign Exchange risk, Hedging Techniques, Corporate Governance. DOI : 10.7176/RJFA/10-5-08 Publication date :March 31 st 2019

Effect of Foreign Exchange Risk Hedging Techniques on Financial Performance of Listed Firms in Kenya

The adoption of floating foreign exchange rate regime in the 1990s and international trade have led to increased exposure of Kenyan firms to foreign exchange risk. Foreign exchange risk can affect a firm’s expected cash flows, and by extension, its financial performance. This paper examines the effects of foreign exchange risk hedging techniques on the financial performance of publicly listed firms in Kenya. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, from 2011 to 2016. The study used panel data research design. Secondary data was obtained from financial statements of the listed firms. The data was coded and analysed using descriptive and inferential statistics—correlation and regression—with the aid of STATA software. The feasible generalised least square model was used to test the hypotheses. The results show currency hedging has a positive effect on financial performance. This implies that when hedging strategies and hedging tools are implemented appropriately, they help firms achieve their financial objectives, increasing financial performance, hence creating value for shareholders.

Macro-Trends in Steel Industry in India: Implications for Risk

This paper presents a macro level analysis of steel industry. We have estimated the growth trend for production, consumption, exports and imports at the economy level by using a semi-log equation model. Firstly, we found that all variables are significantly related to a catch-all variable called ‘time’. Secondly, we calculated the predicted value of all variables and compared them with the actual value by the graphic presentations. They closely follow each other in most cases. The regression analysis shows that production grew at 8% and consumption at 7.75 during the time period 1992-2015. Exports grew at 9.78% per annum and declined drastically after the year 2005. On the other hand, the imports grew at 10.53% and increased also drastically after 2005. It shows that after the year 2005, there could have been a change in the industrial policy. On the whole we concluded that production and consumption increased over the time. Exports and imports show an increasing trend but export trend is weaker than the import trend. This shows that systematic risk arises due to transaction exposure of volatility in foreign exchange because we earned less Foreign Exchange (FE) and spent more on steel import in the form of Foreign Exchange. Since the time when FE rate regime has been liberalised the FE rates have been very volatile and Rupee has been depreciating constantly. If a larger sum is spent on imports it implies that the foreign exchange risk is higher. But since this is systematic risk it cannot be diversified.

Monetary Policy, Exchange Rate and Capital Flow from 'Equilateral Triangle' to 'Scalene Triangle'

The Chinese version of this paper can be found at: http://ssrn.com/abstract=2949313. The traditional “Impossible Trinity” is an equilateral triangle. But since 2008, importance of capital flow has been greatly elevated, and equilateral triangle has transformed into scalene triangle. We first in the literature propose the “Scalene Impossible Trinity”, which is a more general analytical framework about “Impossible Trinity”. We also establish a theoretical model, and with the premise of “Scalene Impossible Trinity”, calculate the optimal level of macro-prudential management regarding cross-border capital flow and optimal level of international monetary policy coordination within different foreign exchange rate regimes. Our proof shows that even if foreign exchange rate could float freely, the central bank should conduct a certain level of macro-prudential management of cross-border capital flow. Based on this model and recent practices of The People’s Bank of China, we also present the New Macro-Financial Policy Framework (New MFPF), which is “Macro-prudential management plus Exchange rate flexibility plus International monetary policy coordination.” Only by adopting this three-pronged strategy, the central bank could attain macroeconomic equilibrium.

The Effects of Short-Term Capital Flows on Exchange Rates in Intermediate and Flexible Exchange Rate Regimes: Empirical Evidence from Turkey

The aim of this paper is to analyze empirically the effects of short-term capital flows on exchange rates in Turkey under intermediate and flexible exchange rate regimes. In this framework, the periods where intermediate (January 1994-February 2001) and flexible (March 2001-September 2012) exchange rate regimes implemented in Turkey were taken as a base. The estimation results show that foreign exchange rate regimes are significant factors for the effects of short-term capital flows on exchange rates. While the short-term capital flows have significant effects on exchange rates in the flexible exchange rate regime, they have no significant effects on exchange rates in the intermediate exchange rate regimes. In the intermediate exchange rate regimes, price differentials have significant effects on exchange rates. These empirical results are consistent with the theory.

