Impact Of Exchange Rate Depreciation Research Articles

On The Impact of Exchange Rate Depreciation on Bilateral Trade of Egypt and China: An ARDL Approach

The main purpose of this study is to examine the relationship of exchange rate depreciation with Egypt and China bilateral trade. The Autoregressive Distributed Lag (ARDL) approach to co-integration is employed to investigate the both long run and short run relationship between the real depreciation and bilateral Trade in the case of Egypt and China over the period of 1994 to 2019. Estimation results confirm the existence of the long-term impact of depreciation on Egypt’s trade flows between the two countries. The results also revealed that growth in domestic income improved the Egypt’s trade balance while growth in China income decreased the bilateral trade flows. Over time, the findings revealed that the J-curve phenomena hold in the long-run. Results suggest two main conclusions to policy makers. First, The improvement of the trade balance needs inclusive support of Egypt's export stimulus policies. Second, Second, China presents enormous opportunities for Egyptian exports to this growing market.

Econometric Assessment of the Impact of Exchange Rate Depreciation on Inflation in Nigeria (1981-2017)

The present reality of the Nigerian economy is the fact that inflation has remained unabated in spite of all exchange rate measures that have been adopted by the monetary authority. This calls for investigation into the extent to which exchange rate impact on inflation in Nigeria. The research paper examined the impact of exchange rate depreciation on inflation in Nigeria for the period 1981–2017, using Auto Regressive Distributed Lag (ARDL) Bounds Test Cointegration Procedure. The research shows that inflation rate in Nigeria is highly susceptible to lagged inflation rate, exchange rate, lagged exchange rate, lagged broad money, and lagged gross domestic product at 5% level of significance. A long run relationship was also found to exist between inflation rate, gross domestic product and general government expenditure, indicating that the model has a self-adjusting mechanism for correcting any deviation of the variables from equilibrium. Therefore, this study concludes that exchange rate is an important tool to manage inflation in the country; thus, this paper recommends that policies that have direct influence on inflation as well as exchange rate policies that would checkmate inflation movement in the country, should be used by the Central Bank of Nigeria. Also, monetary growth and import management policies should be put in place to encourage domestic production of export commodities, which are currently short-supplied. In addition, policy makers should not rely on this instrument totally to control inflation, but should use it as a complement to other macro-economic policies.

Investigating Exchange Rate Pass-through to Consumer Prices in Nigeria

Abstract Research background: There have been several studies on the degree of exchange rate pass-through (ERPT) to consumer prices, as well as macroeconomic environment with yet no clear direction. Purpose: This research work investigates exchange rate pass-through effects into consumer prices in Nigeria from 1960 to 2018. Research methodology: The methodology employed by the study for estimation is the Johansen cointegration and Vector Error Correction Model (VECM) procedures. Results: The empirical results indicate an incomplete pass-through of exchange rate into consumer prices in Nigeria. The pass-through is found to be 1.6 for the model under consideration. The impulse response function results indicate that the response of the consumer prices to the exchange rate shock decreases immediately to a negative shock in the short run, and continues along the horizon to a positive shock in the long run. Also, the response of consumer prices to interest rate shock decreases immediately and continues to fluctuate to a negative shock in both the short run long run horizon. Novelty: The results support the view that exchange rate policy should be complimented with coordinated macroeconomic policy approaches in order to control inflationary level in the economy. The study therefore recommends that the Federal Government should adopt a tightening of the monetary policy as it will help reduce the impact of exchange rate depreciation on consumer prices.

The nexus between exchange rate and long-term investment in Indian manufacturing industry

