Nominal Exchange Rate Depreciation Research Articles

ESTIMATING EXCHANGE RATE PASS-THROUGH TO DOMESTIC PRICES; SIERRA LEONE EXPERIENCE

<p>The study conducts an investigation that seeks to evaluate the nature of exchange rate pass-through on consumer prices in Sierra Leone. As a small, open economy, the country is susceptible to exogenous shocks. The exchange rate acts as a medium through which external shocks get transmitted to the real economy. Therefore, the general objective of the study is to assess the effect of the fluctuation of the exchange rate on domestic prices in Sierra Leone. More specifically, it sought to determine which type of exchange rate pass-through exists for Sierra Leone, using annual time series data between 1992 and 2022. The empirical analysis was based on a VECM model. The coefficient of the exchange rate (.5365) which is also significant at the 5% level of significance (p-value = 0.002), indicates that the exchange rate pass-through is incomplete in Sierra Leone. This means that a 1-unit depreciation of the Leone (increase in nominal exchange rate), leads to an increase in Sierra Leone consumer price by .5365 units or approximately 53.65%. This is an indication of indirect pass-through, where importers increase the price of imported goods to maintain their markup in the event of a nominal exchange rate depreciation. The recommendation to the finding is that since it was revealed that Sierra Leone has relatively high exchange rate shocks means that monetary authorities in Sierra Leone should pay more attention to the effects of EXR fluctuation on consumer prices. Measures such as the promotion of local production to substitute imported goods are key to addressing the effects of exchange rate variations.</p><p> </p><p><strong>JEL: </strong>F31, E31, C32, O24<strong></strong></p><p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/lit/0758/a.php" alt="Hit counter" /></p>

Inflation in Iran: an empirical assessment of the key determinants

PurposeTo study the key determinants of chronically high inflation in Iran.Design/methodology/approachRelying on annual data from 1978 to 2019, the authors employ an Auto-Regressive Distributed Lag (ARDL) model and Error Correction Model (ECM) to study the inflationary effects of monetary and fiscal policies as well as exchange rate swings and sanctions intensification.FindingsThe authors find that increase in money supply, depreciation of nominal exchange rate, increase in fiscal deficit and intensification of sanctions are among the key drivers of inflation in Iran. Their impact is profound in the long run, but in the short run only money supply and currency depreciation are significant. Also, when exploring the inflation in different components of Consumer Price Index (CPI), we find robust long- and short-run effects from money supply and exchange rate, while the effects of fiscal deficit and sanctions vary across different components.Originality/valueThe authors contribute to the literature by setting apart the long-vs short-run effects of key variables on inflation in Iran. The authors also employ improved measures of fiscal deficit and sanctions that are shown to be of significance in the long run. Lastly, the authors go beyond the aggregate index and examine the variations in different CPI components.

THE EFFECT OF NOMINAL EXCHANGE RATE DEPRECIATION ON TRADE IN ELEVEN DEVELOPING COUNTRIES

This study examined the effect of nominal exchange rate depreciation on the trade balance in 11 Asian-African countries between 1980 and 2019, and within the context of an exogenously determined single structural break. The countries had persistently experienced both nominal exchange rate depreciation and upward trends in trade in goods. Using the Chow test to frame the discussion, these countries were found to be facing structural changes associated with external factors such as the commodity price crisis in South Asia and the global financial crisis. The time-series autoregressive distributed lag (ARDL) approach with bounds test for cointegration and error-correction mechanism (ECM) was also applied for the analysis. The results of the study showed a long-term cointegration between the trade in goods and other variables included. Specifically, the nominal exchange rate depreciation positively affected the trade in goods in both the long-run and short-run in most of the Asian-African countries studied. There was a positive relationship between trade and foreign direct investment in the short-run, but this relationship mostly became insignificant in the long-run. Gross domestic product had a significant impact on trade performance in goods in both the long-run and short-run in all countries studied.

Analiza uticaja promene nominalnog deviznog kursa na stopu inflacije na primeru odabranih zemalja

Inflation rate is one of the essential macroeconomics variables and it represents the main goal of monetary policy. It is determined by a great number of factors, so it is necessary to analyse the impact their changes have on inflation rate. The purpose of this research is the analysis of the nominal exchange rate pass-through effect on inflation rate in selected emerging and developed countries in the period 2014-2020, which share the same characteristics of inflation targeting, as main monetary policy regime, and managed floating exchange rate, as exchange rate type. Inverse proportion between volatility of nominal exchange rate and inflation rate is proven (depreciation of nominal exchange rate of national currency leads towards the growth of inflation rate), as well as higher pass-through effect in emerging countries compared to developed countries.