English

The aim of this paper is to analyze empirically the validity of the purchasing power parity (PPP) hypothesis for Turkey under intermediate and flexible exchange rate regimes. In this framework, the periods where intermediate (January 1994-February 2001) and flexible (March 2001-September 2012) exchange rate regimes implemented in Turkey were taken as a base. The estimation results show that foreign exchange rate regimes are significant factors in validity of the purchasing power parity in Turkey. While the purchasing power parity is not valid in the intermediate exchange rate regimes, it is valid in the flexible exchange rate regime. This empirical result is also consistent with the theory. Key words: Purchasing power parity, intermediate exchange rate regime, flexible exchange rate regime.

Country Fundamentals and Currency Excess Returns

(ProQuest: ... denotes formulae omitted.)I. IntroductionThe purpose of this paper is to show that country fundamentals matter for the cross-section of currency excess returns. We include the variables reflecting macroeconomic fundamentals, such as interest rate, default risk, and foreign exchange rate regime. We also include the variables reflecting the degree of capital control and the size of capital market. We speculate that variations of country fundamentals may significantly affect the currency returns through increasing or decreasing the currency risks. For example, the adoption of more flexible exchange rate regime may increase the currency risks substantially. Our analysis shows that these variables do have explanatory power for the cross-section of currency excess returns.Some previous works also considered the country fundamentals as important determinants of currency returns. For example, Jorda and Taylor (2012) and Coudert and Mignon (2013) emphasize the relation of the real exchange rate and default risk with the currency returns, respectively. However, we consider a more extensive set of country fundamentals in this paper and adopt an empirical method basically different from the previous studies.This paper's empirical methodology is partly motivated both by Lustig et al. (2011), and Lustig and Verdelhan (2007). They explain the cross-section of currency returns with a single factor-the global carry profits in case of Lustig et al. (2011) and the global consumption growth in case of Lustig and Verdelhan (2007).We adopt the factor model framework of these authors, but we include new factors that are based on country fundamentals.1In a series of their highly original papers, Pojarliev and Levich (2008, 2010, 2011) build a multi-factor currency returns model from the popular currency strategies such as carry, value, trend following, and volatility. Pojarliev and Levich used the factor model to explain the performance of currency fund managers. We modify the work of Pojarliev and Levich in two directions. First, we construct factors from country fundamentals rather than from investment-style returns. Second, we use the factor model to explain the performance of currencies, rather than currency fund managers.Our main empirical results are based on monthly currency excess returns of 19 major currencies for the 10-year period between January 2001 and December 2010. The 19 currencies have been selected after dropping those currencies with inadequate fundamental data. Our main findings can be summarized as follows:First, when the currencies are sorted on the basis of forward premium, exchange rate regime, the degree of capital control, and the size of capital markets, there are persistent return differences between high-ranked and low-ranked currencies. When the currencies are sorted by default risk, the return differences between high-ranked and low-ranked currencies are not persistent. As far as forward premium is concerned, the pattern has been discussed extensively in the previous literature. The results regarding the other fundamental variables are original in this paper.Second, a parsimonious model with three factors-forward premium, default risk, and foreign exchange rate regime-explains a large part of the cross-section of currency excess returns.Also the zero-intercept restriction of the factor model is not rejected for 13 out of 19 currencies. In comparison, a factor model with three investment-style factors is rejected for 14 out of 19 currencies.In recent years, the persistent profits of so-called carry trades have drawn many authors' attention.2 Carry traders buy a high-yield currency and sell a low-yield currency, or, equivalently, take a long forward position in a high-yield currency against a low-yield currency. Such trades exploit the failure of the uncovered interest parity (UIP). If the UIP holds, the excess returns cannot be predicted by interest rate or forward premium. …

Foreign interest rate shocks and exchange rate regimes in East Asia

Using a theoretical dynamic stochastic general equilibrium model and an empirical panel vector autoregression, we assess the transmission of foreign real interest rate shocks on the volatility of various key macroeconomic variables in nine small open economies in East Asia taking into account the role of exchange rate regimes. Both the theoretical and empirical findings confirm the hypothesis that flexible exchange rate may work as a shock absorber when the economy is hit by foreign real interest rate shocks. The findings suggest a clear trade-off between the volatility of real exchange rate and real output to foreign interest rate shocks, both the US and G7 real interest rates, where the responses of real output are mitigated in countries that have more flexible exchange rate regime.

