Appreciation Of Local Currency Research Articles

Exploring the Impact of Remittance and Economic Growth on Inflation

This study investigates the influence of remittance income and economic growth on the inflation rate in South Asian Association for Regional Corporation (SAARC) countries. Remittance inflows have a double effect on the economy’s inflation rate: firstly, it increases consumer spending capacity, driving up demand for goods and services, which can lead to higher prices; secondly the influx of foreign currency can cause local currency appreciation, raising import costs and contributing to inflation. While previous studies have focused primarily on how inflation hinders economic growth, this study seeks to understand how economic growth causes inflation from the other side. Economic growth boosts consumer and business spending, increasing demand for goods and services, which can increase prices. Furthermore, higher demand for resources and labor can raise production costs, further contributing to inflation. The correlation between remittance income and inflation has been extensively documented, but the impact of economic growth on inflation remains to be determined. The study is based on descriptive and exploratory research design and driven by a positivist research philosophy. The present study is based on secondary data collected from World Bank reports and the countries’ economic surveys. This study uses an unbalanced panel dataset of 272 data points from eight member countries of SAARC. Basic econometric techniques such as covariance analysis, panel unit root testing, panel autoregressive distributed lag model, and scaled coefficient analysis are employed. The remittance income is only statistically significant at the 10 percent significance level. A one percent increase in remittance income leads to a 0.284 percent increase in inflation over the long run. The growth rate of gross domestic product plays a crucial role in setting inflation. One percent rise in gross domestic product growth leads to a 0.3405 percent increase in inflation in the long term. The error correction term exhibits a negative and statistically significant relationship. The coefficient size suggested that around 65.14 percent of the disequilibrium was rectified in each cycle. The current year’s lagged gross domestic product growth negatively and statistically significantly impacts economic growth. One percent rise in gross domestic product growth led to 0.3308 percent fall in inflation in the short term across SAARC countries. The results indicate that remittance income has a minimal long-term effect on inflation in SAARC nations, whereas gross domestic product growth substantially impacts inflation. Policymakers should prioritize promoting sustainable economic growth to mitigate inflationary pressures effectively.

Managing Foreign Exchange Inflows: An Analysis of Sterilisation in Pakistan

A number of developing countries from Asia, Latin America and Eastern Europe have experienced surge in capital inflows during recent years.1 These inflows have potential effects on macroeconomic stability; export competitiveness, and inflation. If not properly managed, these inflows can induce appreciation of local currency leading to serious repercussions for the rest of the economy. Under these conditions, the proactive role of monetary authorities in the management of capital inflows was highly desirable, wherein they intervened in the domestic exchange market in order to contain volatility in exchange rate besides accumulation of foreign exchange reserves. The main instruments available to deal with the possible effects of large capital inflows include sterilised intervention, fiscal tightening, trade and exchange liberalisation including easing controls on capital outflows. The foreign exchange interventions are typically accompanied by active sterilisation policy to keep inflation under control.

Asymmetric Impact of Exchange Rate Changes on Money Demand in Malaysia

The relationship between exchange rate and money demand has long been debated among macroeconomists due to its impact on the stability of money demand and monetary policy. Following the significant depreciation in the currency exchange associated with the political instability in Malaysia in recent years, examining the relationship between exchange rate and money demand is crucial to ensure the monetary policy remains prudent. This study examined the asymmetric impact of exchange rate changes on money demand in Malaysia using both linear and nonlinear ARDL approaches. The findings reveal that the money demand responds asymmetrically to exchange rate changes both in the short and long run, whereby the response to a negative shock (local currency depreciation) outweighs the positive shock (local currency appreciation). The result also suggests that the substitution effects dominate the exchange rate and money demand relationship. Consequently, with the economic and political instability continuing, the currency exchange is expected to depreciate further, contributed by the strong substitution effects. This will greatly affect the stability of money demand and the monetary policy and thereby call upon a policy intervention to strengthen the currency exchange and sustain the long-run economic performance.

Financial Globalization and Bank Lending: The Limits of Domestic Monetary Policy

AbstractExploring bank-level data from a small open economy, we present evidence that global funding conditions limit the effectiveness of domestic monetary policy in terms of shaping both the volume and the riskiness of bank lending. We show that more favorable global funding conditions associated with a local currency appreciation encourage banks to increase lending, leverage up, take more risks, and thus insulate themselves from lean-against-the-wind domestic monetary policy. These results support the existence of a risk-taking channel of currency appreciation at the bank level.

