Managed Exchange Rate Regime Research Articles

Analyzing factors shaping stock market development and regulation in emerging markets: Exchange rates, industrialization, press freedom, and capital flight

The research delved into the determinants of stock market development across nine Southern African Development Community (SADC) nations. The study employed seemingly unrelated regression (SUR) and system generalized methods of moments (SGMM) for comprehensive analysis. By building upon the research conducted by Bala and Hassan (2018) and Nyasha and Odhiambo (2020), this study applied El-Wassal’s (2013) four-factor framework to investigate the impact of capital flight, exchange rate regimes, industrialization, and press freedom on the development of the stock markets. Press freedom was identified as a catalyst for enlarging and enhancing liquidity in the stock market. Conversely, industrialization exhibited a negative impact on market size, while capital flight adversely affected market development, size, and liquidity. The study revealed that the pegged, crawling, and managed exchange rate regimes positively influenced stock market growth and capitalization while a floating exchange rate system detrimentally affected the same. This paper contributes to the extant body of theory and educates policymakers in the region regarding the criticality of selecting regimes that facilitate stable exchange rates, support unrestricted press, encourage industrialization, and mitigate capital flight.

Inflation Targeting, Exchange Rate Distortion and Output Stabilisation A Case of Zimbabwe Disinflation

Inflation targeting (IT) is practised in many countries and the real effects of strict inflation targeting were investigated on several occasions and less on other variants of IT. The study investigates the effects of inflation targeting lite on output. In particular, the compatibility of inflation targeting lite with managed exchange rate regime on output stabilization. The inflation targeting regime, the operating environment and exchange rate regimes were reviewed for Zimbabwe. An ARDL model was adopted as the empirical strategy to investigate the compatibility problem and the real effects of IT lite. Modelling output as output gap, inflation targeting lite and the exchange rate regimes were found to be inconsistent with output stabilization. IT lite and exchange rate premium increased the output gap, however the interaction between IT lite and exchange rate premium had negative effects on output. These results hold for both the short run and long run. However, considering the official rate and parallel rate separately, parallel rate has a negative effect but its interaction with IT has positive effects. The study recommends that developing countries should consider the exchange rate systems before the adoption of IT as a monetary policy framework. A floating exchange rate seemed to be compatible with IT lite.

Effectiveness of the Exchange Rate Channel in Monetary Policy Transmission in Pakistan


 
 
 
 
 The exchange rate is one of the most important channels of monetary policy transmission to the real economy. However, the effectiveness of this channel depends on the extent of exchange rate flexibility, degree of international capital mobility, and inflation expectations. Like other emerging economies, Pakistan is typically characterised by weak fiscal and monetary institutions, currency substitution, liability dollarisation, and vulnerability to sudden stops of capital flows. These features compel emerging economies to follow managed exchange rate regimes by restricting the mobility of capital flow. All these factors weaken the effectiveness of the exchange rate channel of monetary policy transmission. This study estimates the effectiveness of the exchange rate channel in monetary policy transmission in Pakistan and explores the impact of exchange rate regimes on the channel’s strength. The study benefitted from the widely used structural VARs methodology and found that the exchange rate channel is less effective in transmitting monetary policy shocks to the real economy. In recent years, however, greater flexibility in the exchange rate has improved the effectiveness of this channel.
 
 
 
 

Exchange Rate Pass-through to Consumer Prices in Pakistan: Does Misalignment Matter?

This study investigates the impact of exchange rate changes on consumer prices (commonly known as exchange rate pass-through (ERPT)) in Pakistan for the period 1995M1 to 2009M3. The study estimates short-run and long-run ERPT in Pakistan while taking into account the existing real exchange rate misalignment (RERM). The results suggest that the ERPT to consumer price inflation in Pakistan is very low (close to zero). The impact of the previous periods’ misalignment on inflation is found significant in managed exchange rate regime. However, the overall sample misalignment does not affect inflation. The impact of foreign inflation on domestic inflation is positive and statistically significant. JEL classification: F31, F41, E31 Keywords: Pass-through, Misalignment, Inflation

