Free Floating Exchange Rate System 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.

IMPACT OF FLOATING EXCHANGE RATE ON ECONOMIC INDICATORS OF BANGLADESH: A CASE STUDY

In past few years there has been a lot of controversy about the appropriateness of the exchange rate system adopted by the country. Bangladesh has been pursuing a liberal trade policy consistent with the trend of free market economy and WTO agreement. In process of liberalization of the economy, Bangladesh adopted a free-floating exchange rate system since May 31, 2003. The level and extent of movement of exchange rate have a significant impact on the macroeconomic variables of the economy. On the other hand, unsustainable economic policies and other factors also lead to a volatile exchange rate. Both the fixed and floating exchange rates have their own merits and demerits. The present article offers an analytical discourse on the prospects and implications of floating exchange rate in Bangladesh. The study is mainly exploratory in nature. In this study the authors have tried to assess the impact of new exchange rate system on the economy of an underdeveloped country like Bangladesh.

Faktor yang Mempengaruhi Nilai Tukar Rupiah Terhadap Dolar Amerika, Euro dan Poundsterling

The currency exchange rate is a macro indicator that reflects the strength of the economy as a result of the global economy. With the existence of currency exchange rates, it can facilitate international trade transactions with currency agreements that will be used by the two countries. The exchange rate system used in Indonesia is a free-floating exchange rate system since 1997, all of which are left to the market. This study aims to analyze the effect of the money supply, inflation and foreign exchange reserves on the rupiah exchange rate of against the US dollar (USD), euro (EUR), and pound sterling or Great Britain Pound (GBP). The ECM (Error Correction Model) the analysis method is the method used in this study. The results of the research that has been carried out are both in the long term and in the low term, the money supply, inflation and foreign exchange reserves have a significant influence on the exchange rate of the rupiah against the US dollar (IDR/USD). The money supply and foreign exchange reserves and in the short term have a significant effect on the rupiah exchange rate against the euro (IDR/EUR), while only the money supply in the long term has a significant effect on the rupiah exchange rate in the euro (IDR/EUR). Foreign exchange reserves in the short term have a significant effect on the rupiah exchange rate against the pound sterling (IDR/GBP), while only the money supply in a long term has a significant effect on the rupiah exchange rate against the pound sterling (IDR/GBP).

Analisis fenomena Kurva J di Indonesia

The free-floating exchange rate system in Indonesia has consequences for fluctuations in the Rupiah exchange rate. In accordance with the J-Curve theory, will the weakening of the Rupiah value have an impact on improving the trade balance in the long term or will it worsen the trade balance condition in the long term. This study will examine how the influence of the Rupiah exchange rate on the trade balance in both the short and long term and whether the J-Curve phenomenon occurs in Indonesia using the Vector Error Correction Model (VECM) analysis technique in the observation period 2015.1-2020.12. The results of this study prove that the J-Curve phenomenon occurs in the Indonesian economy. The findings show that the depreciation of the Rupiah in the short term will cause a trade balance deficit, but in the long term, the depreciation of the Rupiah will cause a trade balance surplus. The results of the variance decomposition show that the exchange rate has a major role in the formation of fluctuations in the trade balance. In addition, shocks that occur in the exchange rate will be responded to by movements in the trade balance position and permanent, namely for the next ten periods. The limitation of this research is that the identification of the existence of the J curve phenomenon is generally carried out on the entire trade balance. Further research is expected to identify the J curve phenomenon specifically in several trading partner countries of Indonesia.

경제정책 불확실성 지수가 환율결정에 주는 영향분석

The free-floating exchange rate system was applied in South Korea after the 1997 Asian financial crisis. Since then, a lot of studies on exchange rate determination were conducted based on the monetary approach. However, after the 2008 global financial crisis, the economic policies of major countries had a greater impact on financial markets, but fewer studies were published on how the exogenous changes in economic policies affect the foreign exchange market of small open economies. Based on the related literature, we selected explanatory variables such as money supply, income, interest rate, terms of trade, and capital account, and then constructed a Won/Dollar exchange rate determination model by adding Economic Policy Uncertainty(EPU) indexes Baker, Bloom, and Davis(2016) devised as supplementary variables. The empirical analysis period is from October 2000 to December 2020, and regression analysis was performed using both a linear multiple regression model a non-linear VECM model. Monetary model-related variables, such as money supply and interest rate were proved to be more significant factors before the financial crisis. On the other hand, the influence of the EPU indexes was greater after the financial crisis and in particular, the Korea EPU index and Japan EPU index had a significant impact.