PurposeThe purpose of this paper is to examine the impact of changes in the exchange rate on long-term investment decisions of Indian manufacturing firms at the sector level.Design/methodology/approachThe study is undertaken on a sample of 1,222 firms from six key manufacturing sectors of Indian economy during the period 2000-2016. The non-linear relationship between real exchange rate and long-term investment is studied using the two-step generalized model of moments estimator.FindingsThe study finds a concave (i.e. inverted U-shaped) relationship between the long-term investment and real exchange rate, particularly in case of chemical, construction, machinery and textile sector, in particular, and Indian manufacturing industry as a whole. It implies that investments in these sectors increase with depreciation of real exchange rate up to a point of inflection and subsequent to which it starts decreasing if exchange rate continues to depreciate further. But consumer goods and metal product sectors ensure a convex pattern, which demonstrates that investment is decreasing at the initial stage of depreciation of the exchange rate. The study moves one-step forward in validating this nexus between investment and exchange rate with respect to the price-cost margin and the extent of financial flexibility of firms. It is found that high price cost margin and financial flexibility moderates the adverse impact of exchange rate depreciation and immunizes the long-term investments in the scenario of a weak domestic currency and induce long-term investments.Research limitations/implicationsThe study measures the impact of exchange rate changes, but the impact of exchange rate volatility on investment has not been studied, which is absolutely different with different implications.Practical implicationsThe study provides a clear guideline to firm managers for using the exchange rate movements in a favorable manner. The findings can be used to ensure sustainable long-term investments with respect to the core competence of firms in terms of price cost margin and financial flexibility at sector level of Indian manufacturing firms.Originality/valueThe study analyzes the non-linear relationship between exchange rate changes and long-term investment behavior of manufacturing firms from six key sectors of India. Further, the study moves one step forward to analyze this nexus under different scenarios of financial flexibility and price cost margin using dynamic panel models.

Empirical evidence of an S-curve in Croatia

The impact of currency depreciation on the trade balance is still an empirically unanswered question within international and financial economics. This paper is pointed towards partial clarification of that question as the author analyses trade perspectives in Croatia through the concept of an S-curve. The S-curve is an extension of the J-curve, for the impact of exchange rate depreciation wears out after a while and there is no further improvement when all impacts are realised, meaning that at the top of the curve the slope is zero or negative. By focusing on the relationship between the terms of trade (exchange rate) and trade balance the author is trying to provide some new insights into trade dynamics over a business cycle in Croatia. The main result is that both unconditional and conditional relations (conditional to technology’s role identified in the vector error correction model) are consistent with the empirical S-curve pattern of cross-correlations between the trade balance and the terms of trade (exchange rate). Nonetheless, the inability of the S-curve to depict the strength and/or the speed of the adjustment process before and after the terms of trade/exchange rate depreciation explains its limitation within policy recommendations for Croatia.

The analysis of the impact of depreciation on external debt in long run: evidence from Croatia

The impact of exchange rate changes in small open economies has been a widely researched topic for decades. According to economic theory and relevant research, depreciation can have a positive impact on the economy through an increase in exports, and a negative effect through decrease in an individual consumption. The aim of this article is to assess the impact of exchange rate depreciation on external debt in Croatia in the long-run. The long-run impact of depreciation on external debt in Croatia is assessed using Johansen cointegration approach. The results point to the existence of one cointegration relation. The long-run impact of exchange rate depreciation on external debt in Croatia is statistically significant and positive, what is in line with previous research and economic theory. The conducted analysis outlines the possible negative impact of depreciation on Croatian economy through the increase of external indebtedness, what could consequently decrease the wealth of all sectors indebted in foreign currency. Since Croatia is a highly euroised small open economy with high external indebtedness in foreign currency, this research provides captivating results for monetary and fiscal policy-making in Croatia. Therefore, as a result of the conducted empirical analysis, the exchange rate depreciation in Croatia is not recommended as the instrument of increasing export competitiveness due to current high external indebtedness in foreign currency.

The impact of exchange rate depreciation on small and medium sized enterprises performance and development in Nigeria - research

The impact of exchange rate depreciation on small and medium sized enterprises performance and development in Nigeria - research

Commodity trade between Pakistan and the US: is there evidence of the J-curve?

ABSTRACTA few studies that have attempted to estimate the short-run (J-curve) and long-run impact of exchange rate depreciation on Pakistan’s trade balance are either based on aggregate trade data between Pakistan and the rest of the world or between Pakistan and her bilateral trading partners. The findings are mixed at best. Considering the trade balance between Pakistan and the US, as one of its major partners, no significant effects have been discovered. Suspecting that the trade flows between the two countries could suffer from another aggregation bias, we disaggregate their trade flows by commodity and consider the trade balance of 45 industries that trade between the two countries. We find significant short-run effects of currency depreciation on the trade balance of 17 industries. The short-run effects last into the long run in 15 cases. The largest industry that account for more than 10% of the trade seems to benefit from real depreciation in the long run.

