Real Effective Exchange Research Articles

Analisis Dinamika dan Keseimbangan Pembiayaan Bank Umum Syariah Dengan Pendekatan Error Correction Model

The study aims to analyze the dynamics and balance of financing of Islamic Commercial Banks in Indonesia during the period 2015-2023 with a focus on changes in monetary policy, real effective exchange rate, price level, profitability, and capital adequacy. The research method uses a quantitative approach with analysis techniques using the error-correction model (ECM) approach. The results showed that monetary policy, real effective exchange rate, profitability, and capital adequacy ratio have a significant influence on the financing of Islamic Commercial Banks in Indonesia in the long run. In contrast, the price level does not show a significant influence on financing in the long run. These results explain that macroeconomic factors and banking performance are crucial in determining the balance of financing in the Islamic banking sector in Indonesia. The findings suggest that changes in monetary policy, which often reflect overall economic conditions, can affect financing decisions in Islamic banks. In addition, fluctuating real exchange rates can affect the price competitiveness and financial position of banks. Profitability, as an indicator of financial health, and the capital adequacy ratio, as an indicator of a bank's ability to bear risk, were also found to have a significant influence, suggesting that the internal performance of Islamic banks is decisive in the financing provided.

Is There a J-Curve Effect in the Korean Service Trade?

ABSTRACT In this article, we test the asymmetric J-curve hypothesis using data from 10 Korean service industries. When we tested for a symmetric J-curve using the linear autoregressive distributed lag (ARDL) approach, we found support for the J-curve in one industry and the inverse J-curve in two industries. However, when we tested the asymmetric J-curve using the nonlinear ARDL approach, we found support for the asymmetric J-curve in four industries and the asymmetric inverse J-curve in four more industries. The increase from three to eight cases is attributed to the nonlinear adjustment of the real effective exchange rate of the won.

On the fiscal deficit and economic growth in sub-Saharan Africa: A new evidence from system GMM.

Using a two-step approach GMM, this study examines the short- and long-term effects of fiscal deficit on the economic growth of 42 Sub-Saharan African nations between 2011 and 2021. The World Development Index, the most reliable source, is where the panel data is taken from. Using the Levin-Lin-Chu and Hadri LM tests for unit root, it was determined that there is no risk of a random walk in the data. The study's findings indicate that while the fiscal deficit has short-term, positive, and significant benefits on the economic growth of SSA countries, it has long-term, negative repercussions. According to the system GMM's results, an increase in the fiscal deficit of SSA countries is linked to a short-term increase in economic growth of 0.036 percent, while an increase in the fiscal deficit of one percentage point is linked to a long-term decline in economic growth of SSA countries of 0.013 percent, holding all other factors constant. The study's findings also showed that the budget deficit has a larger positive short-run coefficient than a negative long-run coefficient. The study also revealed that while real effective exchange rates and inflation short-term hinder economic growth, gross fixed capital creation and real interest rates are the primary drivers of economic expansion. Long-term economic growth in the SSA countries is also found to be positively and significantly impacted by gross fixed capital formation. According to the study, SSA nations should manage their fiscal deficits and, in the long run, provide more funds for gross fixed capital development.

Intersecting Dynamics: The Influence of Macroeconomic Factors and Financial Development on Interest Rate Spreads in Uganda

The study investigates the factors influencing interest rate spreads in Uganda's banking sector, focusing on inflation, GDP, Real Effective Exchange Rate (REER), private sector credit, and financial development. Using an Autoregressive Distributed Lag (ARDL) model on data from 2001 to 2022, it examines short and long-term dynamics between these variables and interest rate spreads, within the liquidity preference theory framework. In the short run, inflation and GDP have marginally significant positive impacts on interest rate spreads, indicating that initial increases may widen spreads due to heightened liquidity demand and economic activity. Conversely, in the long run, these factors exhibit significant negative effects, suggesting a stabilizing influence of monetary policy and increased market efficiency. The REER's short-term impact reflects currency value fluctuations affecting risk premium adjustments, which diminish in the long run as markets adapt. The study also explores the interaction between inflation and financial development, represented by private sector credit, on interest rate spreads. Short-term results show a non-significant negative moderation by financial development, while long-term analysis suggests a potential amplification of inflation's effects as the financial sector matures, requiring nuanced financial development policies. Policy recommendations stress the importance of stabilizing inflation and exchange rates to control interest rate spreads in the short term. Long-term strategies include enhancing banking sector efficiency and promoting competitive practices to mitigate the negative effects of economic growth on interest rate spreads.

Understanding the Dynamics Between Monetary Policy and Interest Rate Spreads in Uganda: A Quantitative Study

This study delves into the intricate relationship between monetary policy variables and interest rate spreads in Uganda's financial sector. It examines the impact of the rediscount rate, inflation, money supply, and the Real Effective Exchange Rate on interest rate spreads. Findings indicate that while short-term changes in the rediscount rate have a limited effect on interest rate spreads, higher rates widen spreads in the long term as banks adjust strategically. Initially, inflation narrows spreads, but persistent high inflation widens them over time as banks hedge against inflation risk. Moreover, an increase in money supply reduces spreads in the short run but has diminishing effects over time. Recommendations include transparent adjustments of the rediscount rate, robust inflation targeting frameworks, and vigilant monitoring of the money supply to support economic growth and financial stability. Overall, this study provides insights for policymakers and financial institutions, emphasizing the importance of considering both short-term and long-term effects in monetary policy adjustments for Uganda's economic stability.