외환위기 이후 적정환율제도 선택 논의와 한국의 환율제도 선택(Discussions on the Selection of Appropriate Exchange Rate Regime After the Foreign Exchange Crisis)

Korean Abstract: 우리나라는 1997년 12월 16일 외환위기를 계기로 원화절하압력을 견디지 못하고 자유변동환율제도로 이행하게 되었다. 그러나 당시의 급박했던 상황을 고려하면 이러한 환율제도 변경이 여러 가지 요건을 고려하여 신중하게 선택되었다고 보기는 어렵다. 본고는 이러한 문제의식을 갖고 1990년대 중남미․동아시아 위기를 계기로 제기되고 있는 적정환율제도 선택논의를 개관한 후 우리나라의 변동환율제도 운용 경험을 평가하고 앞으로 어떠한 환율제도를 채택해야 바람직한지를 검토해보았다. 주요 시사점으로는 우선 신흥시장국에 적정환율제도로 제시된 양극단의 환율제도 역시 실행경험을 볼 때 외환위기의 원인으로 지목된 중간단계의 환율제도처럼 위기에 취약해질 수 있다는 것이다. 이는 어떠한 환율제도도 모든 국가 또는 모든 시기에 적합하지 않다는 주장(Frankel 1999)과도 부합되는 것으로서 최근 국제회의에서 제기되는 것과 같이 각국의 고유한 사정에 알맞은 환율제도를 채택하는 것이 바람직하다는 시사점을 준다. 둘째 1997년 위기이후 우리나라의 변동환율제도 운용경험을 평가해볼 때 환율의 변동이 상당히 완화된 것으로 나타나 실제로는 관리변동환율제도처럼 운용된 것으로 분석되었다. 그러나 위기이후 자본․외환시장의 급속한 개방 추진, 금융․기업 구조조정 추진 등에 따른 불확실성을 감안해볼 때 사실상의(de facto) 관리변동환율제도를 통해 환율변동을 완화시킨 것은 비용보다 편익이 컸을 것으로 보인다. 그렇지만 2001년부터는 자유변동환율제도가 정착되어 가는 것으로 분석되었다. English Abstract: On December 16, 1997, Korea was unable to withstand the depreciation of the Korean won due to the currency crisis. However, considering the imminent situation of the time, it is difficult to consider that the change of the exchange rate regime has been carefully selected considering various requirements. After reviewing the discussion on the selection of appropriate exchange rate regime, which has been raised in the wake of the crisis in Latin America and East Asia in the 1990s, I have evaluated the experience of operating the floating exchange rate regime and examined what kind of exchange rate regime should be adopted in the future. The main implication is that the exchange rate regime, which is presented as a proper exchange rate regime for emerging market countries, can be vulnerable to crisis as the exchange rate regime, which is pointed out as the cause of the foreign exchange crisis. This implies that any exchange rate regime is consistent with the claim that it is not suitable for all countries or at all times (Frankel 1999), suggesting that it is desirable to adopt the exchange rate regime appropriate to the unique circumstances of each country as recently presented at international conferences. Second, when Korea experienced the experience of operating the floating exchange rate system after the 1997 crisis, the exchange rate fluctuation was considerably eased. However, considering the uncertainties caused by the rapid opening of the capital and foreign exchange markets and the restructuring of the financial and corporate structure after the crisis, the fact that the exchange rate fluctuations were mitigated through the de facto managed floating exchange rate system. However, since 2001, free floating exchange rate system has been operated.

Cointegration Relationships Between Markets Under Different Currency Systems: Post 2007 Financial Crisis

In this study, we examine the cointegration relationships between the US stock market and those of 76 international markets (with 22 developed, 24 emerging, and 29 frontier markets) in the post 2007 Financial Crisis period. Overall, we find that international stock markets are not cointegrated with the US stock market. Over the long run, international portfolio diversification is an effective way to manage country risk. Stock markets in countries with free-floating exchange rate system seem to be more integrated with the US stock market. In other words, US investors may enjoy greater benefits from portfolio diversification by investing in countries whose currencies are not free-floating. However, during a crisis, stock markets becomes more cointegrated as observed by the spike in the recursive cointegration graphs. A financial crisis in one country can have an impact on the stock market of another country. The observed contagion effect makes international portfolio diversification strategy less effective during a crisis.