SPILLOVERS OF GLOBAL LIQUIDITY AND MONETARY POLICY DIVERGENCE FROM ADVANCED ECONOMIES TO VIETNAM

This paper studies the spillovers of global liquidity and monetary policy divergence from advanced economies to Vietnam. Applying the structural Bayesian Vector Auto-Regressive model with Sims–Zha prior distribution, we find that unconventional monetary policy shocks of major central banks led to a reduction in inflation and short-term interest rate as well as an appreciation of local currency in Vietnam. However, market liquidity provided by surge in the cross-border credit flow led to a temporary upward pressure on inflation, interest and foreign exchange rates. Both types of global liquidity caused an insignificant effect on stock price which evidence the dominance of traditional interest rate and bank-lending over asset price channels in Vietnam. When disintegrating the effects among the monetary shocks from the US, European Union and Japan, the empirical result reveals some evidence of contradictory effects. Accordingly, GDP decreased after Fed’s asset purchase while it slightly increased following the same action from European Central Bank. Quantitative easing shocks also caused a depreciation in USD and Euro, resulting in a decrease in foreign exchange rate but large-scale asset purchase from the Bank of Japan is translated into an upward trend in the exchange rate.

Macroeconomic Determinants of House Prices in Malaysia

House prices in Malaysia are considered to be seriously unaffordable as the median all-house price is relatively higher than the annual median income. Although the issue of house prices is prevalent in the country, few studies have been done to determine factors that influence its movement. The current paper, therefore, attempts to investigate the causal relationship between macroeconomic variables and house prices in Malaysia by accounting for the existence of a structural break for the variables. It is identified that in the long run, macroeconomic variables are collectively significant in influencing house price movement while the individual impact of macroeconomic variables is varied. The rise in the level of interest rates, housing supply, and inflation will result in the decline in house prices while gross domestic product and local currency appreciation cause the price to increase. It was found that stock prices do not significantly influence house prices. Of all the macroeconomic factors analyzed, exchange rate fluctuations appear to be most significant in explaining the movement of house prices. In the short-run, all macroeconomic factors are individually significant in influencing house prices and it is also identified that house prices tend to move back into their long-run state after temporary macroeconomic shocks with the speed of adjustment around 5.2 percent quarterly. It is advised for the policymakers to constantly monitor the movement of macroeconomic factors and take necessary actions to cushion the adverse impact of the movement of house prices in the country.

Monetary Policy and Stock Market Returns: Evidence from ARDL Bounds Testing Approach for the Case of Vietnam

The paper investigates the presence of a cointegrating relationship between monetary policy indicators (namely refinancing rate, money supply, exchange rate, domestic credit, and inflation rate) and VN-Index (the main representative index of Vietnamese stock markets) from August 2000 to December 2018. By using the Autoregressive Distributed-Lag (ARDL) bounds tests, followed by the error correction model for short term dynamics and robustness tests for the stability of the model, the key findings showed that the VN-Index was significantly influenced by all the selected variables in the long term. The outcomes contributed to the current literature by clarifying the determinants of stock prices from monetary policy perspective within the context of an emerging economy and then providing relevant recommendations for enhancing the performance of the Vietnamese stock market. The remaining money supply expansion and the local currency appreciation, while controlling inflation, domestic credit, and reducing refinancing rate can promote the progress of the Vietnamese securities market. Any shock from equilibrium should be adjusted at the considerably high-speed of 48.91% over the next period. It can be considered as a precious reference for policymakers, financial analysts, stock exchange examiners, and any researchers who interested in this field.

Asymmetry in exchange rate pass-through to consumer prices: Evidence from emerging and developing Asian countries

This paper investigates the asymmetrical exchange rate pass-through (ERPT) to consumer prices for emerging and developing Asian countries from 1995Q1 to 2016Q4. We estimate the ERPT to consumer prices for each country by using the nonlinear autoregressive distributed lag (NARDL) approach and dynamic panel techniques robust to cross-sectional dependence. First, the results suggest an asymmetrical ERPT for local prices in emerging Asian sub-region in the short and long-term and only in the short-term in the developing Asian sub-region. Second, this study finds a significant and complete ERPT for appreciation, higher during local currency appreciation than depreciation in the long-term. Our results indicate downward price rigidity and weak competitive market structures. Finally, the pass-through has not declined in emerging and developing Asian countries in the long-term, as has been suggested by most of the studies on developed countries. On average, consumer prices rise by 0.90% (0.50%) following a 1% appreciation (depreciation) of the local currency in the long-term for the entire emerging and developing Asian region with different effects across the subregions during the short-term. The ERPT is higher in emerging Asian sub-region associated with low inflation levels and price volatility than in developing Asian sub-region. Therefore, the policy implication is to consider these asymmetries when determining the monetary policy rules and to promote competitive market structures and trade liberalization in emerging and developing Asian countries.