Effects of Exchange Rate Volatility on Economic Growth: Evidence from West African Monetary Zone

Abstract: This study examined the effects of exchange rate volatility on economic growth in four WAMZ countries. The study uses the pooled ordinary least squares, fixed effects and random effects models, and obtains a robust standard error estimate of the model by applying xtreg, cluster()fe. The empirical analysis shows that the effects of exchange rate volatility on economic growth is insignificant. The results also show a positive correlation between exports and economic growth. This implies that policies aimed at increasing exports through an appropriate exchange rate may be beneficial countries. In addition, the analysis also shows a positive and significant link between imports and economic growth rates. Therefore, this confirms that the countries actually benefit from imports resulting from the competitive pressure generated by the import of consumer goods and professional knowledge, and also from the transfer of technology embodied in the import of goods by producers. Hence, the policy of removing import barriers will benefit the countries. In addition, the results show that there is a positive correlation between the nominal exchange rate and economic growth rate. Therefore, it shows that the nominal exchange rate depreciation policy can play an important role in improving the economic growth of the countries. However, the research results show that there is an inverse relationship between the real exchange rate and economic growth. Considering the importance of the real exchange rate, this study suggests the introduction of a common currency in the WAMZ to reduce the negative effects of the real exchange rate on economic growth.

Long-run purchasing power parity redux

We test for long-run covariability between nominal exchange rate depreciation and inflation differentials to provide a new perspective on long-run Purchasing Power Parity (PPP). The method directly tests Cassel’s concept of relative PPP and is more robust to departures from exact unit roots in nominal exchange rates or relative prices than standard unit root and cointegration tests for PPP. The central result of the paper is that the 90 percent confidence interval for (1) the long-run correlation coefficient is above zero and (2) the long-run linear regression coefficient contains one and, therefore, long-run PPP cannot be rejected for 9 of the 16 countries. For six of the countries, adding a third criterion that the confidence interval for the long-run linear regression coefficient have relatively narrow bands provides strong evidence of long-run PPP. The evidence of long-run PPP is much stronger for high inflation/high depreciation countries than for low inflation/low depreciation countries.

MONETARY POLICY RULES AND MACROECONOMIC STABILITY: EVIDENCE FROM SRI LANKA

This study estimates the forward-looking monetary policy reaction function for SriLanka using monthly data from 1980 to 2017. The results indicate that the CentralBank of Sri Lanka (CBSL) followed the Taylor rule to set interest rates. Our forwardlookingmodel estimations show that the coefficient on inflation increases over time,reflecting the greater focus on price stability by the bank. The results suggest that theCBSL reacted to nominal exchange rate depreciation by tightening monetary policy.Although the degree of interest rate smoothness gradually decreases over time, thestudy shows that the CBSL did not react to movements in fiscal deficit during theperiod under investigation. This finding suggests that the inclusion of fiscal deficit inthe Taylor rule does not provide a better specification of the policy reaction functionin Sri Lanka.

Remittances, Remittance Concentration, and Volatility: Is Africa Different from the Middle East?

This paper makes a new contribution to the empirical literature on the macroeconomic consequences of remittances using data over 1970-2015 period for 56 African and Middle Eastern countries to study the impact of (i) large remittance inflows and (ii) high concentration of origin of remittance on the volatilities of real GDP growth, exports-to-GDP ratio, nominal exports growth and nominal exchange rate depreciation. We find that (i) large remittances can reduce all types of volatility, especially in African countries, and (ii) high remittance concentration, by itself, has been associated with higher volatilities in African but not Middle Eastern countries, and that having both high remittances, but also high concentration aggravates all types of volatility in both regions, although results for the Middle East are not always conclusive.

The effects of conventional and unconventional monetary policy on exchange rates

What are the effects of monetary policy on exchange rates? And have unconventional monetary policies changed the way monetary policy is transmitted to international financial markets? According to conventional wisdom, expansionary monetary policy shocks in a country lead to that country's currency depreciation. We revisit the conventional wisdom during both conventional and unconventional monetary policy periods in the US by using a novel identification procedure that defines monetary policy shocks as changes in the whole yield curve due to unanticipated monetary policy moves and allows monetary policy shocks to differ depending on how they affect agents' expectations about the future path of interest rates as well as their perceived effects on the riskiness/uncertainty in the economy. Our empirical results show that: (i) a monetary policy easing leads to a depreciation of the country's spot nominal exchange rate in both conventional and unconventional periods; (ii) however, there is substantial heterogeneity in monetary policy shocks over time and their effects depend on the way they affect agents' expectations; (iii) we find favorable evidence to Dornbusch's (1976) overshooting hypothesis; (iv) changes in expected real interest rates play an important role in the transmission of monetary policy shocks.