Monetary policy rule, exchange rate regime, and fiscal policy cyclicality in a developing oil economy

According to Frankel and Catao (2011), a commodity-exporting developing economy is advised to target the product price rather than consumer price, as the former monetary policy is automatically countercyclical against the volatile terms of trade shock. This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policies for a developing oil economy, to find an appropriate monetary rule combined with a pro/counter/acyclical fiscal stance based on a loss measure. The foreign exchange interventions distinguish between a managed and flexible exchange rate regime, while fiscal policy cyclicality depends on the oil output response of public consumption and public investment. The study reveals that the best policy combination is a countercyclical fiscal stance and consumer price monetary targeting under a managed exchange rate regime to stabilize the domestic price inflation, aggregate output, and real exchange rate in a small open economy.

Managed exchange rate regimes and monetary independence: an empirical appraisal

ABSTRACT Under the impossible trinity, it is alleged that attempts to maintain both monetary independence and an undervalued domestic exchange rate whilst being exposed to global capital flows will culminate in macroeconomic instability. To analyse the validity of the impossible trinity in the instance of a balance of payments surplus, we first employ a number of ARDL models to investigate the potential presence of co-integration between foreign reserves and several variables on the balance sheet of the Central Bank. A VECM is then used to exemplify the fact that policymakers must respond to an increase in foreign reserves so as to steer the interbank rate to the policy rate. In total, we argue that in the case of a balance of payment surplus (i) it is problematic to validate the existence of a transmission mechanism between foreign reserve accumulation and inflation; (ii) economies with heavily managed exchange rates appear to have achieved monetary independence whilst remaining open to global capital flows; and finally, (iii) since the four Central Banks examined target an overnight rate, rather than any form of monetary aggregate, ‘exogenous’ sterilisation initiatives are involuntary.

Exchange rate policies in Asia in an era of financial globalisation: An empirical assessment

AbstractEbbs and flows of capital have complicated macroeconomic policy management for all emerging market and developing economies (EMDEs) regardless of whether they have adopted flexible or managed exchange rate regimes. In the light of the renewed interest in the trilemma versus dilemma debate, we contribute to the related literature by presenting an empirical analysis of exchange rate flexibility and intervention for selected Asian EMDEs over the time period 2001–2016. In addition to estimating augmented Frankel–Wei regressions, we employ a generalised auto‐regressive conditional heteroscedasticity (GARCH) model to assess the extent of foreign exchange (FX) intervention and whether there exist any asymmetries in the way countries intervene. Our results show that although there is greater flexibility in exchange rates, there is evidence of some countries potentially using FX intervention to manage currency movements. We also find evidence of asymmetry in intervention where exchange rate volatility responds more emphatically to FX sales than purchases.

South Africa’s Trade Performance under Alternative Exchange Rate Regimes

This study examined the effect exchange rates have on import and export volumes under alternative exchange rate policies adopted in South Africa over the period 1960 to 2017. Using quarterly time series data for the stated period, a log-linear error correction model is employed to estimate the country’s export and import elasticities, taking into account Gross Domestic Product (GDP), the real price of exports, the real price of imports and real exchange rates. Using the freely floating exchange rate regime as the base period, the study concluded that both export and import volumes are lower under a system of fixed exchange rates. Export and import volumes were also found to be lower under the dual exchange rate regime, relative to the freely floating exchange rate regime. In accordance with export-led growth strategies, exports were found to be higher and imports lower under a managed floating exchange rate regime. It is therefore recommended that South Africa revert to a more managed exchange rate regime, until the South African economy is developed to accommodate a freely floating exchange rate regime.

South Africa’s Trade Performance under Alternative Exchange Rate Regimes

This study examined the effect exchange rates have on import and export volumes under alternative exchange rate policies adopted in South Africa over the period 1960 to 2017. Using quarterly time series data for the stated period, a log-linear error correction model is employed to estimate the country’s export and import elasticities, taking into account Gross Domestic Product (GDP), the real price of exports, the real price of imports and real exchange rates. Using the freely floating exchange rate regime as the base period, the study concluded that both export and import volumes are lower under a system of fixed exchange rates. Export and import volumes were also found to be lower under the dual exchange rate regime, relative to the freely floating exchange rate regime. In accordance with export-led growth strategies, exports were found to be higher and imports lower under a managed floating exchange rate regime. It is therefore recommended that South Africa revert to a more managed exchange rate regime, until the South African economy is developed to accommodate a freely floating exchange rate regime.