Are BRICS exchange rates chaotic?

ABSTRACTIn this paper, we focus on the stochastic (chaotic) attributes of the US dollar-based exchange rates for Brazil, Russia, India, China and South Africa (BRICS) using a long-run monthly dataset covering 1812M01-2017M12, 1814M01-2017M12, 1822M07-2017M12, 1948M08-2017M12, and 1844M01-2017M12, respectively. For our purpose, we consider the Lyapunov exponents, robust to nonlinear and stochastic systems, in both full – samples and in rolling windows. For comparative purposes, we also evaluate a long-run dataset of a developed currency market, namely British pound over the period of 1791M01-2017M12. Our empirical findings detect chaotic behavior only episodically for all countries before the dissolution of the Bretton Woods system, with the exception of the Russian ruble. Overall, our findings suggest that the establishment of the free floating exchange rate system have altered the path of exchange rates removing chaotic dynamics from the phenomenon, and hence, the need for policymakers to intervene in the currency markets for the most important emerging market bloc, should be carefully examined.

Are BRICS Exchange Rates Chaotic?

In this paper, we focus on the stochastic (chaotic) attributes of the US dollar-based exchange rates for Brazil, Russia, India, China and South Africa (BRICS) using a long-run monthly dataset covering 1812M01-2017M12, 1814M01-2017M12, 1822M07-2017M12, 1948M08-2017M12, and 1844M01-2017M12, respectively. For our purpose, we consider the Lyapunov exponents, robust to nonlinear and stochastic systems, in both full — samples and in rolling windows. For comparative purposes, we also evaluate a long-run dataset of a developed currency market, namely British pound over the period of 1791M01-2017M12. Our empirical findings detect chaotic behavior only episodically for all countries before the dissolution of the Bretton Woods system, with the exception of the Russian ruble. Overall, our findings suggest that the establishment of the free floating exchange rate system have altered the path of exchange rates removing chaotic dynamics from the phenomenon, and hence, the need for policymakers to intervene in the currency markets for the most important emerging market bloc, should be carefully examined.

Analysis of short- and long-run interactions between real exchange rate and private domestic investment in South Africa

This study analysed the short- and long-run interactions between the real exchange rate and private domestic investment in South Africa, during the period of a free-floating exchange rate system. Vector autoregressive (VAR) model, a multivariate Johansen co-integration approach and Granger causality test were used to analyse quarterly observations from 1994 to 2014. Co-integration analysis found no evidence supporting the long-run relationship between real exchange rate and private domestic investment in South Africa. However, short-run analysis showed that both variables are mostly driven by their own innovation with short-run changes in real exchange rate being affected by changes in private domestic investment. Granger causality test found a one-way causal relationship from private domestic investment to real exchange rate; implying that previous changes in private domestic investment lead to changes in current real exchange rate. This study concluded that growth in South African private domestic investments is linked with the depreciation of the domestic currency.

Analysis of short- and long-run interactions between real exchange rate and private domestic investment in South Africa

This study analysed the short- and long-run interactions between the real exchange rate and private domestic investment in South Africa, during the period of a free-floating exchange rate system. Vector autoregressive (VAR) model, a multivariate Johansen co-integration approach and Granger causality test were used to analyse quarterly observations from 1994 to 2014. Co-integration analysis found no evidence supporting the long-run relationship between real exchange rate and private domestic investment in South Africa. However, short-run analysis showed that both variables are mostly driven by their own innovation with short-run changes in real exchange rate being affected by changes in private domestic investment. Granger causality test found a one-way causal relationship from private domestic investment to real exchange rate; implying that previous changes in private domestic investment lead to changes in current real exchange rate. This study concluded that growth in South African private domestic investments is linked with the depreciation of the domestic currency.

Validity test of purchasing power parity doctrine: An Indonesian case study

The goal of this study is to analyze the doctrine purchasing power parity (PPP) in Indonesia with the case study of the rupiah exchange rate to U.S. dollar. The autoregressive is used to estimate the relationship between the change of exchange rate and the difference Indonesia–USA inflation rate. The data used in this study are quarterly data obtained from the International Financial Statistics (IFS) and Bank Indonesia (BI) with the period 1997Q4-2013Q4. The exchange rate that used in this study is using the rate on rupiah to U S dollar. The price data used consumer price index in Indonesia and the United States with a base year of 2000. The results of this study show, that rupiah to the U.S. dollar is undervalued during the free floating exchange rate system and, the PPP doctrine to the case of the rupiah to the U.S. dollar is not valid in the period of this study.