Income Convergence in the East African Community

The East African Community partner states aim to establish a Monetary Union by 2023. As advanced by the optimum currency area theory, countries seeking to enter into a monetary union should be as similar as possible to reduce their susceptibility to adverse economic shocks. The East African Monetary Union Protocol signed in 2013 stresses the need for convergence of macroeconomic variables as important preconditions before forming the monetary union. The benchmark macroeconomic indicators include a headline inflation rate of eight per cent, a fiscal deficit of three per cent of the country’s gross domestic product on net present value terms, a debt to gross domestic product ratio of 50 per cent and maintenance of a 4.5 months’ reserves of import cover. Article 82 (1) of the East African Community Treaty also compels partner states to work towards harmonizing their macro-economic policies especially those related to interest and exchange rates, fiscal and monetary policies. However, as argued by many scholars, nominal convergence alone cannot indicate how well countries will perform once they are in a monetary union. The criteria also fail to distinguish the countries that constitute an optimal currency area. An autoregressive distributed model was applied in regression analysis. Empirical findings supported the presence of conditional convergence and that per capita gross domestic product growth was positively influenced by physical capital and nominal exchange rate depreciation and negatively affected by human capital and inflation rate. From the foregoing, it can be concluded that reduction of income differences among the partner states can be fostered through increased investments in physical capital, maintenance of a competitive exchange rate regime and a low inflation rate regime. Keywords: Unconditional convergence, conditional convergence, Solow model, optimum currency areas and autoregressive redistributed lag model

Impact of Exchange Rate on Macroeconomic Indicators

The exchange rate is a pivotal pricing instrument that simultaneously impacts various components of the economy. Depreciation of nominal exchange rate is export promoting, which might be a desired export led growth policy, and especially critical to closing-down the widening current account imbalance. But negative effects resulting from high dollarization and high share of imported intermediate inputs can outweigh positive effect. The aim of this research is to quantify impact of change in nominal exchange rate and test contractionary depreciation hypothesis on Georgian economy using structural and Bayesian vector autoregression. According to the acquired results, appreciation of nominal exchange rate is expected to decrease inflation, monetary policy rate, interest rate on domestic currency loans and economic growth in the medium run; however, impact on economic growth in the short run is statistically not significant.

Bilateral Export Demand Function of India: An Empirical Analysis

In this paper, we examine the determinants of bilateral export demand function of India during 1993:Q1-2015:Q1. The starting point of our study is 1993:Q1 by keeping into consideration that RBI implemented market determined managed floating flexible exchange rate system during that period. We have employed Auto Regressive Distributed Lag (ARDL) model by using the macroeconomic variables such as real exports, foreign income, nominal exchange rate (Rupee-Dollar) and relative price. We found there exists a long run equilibrium relationship between real exports, foreign income, exchange rate and relative price. In our empirical analysis, we found that in the long run and short run, real exports are influenced more by foreign income followed by relative price. Foreign income carries a positive sign and is statistically significant, which implies that 1% increase in foreign income will increase real export by 1.63% in the long run. Likewise, relative price carries a negative sign and is statistically significant which implies 1% decrease in relative prices that will increase real exports by 0.22% in the long run. The nominal exchange rate carries a negative sign and is statistically significant (in both short run and long run), which suggests that depreciation of nominal exchange rate would not stimulate the volume of export during our study period. Hence, for policy point of view if any policy makers want to promote exports by depreciating, the rupee will not give fruitful results.

Distribution and Conflict Inflation in Brazil under Inflation Targeting, 1999–2014

In this paper, we analyze Brazilian inflation under the inflation-targeting system from a conflict inflation perspective and show how the inflation target system only worked well when there was a trend of exchange rate appreciation. Later, the strengthening of the bargaining power of workers and rising real wages since 2006, combined with continuous nominal exchange rate depreciation after mid-2011, increased distributive conflicts and are ultimately behind the recent shift toward austerity.

Impact of Exchange Rate on Macroeconomic Indicators

The exchange rate is a pivotal pricing instrument that simultaneously impacts various components of the economy. Depreciation of nominal exchange rate is export promoting, which might be a desired export led growth policy, and especially critical to closing-down the widening current account imbalance. But negative effects resulting from high dollarization and high share of imported intermediate inputs can outweigh positive effect. The aim of this research is to quantify impact of change in nominal exchange rate and test contractionary depreciation hypothesis on Georgian economy using structural and Bayesian vector autoregression. According to the acquired results, appreciation of nominal exchange rate is expected to decrease inflation, monetary policy rate, interest rate on domestic currency loans and economic growth in the medium run; however, impact on economic growth in the short run is statistically not significant.

‘Dog Days’ Full Employment without Depreciation: Can It Be Done?

‘Dog Days’ Full Employment without Depreciation: Can It Be Done?