Impact of exchange rate depreciation on the balance of payments: Empirical evidence from Nigeria

AbstractThe paper investigates the impact of exchange rate depreciation on the balance of payments (BOP) in Nigeria over the period 1961–2012. The analysis is based on a multivariate vector error correction framework. A long-term equilibrium relationship was found between BOP, exchange rate and other associated variables. The empirical results are in favour of bidirectional causality between BOP and other variables employed. Results of the generalized impulse response functions suggest that one standard deviation innovation on exchange rate reduces positive BOP in the medium and long term, while results of the variance decomposition indicate that a significant variation in Nigeria’s BOP is not due to changes in exchange rate movements. The policy implication is that exchange rate depreciation which has been preponderant in Nigeria since the mid-1980s has not been very useful in promoting the country’s positive BOP. It is recommended that growth in the real sector should be improved to enhance exports, cre...

Threshold effects of exchange rate depreciation and money growth on inflation

Purpose – This paper aims to investigate the impact of exchange rate depreciation and money growth to the consumer price index (CPI) inflation in Indonesia. Design/methodology/approach – Using threshold model applied to Phillips curve equation. Findings – Using monthly data from 1980:1 to 2008:12, the econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effect of exchange rate depreciation on inflation. Even though the threshold value for exchange rate depreciation is found at 8.4 percent, the F-test suggests that there is no significant difference between the coefficient below and that above the threshold value. While two threshold values are found for money growth, i.e. 7.1 and 9.8 percent, and they are statistically different. The impact on inflation is high when money grows by up to 7.1 percent, it is moderate when money grows by 7.1-9.8 percent, and it is low when money grows by above 9.8 percent. Research limitations/implications – This research is using methodology proposed by Hansen which the threshold is based on the minimum SSR. The value of SSR will differ from one model to one model. For example, model using quarterly data will give the different result from that using monthly or yearly data. Also, when the author uses the new data, the result could be different. Practical implications – Even though inflation targeting framework has been adopted by Bank Indonesia (BI) since 2005, BI should not disregard the monetary aggregate variable, especially M1. This is because the growth of money is still matter to influence inflation in the short run. The impact on inflation is found to be larger than the impact of exchange rate depreciation when it is below a certain threshold value. Originality/value – This is the first paper that evaluates the threshold effect of exchange rate and money growth in emerging country, especially in Indonesia.

A new look into the prevalence of balance sheet or competitiveness effect of exchange rate depreciation in a highly euroised economy

This article empirically tests the impact of exchange rate depreciation on sectoral performance proxied by investment or, alternatively, sales. It measures the balance sheet and the competitiveness effect in a country that records very high levels of liability euroisation. Panel data methodology is applied on a dataset of 20 Croatian non-financial sectors combining macroeconomic and sectoral financial information. Results confirm there are strong negative effects of liability euroisation on both investment and sales. Negative balance sheet effects and very small positive competitiveness effects are found as well, adding up to a negative overall exchange rate depreciation effect on sectoral performance. Moreover, we find evidence that the corporate sector does not hedge against exchange rate exposure and that the domestic financial system is a constraining factor for corporate investment growth. We also find evidence of size asymmetries related to bank lending relationships.

Impact of exchange rate depreciation on domestic output in Pakistan

There is disagreement on the desirability of devaluation in the LDCs. Since the de-linking from USA dollar in January 1982, the Pakistan rupee has been losing its value vis-à-vis US dollar and other important currencies. The purpose of the paper was to see the response of domestic output to fiscal and monetary policies besides exchange rate and terms-of-trade. These policies have stable and long- run relationship with the domestic output. However, the impact of money supply and exchange rate is more robust than the other variables. Easy monetary policy has a favourable impact on domestic output. Fiscal discipline is the need of the hour because persistent and large budget deficit breeds inflation.