Current Account and Real Exchange Rate Dynamics in Indonesia

We analyze the role of both permanent and temporary factors in affecting the Indonesian current account and real exchange dynamics before and after 2000. Adopting Lee and Chinn (1998; 2006) approach as well as Chinn et al. (2007), two results stand out. First, we confirm that the behavior of the real exchange rate has altered since 2000. Identifications show that permanent shocks are the primary causes for the movement of the real exchange rate after 2000, while in the period before 2000, the Indonesian real exchange rate changes are characterized by greater dominance of temporary shocks. The apparent change in the real exchange rate behavior may be strongly justified by the implementation of free-floating exchange rate system since August 1997. Second, the shift of the real exchange rate behavior after 2000 does not necessarily affect the current account dynamics. Empirical evidence confirms that the variance of current account post 2000 remains largely due to temporary shocks. Albeit having increasing influence, permanent shocks have insignificant effect in explaining fluctuations of the current account. In this sense, the current account surplus after 2000 is attributed largely to nominal variables such as price increase, while the impact of productivity improvement is still limited.Keywords: Current Account; Real Exchange Rate; Asian Crises 1997/1998AbstrakKami menganalisa peranan faktor permanen dan temporer dalam memengaruhi neraca berjalan dan dinamika nilai tukar mata uang riil Indonesia sebelum dan setelah tahun 2000. Mengadopsi pendekatan Lee dan Chinn (1998; 2006) serta Chinn et al. (2007), telah diperoleh dua kesimpulan. Pertama, kami mengonfirmasi bahwa pola nilai tukar mata uang riil telah berubah sejak tahun 2000. Identifikasi menunjukkan bahwa shock permanen adalah penyebab utama pergerakan nilai tukar mata uang riil setelah tahun 2000, sedangkan di periode sebelum tahun 2000 perubahan nilai tukar mata uang riil dicirikan oleh dominansi shock temporer. Perubahan pola nilai tukar mata uang tersebut dapat berakar dari penerapan sistem nilai tukar mengambang bebas sejak Agustus 1997. Kedua, perubahan pola nilai tukar mata uang setelah tahun 2000 tidak serta merta memengaruhi dinamika neraca berjalan. Bukti empiris mengonfirmasi bahwa variansi neraca berjalan setelah tahun 2000 tetap disebabkan utamanya oleh shock temporer. Meskipun menunjukkan peningkatan pengaruh, shock permanen memiliki pengaruh yang tidak signifikan dalam menjelaskan fluktuasi neraca berjalan. Atau dalam kata lain, surplus neraca berjalan setelah tahun 2000 dapat diatribusikan kepada variabel nominal seperti kenaikan harga, sedangkan pengaruh peningkatan produktivitas masih cenderung terbatas.Kata kunci: Neraca Transaksi Berjalan; Nilai Tukar Riil; Krisis Asia 1997/1998JEL classifications: F31; F41

PERANAN VARIABEL EKONOMI MAKRO TERHADAP INFLASI PASCAPENERAPAN INFLATION TARGETING FRAMEWORK (ITF) 1 DI INDONESIA TAHUN 1999.1-2008.6

The objective of this research is to analyze the effect of macroeconomics variable, which is real exchange rate, SBI, M1 and GDP to domestic inflation in Inflation Targeting Framework. This research also intended to analyze effect of macroeconomics to inflation, which been transmitted through interest rate and will give us a big picture on what’s the next monetary policies. We used monthly time series data 1999:01–2008:06 and applied Vector Error Correction Model to analyze the phenomenon. Real exchange rate, SBI (quarterly), M1 and GDP have positive effect to the inflation, but only real exchange rate and SBI (quarterly) which has permanent and long term effect. The real exchange rate has strong effect on inflation stability because, by applying ITF. The free-floating exchange rate system should be applied, and the fragile currency shall be easily fluctuated.