Impact of the Effective Exchange Rate on the Trade Balance of Sri Lanka: Evidence from 2000 to 2013

This study investigates the possibility of improving the trade balance of Sri Lanka through currency depreciation. An error correction model (ECM) was used to examine the short-term and long-term effects of nominal and real effective exchange rate depreciation on the trade balance. While there is no long-run relationship between the real effective exchange rate and the trade balance, depreciation of the nominal effective exchange rate will lead to a deterioration of the trade balance in the long term. Further, the results indicate that there is a positive causality relationship from the real GDP to the trade balance. Conversely, growth in money supply will worsen the country’s trade balance in the long run. The empirical findings show that currency devaluation is not an effective policy tool to improve the country’s trade balance. JEL Classification: F 140

Public Foreign Debt and Economic Growth in Ukraine

On the surface, a rapid accumulation of public external debt over the last few years has been motivated by the logic of stabilisation policy, following a deep recession during the 2008–2009 financial crisis and slow post-crisis recovery. However, it is exactly the excessive build-up of foreign debt that is blamed for recent macroeconomic difficulties. Based on the quarterly data for the years 2000–2013, it was found within the SVAR framework that an increase in public foreign debt is associated with a short-lived increase in output, with a decline in that indicator to follow, and nominal exchange rate depreciation, with no impact on the current account. On the other hand, either the current account deficit or the exchange rate depreciation contribute to a higher debt level, while there is no output effects on the public foreign debt. Among other results, the exchange rate depreciation brings about an improvement in the current account, but its impact upon the output is restrictionary. Also, there is a virtuous two-way causality between the output and the current account that underlines the importance of external equilibrium for Ukraine’s economy. Our results are robust to changes in the length of the data sample and the choice of industrial output as a proxy for output.

Domestic and External Demand Shocks in Ukraine

Persistent budget deficits and extremely high interest rates (while inflation remains relatively low) have been a distinct feature of the 2010–2013 period in Ukraine. By using a statistical technique of the vector autoregressive − vector error correction (VAR/VEC) model, it is established that: a) the budget deficit is a factor behind the exchange rate depreciation and an increase in the interest rate, with a very strong contractionary effect on output; b) a higher interest rate contributes to worsening of the budget balance and a significant decrease in output (both are standard macroeconomic relationships); c) nominal exchange rate depreciation permanently widens the budget deficit, combined with a temporary increase in the interest rate and short-lived output contraction. It is worth noting that upward interest rate pressure is the only statistically significant effect of a positive output shock. According to the variance decomposition, the budget balance determines up to 50% and the interest rate upwards of 40% of changes in the output, respectively. It is confirmed that an increase in output is of marginal importance for the budget balance. On the whole, our findings argue in favour of fiscal discipline in Ukraine as a stabilisation policy tool.

Analyzing the Exchange Rate Pass-through in Mexico: Evidence Post Inflation Targeting Implementation

This paper presents an analysis of the exchange rate pass-through mechanism for the Mexican economy after the formal adoption of inflation targeting policy. In particular, this research work analyzes how a change in the nominal exchange rate depreciation is transmitted to domestic prices along the distribution chain of pricing. The analysis is carried out using a recursive Structural Vector Autorregression with exogenous variables (recursive SVAR-X) model, which aims at the estimation of structural impulse-response-functions as a tool to analyze the degree and speed of the effect of exchange rate depreciation changes on domestic prices. Additionally, variance decompositions are computed to capture the relative importance of exchange rate depreciation shocks in explaining inflation fluctuations. Our results show that, for the period of analysis (after the formal adoption of inflation targeting in Mexico), the exchange rate pass-through to consumer prices is quite small and fast and exchange rate surprises are not relevant to explain consumer price inflation variation.

Two Exercises of Inflation Modelling and Forecasting for Azerbaijan

The paper proposes two econometric models of inflation for Azerbaijan: one based on monthly data and eclectic, another based on quarterly data and takes into account disequilibrium at the money market. Inflation regression based on monthly data showed that consumer prices dynamics is explained by money growth (the more money, the higher the inflation), exchange rate behaviour (appreciation drives disinflation), commodities price dynamics (“imported” inflation) and administrative changes in regulated prices. For the quarterly model, nominal money demand equation (with inflation, real non-oil GDP and nominal interest rate on foreign currency deposits as predictors) and money supply equation were estimated, and error-correction mechanism from money demand equation was included into inflation equation. It is shown that disequilibrium at the money market (supply higher than demand) drives inflation together with money supply growth and nominal exchange rate depreciation and administrative changes in prices.No cost-push variables appeared to be significant in this equation specification. Both models give similar inflation projections, but sudden changes in money demand (2012) lead to significant differences between the projections. It is shown that money is the most important inflation determinant that explains up to 97.8% of CPI growth between 2012 and 2015, and that in order to keep inflation under control the Central Bank of Azerbaijan should link money supply to real non-oil GDP growth.