Time Consistency of Optimal Monetary and Fiscal Policy in a Small Open Economy

This paper characterizes conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime. It shows that these conditions depend on the way in which leisure is assumed to enter preferences and/or on the process which productivity is assumed to follow. This paper further argues that these conditions may fail to be sufficient if the small open economy implements a fixed foreign exchange rate regime. Thus, a credible fixed exchange rate regime does not necessarily help render optimal policy time consistent.

Time consistency of optimal monetary and fiscal policy in a small open economy

This paper characterizes conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime. It shows that these conditions depend on the way in which leisure is assumed to enter preferences and/or on the process which productivity is assumed to follow. This paper further argues that these conditions may fail to be sufficient if the small open economy implements a fixed foreign exchange rate regime. Thus, a credible fixed exchange rate regime does not necessarily help render optimal policy time consistent.

Foreign Exchange Rate Regimes and Foreign Exchange Markets in Transitive Economies

In this paper we discuss the issue of the choice of foreign exchange rate regimes in transitive economies, their effect on the relative changes and the volatility of the foreign exchange rate and the development of the national foreign exchange market. The results of our analysis indicate that the choice of the foreign exchange rate regime is not a passive factor regarding both average relative changes in exchange rates and volatility as measured by the standard deviation. They also show that increased volatility of spot rates and a growing interest rate differential lead to the growth of the share of outright forwards and swaps (e.g. transactions that might be used for hedging) in relation to spot transactions.

Emerging Asia: Essays on Crises‚ Capital Flows‚ FDI and Exchange Rates

DOI: 10.1355/ae28-3h Emerging Asia: Essays on Crises, Capital Flows, FDI and Exchange Rates. By Ramkishen S. Rajan. London: Palgrave Macmillan, 2011. Pp. xiii, 175. Rajan's book is true to its title: his primary foci are on FDI and exchange rates within the framework of financial and economic crises and the role played by capital flows in them. He sets the tone and direction of his volume by arguing that Much of the prevailing discussion of the contemporary phenomena impacting the global economy is largely journalistic in nature, lacking any solid analysis or debate (p. xii). He goes on: Many scientific works are either narrow in their perspective or not easily comprehensible. This book therefore aims to discuss international economic in a straightforward manner that makes it intelligible to students of applied economics, public policy and international issues (p. xii). Rajan generally achieves his aims within the pages of five parts of his book that deal with (i) crisis, capital flows and exchange rates; (ii) exchange rate volatility, crisis and controls; (iii) global financial architecture; (iv) monetary and financial issues; and (v) foreign direct investment. While his focus is broadly on Asia, the book also contains a useful chapter on India that will particularly interest readers whose attention centres on that national economy. The book begins by reminding readers that financial crises hit Asian economies hard during 1997-99 and then again in 2008-09 when they experienced severe capital shocks. The boom and bust cycles that Asian economies experienced were reflected in balance of payments capital account data that evidenced the persistent crises and recoveries. His balance of payments perspective set the stage for the author's focus on the roles that foreign direct investment (FDI) and exchange rate regimes played in the episodes of crises and recoveries. The author's foci on foreign exchange markets, FDI and other balance of payments capital account financial flows provides readers with a fundamental linkage to the money and the real economies at national levels. This feature is one of the book's strengths. In addition, when he discusses foreign exchange markets two factors stand outothe maintenance of convertibility and the optimum mix of stability and flexibility (e.g., minimum volatility) and coordinating exchange rate and overall monetary policies within an economy. Rajan is quick to point out that coordination does not imply straight-jacketing all Asian economies in a common exchange rate regime due to differences in monetary policy approaches and their connection to real economic activity; that is, the generation of income, output, employment and price levels. For example, Rather than adopting a single immediately, East Asian economies might consider gradually moving towards pegging to a basket, starting with individual weights and varying of extents of flexibility around the pets, with a graduate convergence of time. (p. 25). The author pegs his discussion of exchange rate regimes to their potential impact on highly open real economies by noting that given the heavy reliance of Asia on external trade, FDI and capital flows, the obvious desire by many Asian policy-makers is to minimize volatility in understandable (p. 35). He further states that the link between currency volatility, trade, investment and growth is not unambiguous (p. …