THE IMPACT OF EXCHANGE RATE DEPRECIATION AND THE MONEY SUPPLY GROWTH ON INFLATION: THE IMPLEMENTATION OF THE THRESHOLD MODEL

This paper investigates the impact of exchange rate depreciation and money growth to the CPI inflation in Indonesia. Using monthly data from 1980:1 to 2008:12, our econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effectof exchange rate depreciation on inflation. Even though the threshold value for exchange rate depreciation is found at 8.4%, the F-test suggests that there is no significant difference between the coefficient below and that above the threshold value. While, two threshold values are found for money growth, i.e. 7.1% and 9.8%, and they are statistically different. The impact on inflation is high when money grows by up to 7.1%, it is moderate when money grows by 7.1% to 9.8%, and it is low when money grows by above 9.8%.JEL Classification: C22; E31; E51.Keywbords: Inflation, Threshold Effect; Indonesia

DAMPAK DEPRESIASI NILAI TUKAR DAN PERTUMBUHAN UANG BEREDAR TERHADAP INFLASI: APLIKASI THRESHOLD MODEL

This paper investigates the impact of exchange rate depreciation and money growth to the CPI inflation in Indonesia. Using monthly data from 1980:1 to 2008:12, our econometric evidence shows that there are indeed threshold effects of money growth on inflation, but no threshold effectof exchange rate depreciation on inflation. Even though the threshold value for exchange rate depreciation is found at 8.4%, the F-test suggests that there is no significant difference between the coefficient below and that above the threshold value. While, two threshold values are found for money growth, i.e. 7.1% and 9.8%, and they are statistically different. The impact on inflation is high when money grows by up to 7.1%, it is moderate when money grows by 7.1% to 9.8%, and it is low when money grows by above 9.8%.JEL Classification: C22; E31; E51.Keywords: Inflation, Threshold Effect; Indonesia

Exchange Rate Sensitivity of China's Bilateral Trade Flows

Traditional assessments of the impact of exchange rate depreciation or appreciation on trade have involved estimating the elasticity of trade volume to relative prices. Such studies relied heavily on aggregated trade data. More recent studies employ bilateral trade data and methodologies such as ECM and gravity models. This study uses a generalized gravity model with data panel analysis in assessing the impact of currency depreciation or appreciation on bilateral trade flows between China and its top trading partners. The empirical evidence suggests exchange rates (both real and nominal) do not exert a significant influence on the overall exports from China. Thus, a devaluation or revaluation of the yuan should be expected to have only limited impact on China's trade balance. Moreover, previous studies provide limited evidence of a negative relation between exchange rate volatility and trade flows. Given the current revaluation expectations, we find China's anticipated shift toward a more flexible exchange rate regime fails to address China's trade surplus issues, and thus will merely lead to a revaluation of the nominal exchange rate and increased exchange rate volatility. It appears a major overhaul of the country's heavily subsidized export regime must first occur for the exchange rate to assume a larger role in China's international trade.

Exchange Rate Sensitivity of China's Bilateral Trade Flows

Traditional assessments of the impact of exchange rate depreciation or appreciation on trade have involved estimating the elasticity of trade volume to relative prices.Such studies relied heavily on aggregated trade data.More recent studies employ bilateral trade data and methodologies such as ECM and gravity models.This study uses a generalized gravity model with data panel analysis in assessing the impact of currency depreciation or appreciation on bilateral trade flows between China and its top trading partners. The empirical evidence suggests exchange rates (both real and nominal) do not exert a significant influence on the overall exports from China.Thus, a devaluation or revaluation of the yuan should be expected to have only limited impact on China's trade balance.Moreover, previous studies provide limited evidence of a negative relation between exchange rate volatility and trade flows. Given the current revaluation expectations, we find China's anticipated shift toward a more flexible exchange rate regime fails to address China's trade surplus issues, and thus will merely lead to a revaluation of the nominal exchange rate and increased exchange rate volatility.It appears a major overhaul of the country's heavily subsidized export regime must first occur for the exchange rate to assume a larger role in China's international trade. Keywords: Exchange Rate, Trade, China, Competition, Gravity Model, Panel JEL Classification: C22, C23, F14, F31

Hyperinflation, the exchange rate and endogenous money: post-World War I Germany revisited

We re-examine the interaction of domestic and external factors in the German hyperinflation by extending Frenkel's monetary model of the exchange rate to incorporate: (1) endogeneity of the money supply with respect to government debt, expected inflation and money wages; (2) the direct impact of exchange rate depreciation on the domestic price level; and (3) endogenous wage determination. Four-equation estimates support each extension of the monetary model. It appears that government deficit finance, the collapse of the exchange rate and the monetary transmission of the wage-price spiral were all crucial contributors to the price explosion.