The Rise of the Dollar and Fall of the Euro as International Currencies

The modern notion of an international currency involves use in areas of international finance and trade that extend well beyond central banks' coffers. In addition to their important roles as foreign exchange reserves, international currencies are most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. In this short article, we provide evidence suggesting a recent rise in the use of the dollar, and fall of the use in the euro, with similar patterns manifesting across all these aspects of international currency use.

The Rise of the Dollar and Fall of the Euro as International Currencies

International currencies play important roles as foreign exchange reserves but are also most frequently used to denominate corporate and government bonds, bank loans, and import and export invoices. These currencies offer unrivaled liquidity, constituting large shares of the volume on global foreign exchange markets, and are commonly chosen as the anchors targeted by countries with pegged or managed exchange rate regimes. We provide evidence suggesting a recent rise in the use of the dollar, and fall of the use of the euro, with similar patterns manifesting across all these aspects of international currency use.

A market-based measure for currency risk in managed exchange rate regimes

We introduce a novel currency risk measure based on American Depositary Receipts (ADRs). Using an augmented ADR pricing model, we exploit investors’ exposure to potential devaluation losses to derive an indicator of currency risk. Using weekly data for a sample of 807 ADRs located in 21 emerging markets over the 1994–2014 period, we find that a deterioration in the fiscal balance and higher inflation increase currency risk. Interaction models reveal that the fiscal balance and inflation drive the determination of currency risk for countries with poor sovereign rating, low foreign reserves, low capital account openness and managed float regimes.

Capital controls and the real exchange rate: Do controls promote disequilibria?

The consensus view is that capital controls can effectively lengthen the maturity composition of capital inflows and increase the independence of monetary policy but are not generally effective at reducing net inflows and influencing the real exchange rate. This paper studies the adjustment dynamics of the real exchange rate towards its long-run equilibrium and presents empirical evidence that capital controls increase the persistence of misalignments. Allowing the speed of adjustment to vary according to the intensity of restrictions on capital flows, it is shown that the real exchange rate converges to its long-run level at significantly slower rates in countries with capital controls. This result is stronger when the exchange rate is undervalued and is independent of confounding factors such as the exchange rate regime and other forms of heterogeneity affecting the speed of adjustment. I also find evidence that controls on capital inflows have greater effects than controls on outflows. In addition, while the combination of capital controls with a fixed or managed exchange rate regime significantly increases the persistence of misalignments, controls appear to loose traction under more flexible exchange rate arrangements.

The effects of government spending shocks on the trade account balance in Korea

This paper investigates fiscal policy effects on the trade account balance in Korea using open economy vector autoregressive (VAR) models. In response to fiscal spending shocks, real appreciations occur, followed by deteriorations in the trade account balance with the pre-2000 sample period, while real depreciations occur leading to an improvement in the trade account balance with the post-2000 sample period. We explain this structural break in relation to Korea's transition from a tightly managed exchange rate regime to a more market-oriented floating system after Korea's foreign exchange crisis in 1997–98. Furthermore, such fiscal policy effects from our post-2000 sub-sample imply that expansionary fiscal policy can be effective in stimulating private sector economy in Korea.

Monetary and fiscal policy interactions in a post Keynesian open-economy model

ABSTRACTUsing a post Keynesian model, this study aims to analyze the stabilizing role of fiscal and monetary policies in an open economy with a managed exchange rate regime. The real exchange rate is modeled as an endogenous variable and inflation explained using the conflicting claims approach. The dynamic properties of macroeconomic equilibrium are evaluated in different regimes of fiscal and monetary policies. The main result of this study suggests that the preferred policy regime is the one in which economic authorities are complementary and fiscal policy plays an explicitly active role. In this regime, the fiscal policy must commit to the target for the rate of capacity utilization and the monetary authority must commit to the inflation target.