Capital Flows, Capital Account Regimes, and Foreign Exchange Rate Regimes in Africa

This study examines capital flows and shifts in capital account and exchange rate regimes in African countries over the past two decades. The evidence shows that official lending to Africa has declined while the volume of private capital flows remains low and significantly below the levels observed in other developing regions. Private capital inflows to Africa are limited due to several factors, including the weakness of the macroeconomic environment, underdeveloped financial systems, high country risk, and exchange rate misalignments. The focus of policy reforms must be on alleviating these constraints in order to attract more foreign capital and overcome the shortage of development financing. Many African countries have pursued reforms aimed at liberalizing their capital account and exchange rate regimes. However, liberalization has not been accompanied by systematic gains income growth, price stability, and trade performance. African countries must pay serious attention to the scope, speed, and sequencing of capital account liberalization to minimize potential adverse effects of openness. It is desirable for countries to maintain selective discretionary control over capital movements and exchange rate markets in order to hedge against adverse shocks to the economy and to maintain macroeconomic and financial stability. To attract foreign capital, any move toward capital account openness and exchange rate liberalization must be supported by reforms aimed at improving credibility of macroeconomic policy and establishing an investment-friendly environment. These reforms will not only attract foreign capital but also encourage domestic investment. An important aspect of capital movements in Africa is the high level of capital flight. There is an urgent need for policies to stem further hemorrage of capital from Africa and induce the repatriation of private capital held abroad. This will require not only improvement of the macroeconomic conditions to ameliorate incentives for domestic investment, but also reform of the political and legal systems to improve accountability and credibility of economic policy.

Foreign Direct Investment and Exchange Rate Regimes

The paper uses a comprehensive data set with bilateral direct investment flows and establishes the influence of the de-facto exchange rate regime for FDI flows. We find a strong and significant effect from fixed rates on bilateral FDI flows in developed economies, but no significant effect for developing countries. There is thus no general and uniform impact of stable exchange rates on FDI. We provide several possible explanations for this difference.

The Brazilian Strategy and the Interventions to Manage Risk of Foreign Currency Exposure During Crisis

Even in a floating foreign exchange rate regime monetary authorities sometimes intervene in the currency market due to liquidity demand and foreign exchange crisis. Typically, central banks intervene using foreign currency trades and/or changing domestic interest rates. We discuss this framework in the context of an optimal impulse stochastic control model. The control and the performance equations consider interventions with swap operations in the domestic market since Central Bank of Brazil also use these operations. We evaluate risk management strategies for central bank interventions in case of crisis based on the model. We conclude that the Brazilian risk management strategy of increasing international reserves holdings and decreasing foreign exchange rate short exposure on public domestic debt after 2004 gave more flexibility to the country to manage foreign exchange rate risk in 2008 and to avoid higher interest rates to attract international capital as it was necessary in previous crises.

A tail index tour across foreign exchange rate regimes in Turkey

This article uses daily foreign exchange data in the USD/TRL foreign exchange market to test for structural breaks due to exchange rate regime switches. The analysis focus on extreme movements of exchange rate returns across different regimes using tail index indicators. Sequential and rolling tests, developed by Quintos et al (2001) are used to identify the dates of breaks in the Turkish exchange rate for the period 28 January 1980 to 11 October 2004 and for the sub-periods which cover the fixed exchange rate regime from 28 January 1980 to 22 February 2001 and the flexible exchange rate regime from 23 February 2001 to 11 October 2004. Compelling evidence for breaks in the tail index is found not only across but also within different exchange rate regimes – especially within the fixed regime. Moreover, breakpoint dates are clustered right before the crisis in 2001. This makes the tail index indicator a fairly good candidate for a variable to be used in early warning systems for currency crises.

4 Domestic Needs for Foreign Finance and Exchange Rate Regime Choice in Developing Countries, with Special Reference to the Turkish Experience

4 Domestic Needs for Foreign Finance and Exchange Rate Regime Choice in Developing Countries, with Special Reference to the Turkish Experience