Keseimbangan Jangka Pendek dan Jangka Panjang Nilai Tukar Rupiah terhadap Dollar Amerika

Free floating exchange rate system that has been adopted since august 1997 resulted in the strong relationship between macro economic variables with the determination of the exchange rate. Therefore the objective of this research was to explain the effect of these variables to exchange rate in the short run and the long run in the period of 1997 to 2012. The method used was econometrics through error correction model. The research result describes important roles of monetary authority, government and business sector in determining the exchange rate.

The Response of the Johannesburg Stock Exchange to Changes in Exchange Rate Regimes

This paper used Granger Causality test and descriptive statistics analysis to examine the response of the South African stock market to different exchange rate regimes from 1978 to 2008. The analysis of the history of the exchange rate regimes in South Africa showed that the flexibility was introduced in 1979 but the exchange rate shocks of great magnitude appeared during the period of the free-floating exchange rate system (1995-2008). Results reported in this paper revealed that the response of Johannesburg Stock Exchange to changes in the exchange rate was not consistent throughout different exchange rate regimes. A significant correlation between the variables during the sub-periods characterised by capital controls was observed. Granger causality test revealed that the direction of causality changed with exchange rate regimes. This paper concluded that changes in exchange rate regimes have a significant impact on the relationship between the stock market index and the exchange rate. DOI: 10.5901/mjss.2013.v4n6p413

Current Account and Real Exchange Rate Dynamics in Indonesia

We analyze the role of both permanent and temporary factors in affecting the Indonesian current account and real exchange dynamics before and after 2000. Adopting Lee and Chinn (1998, 2006) approach as well as Chinn et al (2007), two results stand out. First, we confirm that the behavior of the real exchange rate has altered since 2000. Identifications show that permanent shocks are the primary causes for the movement of the real exchange rate after 2000, while in the period before 2000, the Indonesian real exchange rate changes are characterized by greater dominance of temporary shocks. The apparent change in the real exchange rate behavior may be strongly justified by the implementation of free-floating exchange rate system since August 1997. Second, the shift of the real exchange rate behavior after 2000 does not necessarily affect the current account dynamics. Empirical evidence confirms that the variance of current account post 2000 remains largely due to temporary shocks. Albeit having increasing influence, permanent shocks have insignificant effect in explaining fluctuations of the current account. In this sense, the current account surplus after 2000 is attributed largely to nominal variables such as price increase, while the impact of productivity improvement is still limited.

통화론적 접근방법에 근거한 외환위기 전후 원/달러 환율결정에 대한 비교분석

Korea experienced a financial crisis in 1997. Since then Korea economy has undergone severe change such as exchange rate regime from the market average exchange rate system to the free floating exchange rate system in 1997, and the currency rate fluctuation has been widening. We empirically analyze the determination of the Won/Dollar exchange rate based on the monetary approach. We employ Lucas (1982), Bilson (1978) and Frankel (1979) models and consider some mixed models. We make use of monthly data of money supply, income, interest rate, capital balance, terms of trade, and the yen/dollar exchange rate over the period 1990-2009. We compare the empirical results of cointegration tests and the vector error correction model(VECM) from the two regimes, the pre and post korean financial crisis. The won/dollar exchange rate has long-run relationship with the variables in the monetarist models in the two regimes. For the post crisis regime, the Bilson model is the best and the long run variables also affect the short run dynamics of the won/dollar exchange rate.

The Volatility and Asymmetry of Won/Dollar Exchange Rate

The study on volatility and asymmetry of the exchange rate by applied to the daily Won/Dollar exchange rate shows that past volatility of the exchange rate still has strong persistency at present and asymmetry effect and the leverage effect, which explain that volatility shock has an effect on the uncertainty of the exchange rate, are also existent after the free floating exchange rate system was adopted.

Political elections and foreign investor trading in South Korea's financial markets

This article investigates the relationship between foreign investors’ trading behaviour and political election events in South Korea and the effect of the relationship on the financial markets via a bivariate GARCH (1,1) model analysis. The empirical results show that the KOSPI 200 index return (total trading volumes of spot) and the derivatives volume have a negative (positive) relationship for foreign investors. South Korea shifted to a free floating exchange rate system, however, it did not have an effect on foreign investors’ trading behaviour. In particular, foreign investors showed significant decrease in trading options contracts during the parliamentary election periods and the parliamentary elections stabilized derivatives trading volatility. It is evident from the results that the presidential elections create far more financial uncertainty in comparison to parliamentary elections.