The impact of exchange rate volatility on emerging market exports

Orientation: High exchange rate volatility has implications for business and policy decisions and exchange rate movements are important in debates around trade and trade policies. Research purpose: The purpose of the research was to determine the impact of exchange rate volatility on exports in emerging markets. Motivation for the study: A lack of clarity in literature regarding this relationship increases the risk of improper planning by export organisations as well as implementing suboptimal economic policies. Research design, approach and method: This research analysed the effect of exchange rate volatility on emerging market exports using a sample of nine emerging countries from 1995 to 2010. Panel data analysis was conducted. Volatility was measured by Generalised Autoregressive Conditional Heteroscedasticity and conventional standard deviation in order to determine if the instrument of volatility used influenced the nature of the relationship between exchange rate volatility and exports. The Pedroni residual cointegration method was used to test for panel cointegration in order to determine if there was a long-run relationship. Main findings: The results showed that exchange rate volatility had a significant negative effect on the performance of exports, regardless of the measure of volatility used. It was also evident that a long-run relationship did exist. Practical/managerial implications: The study concluded that the policy mix that will reduce exchange rate volatility (such as managed exchange rate regimes) and relatively competitive exchange rates were essential for emerging markets in order to sustain their exports performance. Contribution/value-add: This research provided policy makers of emerging market economies with new evidence pertaining to the relationship between exchange rate volatility and the performance of exports. This research contributed to the existing knowledge on the topic and provides a base for future research on related topics.

The Game of Anchors: Studying the Causes of Currency Crises in Belarus

Belarus experienced a sequence of currency crises during 2009-2014. Our empirical results, based on a structural econometric model, suggest that the activist wage policy and extensive state program lending (SPL) conflicted with the tightly managed exchange rate regime and suppressed monetary policy transmission. This created conditions for the unusually frequent crises. At the current juncture, refocusing monetary policy from exchange rate to inflation would help to avoid disorderly external adjustments. The government should abandon wage targets and phase out SPL to remove the underlying source of the imbalances and ensure lasting stabilization.

The Game of Anchors: Studying the Causes of Currency Crises in Belarus

Belarus experienced a sequence of currency crises during 2009-2014. Our empirical results, based on a structural econometric model, suggest that the activist wage policy and extensive state program lending (SPL) conflicted with the tightly managed exchange rate regime and suppressed monetary policy transmission. This created conditions for the unusually frequent crises. At the current juncture, refocusing monetary policy from exchange rate to inflation would help to avoid disorderly external adjustments. The government should abandon wage targets and phase out SPL to remove the underlying source of the imbalances and ensure lasting stabilization.

Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework

We study a wide range of hybrid inflation–targeting (IT) and managed exchange rate regimes, analyzing their implications for inflation, output and the exchange rate. To this end, we develop an open economy new–Keynesian model featuring sterilized interventions as an additional central bank instrument operating alongside the Taylor rule and affecting the economy through portfolio balance effects in the financial sector. We find that there can be advantages, from a welfare perspective, to combining IT with some degree of exchange rate management via FX interventions. Unlike “pure” IT or exchange rate management via interest rates, FX interventions can help insulate the economy against certain shocks, especially shocks to international financial conditions. However, managing the exchange rate through interventions may also hinder necessary exchange rate adjustments, e.g., in the presence of terms of trade shocks.

Monetary Policy in Hybrid Regimes: The Case of Kazakhstan

This paper analyzes the monetary policy framework in Kazakhstan. The authorities have been successful in containing inflation in the context of a managed exchange rate regime. Over the past two years, the central bank has taken steps to enhance its ability to regulate liquidity in the financial system. However, the current policy interest rate does not properly signal the stance of policy, reflected in a weak transmission from the policy rate to money market interest rates. With the use of a stylized model, the paper studies the macro determinants of money market interest rates under the current framework, and illustrates both the benefits and challenges of active interest rate policy. The model shows that limited use of instruments to steer short-term interest rates weakens the framework’s ability to counteract shocks. Finally, the paper explores the implications of varying degrees of exchange rate flexibility for interest rate policy and open market operations.