Factors Affecting Export Competitiveness of Singapore’s Manufacturing Sector: A Regression Analysis

This paper examines the export competitiveness of the manufacturing sector in Singapore. More specifically, we examine how the existence of import content of exports, productivity gains, and profit margins affect the competitiveness of Singapore’s manufacturing exports. Using proxies such as price of exports, price of imports, unit business costs, and net operating surplus over manufacturing output, we analyze our results empirically and seek to show the significance of these variables in affecting the export competitiveness in the unique case of Singapore. As price of exports and price of imports are both expressed in Singapore dollars (SGD) and this captures the exchange rate, we can assess the impact of a stronger SGD on the export competitiveness of Singapore’s manufacturing sector. Traditional economic notions according to Mundell–Fleming model have predominantly assumed that the appreciation of local currency would stimulate imports and harm exports, vice versa. However, in the case of Singapore where there is a high import content in exports, our paper reveals that exports are not adversely affected by an appreciation of SGD. This is attributed to the direct causal relationship between import prices and export prices that helps to minimize the effects of a higher cost of export production brought about by appreciation, with lower import costs. Furthermore, the impacts of productivity growth and profit margins on export competitiveness are very small, supporting the notion that Singapore exporters are price-takers.

An Empirical Study on the Economic Effect of Financial Cooperation among Countries of the “Silk Road Economic Belt”

Financial cooperation has been popular among different countries since the new century. Recently, the “Silk Road Economic Belt” has attracted the attention of the world. This research focuses on the economic impacts of financial cooperation between different countries along this belt, arguing that the adoption of local currency settlement system is at the initial stage of regional financial cooperation. This research innovatively measures international trade volume, GDP, and welfare among Silk Road and other major countries as a result of financial cooperation through the application of the GTAP model. The results show that, if the local currency settlement system becomes the main model of regional financial cooperation, the appreciation of local currency, e.g. RMB, can increase the GDP in Central Asia, the European countries, and North Africa and optimize the international trade structure in China at the same time. However, the export and import volumes of most industries of the United States, Japan and Australia which do not belong to the Silk Road will suffer from slight declines due to the change of international trade, while their national welfares will increase slightly at the same time. The results have significant implication for relevant researchers, organizations, and government policy makers. DOI: http://dx.doi.org/10.5755/j01.ee.28.5.19189

Asymmetric mean reversion and volatility in African real exchange rates

This study seeks to examine the asymmetric mean reversion characteristics of the real exchange rate for Egypt, Ghana, Kenya, Nigeria and South Africa. We apply a two-factor model to monthly time series data spanning the period 1972:1 to 2016:12. The empirical findings suggest that the five countries’ real exchange rate exhibit non-stationary behaviour following local currency depreciation but is strongly mean reverting following local currency appreciation. However, the mean reverting component more than offsets the non-stationary component. We also found that the time-varying conditional volatility is persistence and asymmetric in all the five countries. These findings have policy and investment implications. Knowledge of purchasing power parity may be used to forecast exchange rates, manage inflation, and implement monetary policy. Also, investors could base their investment strategies on different regimes to minimise exchange rate risk.

Regime-dependent exchange-rate pass-through to import prices

This paper investigates departures from linearity in the exchange rate pass-through (ERPT) to import prices of six major economies by using a logistic smooth transition pass-through (LSTP) regression. The analysis of LSTP regressions provides the following new insights into the dynamic features of ERPT: (i) There is strong evidence for the presence of smooth transition type threshold effects in the ERPT. The identified threshold dynamics reveals the existence of two extreme regimes, one with “low” and another with “high” pass-through. (ii) Both the short-run and the long-run pass-through estimates exhibit variation across these extreme regimes and in the long-run, pass-through tends to be complete in the “high” pass-through regime and low, but, incomplete in the “low” pass-through regime. (iii) Import price elasticities are asymmetric, as such, the same 1% depreciation of the currency is not associated with the same degree of ERPT across regimes. (iv) Temporal behavior of ERPT for a given country is generally similar across local currency appreciation and inflation rate-driven episodes. On the other hand, there is considerable variation across countries in the speed of the transitions and the estimated thresholds under each transition variable. These findings may explain why the linear ERPT literature might have obtained mixed results on the degree of ERPT across countries and sample periods used.

Cross-Border Banking and Global Liquidity

We investigate global factors associated with bank capital ‡ows. We formulate a model of the international banking system where global banks interact with local banks. The solution highlights the bank leverage cycle as the determinant of the transmission of …nancial conditions across borders through banking sector capital ‡ows. A distinctive prediction of the model is that local currency appreciation is associated with higher leverage of the banking sector, thereby providing a conceptual bridge between exchange rates and …nancial stability. In a panel study of 46 countries, we …nd support for the key predictions of our model.

Effectiveness of Monetary Policy in Bangladesh

This paper uses Structural Vector Autoregression models with appropriate short run restrictions to see the response of output, price and exchange rate to an exogenous monetary–policy shock in Bangladesh. The impulse response functions show that an independent increase in policy interest rate is followed by decrease in output, appreciation of local currency, and increase in price level. However, the impacts are not statistically significant, implying that monetary policy is not effective in controlling short run economic fluctuations in Bangladesh. ‘Prevalence of microcredit’ and ‘government domestic borrowing’ may weaken the effectiveness of monetary policy. Thus, when conducting the monetary policy to achieve certain goals, the central bank of Bangladesh should consider the reality of microcredit and government domestic borrowing.

African stock market returns and liquidity premia

We investigate the association between African real stock returns and stock liquidity for sixteen countries over the years 1995–2010. Using fixed effect models (FEM) and system generalized method of moments (SGMM), stock returns and liquidity measures are positively related when South Africa is excluded from the sample, making liquidity “priced in” these less liquid markets. The discount rate (MSCI world index return) is negatively (positively) related with African stock returns. Overall, the results on controls are more robust in dynamic panels: equity markets respond negatively to local currency appreciation, consistent with the export-commodity nature of many of these countries.

International Transmission of Food Prices and Volatilities: A Panel Analysis

High and volatile food prices pose a significant policy challenge around the world, and an understanding of the dynamics of food price inflation and volatility is essential in designing appropriate policy responses. Using the panel data for 72 countries from 2000 to 2011, the paper assesses the international transmission of food price inflation and volatilities as well as the effects of various internal and external factors on domestic food price inflation and volatility. The paper offers evidence in support of the international transmission of food price inflation and volatility. Specifically, the paper finds that the domestic food price inflation in Asia is strongly associated with the lagged value of global food price inflation (using the FAO food price index), while volatility spillovers from global to domestic food prices are rather contemporaneous. The paper also finds that both national food price inflation rates and volatilities are strongly associated with both intra- and extra- regional food price inflation rates and volatilities, respectively. The findings also suggest that higher economic growth rates, greater shares of food in merchandise imports, and smaller increases in the share of food in merchandise imports lead to lower domestic food price inflation. An appreciation of local currency, greater political stability, and higher income level are also found to lower domestic food price inflation. On the other hand, higher economic growth rates lead to lower volatilities of food prices.

Viable Stabilising Non-Taylor Monetary Policies for an Open Economy

We extend Krawczyk and Kim (Macroecon Dyn 13(1):46---80, 1999) and apply a viability approach to a small-open economy where the exchange rate works as an additional monetary policy transmission channel. A continuous-time version of the model presented in Batini and Haldane (In: Monetary policy rules. National Bureau of Economic Research, Cambridge, pp. 157---202, 1999a) is used. The model comprises the IS equation, a supply curve and the interest parity condition. We modify the third equation to capture an impact of a domestic interest-rate hike on the speedy appreciation of local currency. We calibrate this modified model using available literature results and apply specialised software (VIKAASA) to compute the open-economy viability kernel that is a set of economic states, from which the central bank can control the economy so that it remains within a nominal constraint set. We then analyse the kernel topology and show a few stablising policies that keep the economy within the constraint set. We also discuss the robustness of such polices to shocks and parameter uncertainty and observe that viability-based policies come from models, which do not require explicit weights on the variables of interest of a central bank. We also contend that in general, viability-based policies are less likely to do damage, if the policy-maker is wrong about some aspects of the environment.

The relationship between stock returns and the foreign exchange rate: the ARDL approach

This study employs the ARDL cointegration approach in order to examine the impact of financial liberalization on the relationships between the exchange rate and share market performance in China. We discovered that cointegration has existed between the Shanghai A Share Index and the exchange rate of the renminbi against the US dollar and Hong Kong dollar since 2005, when the Chinese exchange rate regime became a flexible, managed, floating system. We found that both the exchange rate and the money supply influenced stock price, with a positive correlation. We further show that the money supply increase was largely caused by a huge ‘hot money’ inflow from other countries in recent years. After local currency appreciation, hot money, followed by the money supply increase, pushed the market into a high level, based on expectations regarding the local currency's further appreciation.