Analysing the Mediating Influence of Share Markets on the Relationship between GDP Growth and Macroeconomic Variables in MENA and Developed Countries

This study examined the relationship between GDP growth and different macroeconomic variables including foreign direct investment, gross fixed capital formation, government expenditure on education, consumption expenditure, GDP per person employed, exchange rate, market capitalization, and inflation in case of MENA and developed countries. Furthermore, it tried exploring the mediating role of the share market in the relationship between economic development and various macroeconomic variables MENA & developed countries. The study has used panel data from the period of 2002-2021. The data has been taken from multiple sources i.e. World Development Indicators (WDI) by The World Bank, International Financial Statistics (IFS), several economic surveys of respective countries and Central Bank’s publications. The study reveals mixed order of integration among variables. Consumption expenditure is stationary in both panels, while expenditure on education is non-stationary. Real effective exchange rate is stationary under both panels, while GDP per employed persons is non-stationary. GDP growth rate, inflation, and market capitalization are stationary for both developed and Mena countries. However, gross fixed capital formation is stationary at first difference. The correlation matrix results show a weak correlation between consumption expenditure and educational expenditure, with a 9 percent negative correlation. For Mena countries, the study found a negative association between consumption expenditure and educational expenditure, with a 23% correlation. Real effective exchange rate is negatively associated with foreign direct investment, GDP per employed person, gross fixed capital formation, inflation, and market capitalization. For developed countries, the coefficient of FDI increases GDP growth rate by 97%, while gross fixed capital formation decreases GDP growth rate by 10.2 units due to 1 unit increase in gross fixed capital formation. Consumption expenditures increase GDP growth rate by 2% due to 1 unit increase, while inflation increases it by 5.9 units. Exchange rate is also positively related with GDP growth rate, with a 1% increase in exchange rate boosting it by 29%. The study found partial mediation of market capitalization in developed countries and uni-directional causality in Mena countries. Keywords: Market Capitalization, Mediation Analysis, Mena Countries, Economic Growth, Panel Data Analysis

Are exchange rates absorbers of global oil shocks? A generalized structural analysis

This paper studies the impact of global oil market shocks on the level, volatility, and correlation dynamics of real effective exchange rates over time. We find that the USD and the EURO act as shock absorbers, as shocks to the global oil market explain substantial proportions of the volatility and correlation dynamics of each exchange rate – compared to the small or even negligible contributions of exogenous interest rate and effective exchange rate shocks. Further we find an interesting “puzzle” that the Euro Area unexpectedly behaves as if it were an oil exporting country - the EURO appreciates in response to a flow demand shock that increases oil price. Our findings are garnered from a generalized time-varying SVAR model with stochastic volatility that allows for correlated disturbances between observation and transition equations and among transition equations themselves. This approach of enriching dynamics between the first and second moments of endogenous variables is particularly suitable for capturing the transmission of structural level oil shocks to the volatility of exchange rates and their correlation with the global oil market.

Real exchange rate and economic activity in Jamaica

This paper uses Bayesian VAR Analysis to empirically evaluate the relationship between the deviations of the real effective exchange rate from its equilibrium and Jamaica's GDP (and its components) over the period 1998 to 2021. The paper finds that an appreciation in the real exchange rate is generally associated with a fall in Jamaica's GDP, but the impact is small and statistically insignificant. However, this paper finds evidence that an appreciation hurts the trade balance of goods and the export of goods and services. The paper also finds that the tourism industry is resilient to losses in competitiveness, which may reflect the impact of factors that are not captured in our model.

Export Instability, Investment, Export Growth and Economic Growth in India

The “Export-led Growth Hypothesis,” as it is known in the literature, is still a popular issue in both theoretical and empirical research. According to the export-led growth hypothesis (ELGH), a key factor in determining growth is the expansion of exports. It asserts that growing capital and labour inputs into the economy as well as exports can contribute to a country’s overall growth. The association between economic development, export growth, export fluctuation, and real effective exchange rate (REER) in India from 2001 to 2021 is examined in this paper using a multiple linear regression analysis model. Additionally, the impacts of foreign exchange, export fluctuation on investment, and import of capital goods have also been studied. The autocorrelation is also tested using the Durbin-Watson (D-W) test. Investigation of the association between income growth and exports in the context of India reveals that the country’s exports haven’t increased significantly enough to prove the theory of export-led growth. For instance, ceteris paribus, one per cent change in exports over time is expected to result in a 0.007 per cent increase in GDP. Weaker global demand, inflation, dropping exports, and growing global trade conflict all contribute to a weaker-than-expected positive link between GDP and exports. However, the findings have also shown that one per cent rise in instability increases GDP by 5.04 per cent. Furthermore, research has indicated that export instability does contribute to import for capital goods and demonstrates the relationship between investment and export instability is positive but not statistically significant. The result for policy is that, in order to decrease the negative impacts of export fluctuations, India should concentrate on those goods in which it has a competitive edge. The primary factors of the excessive volatility and restricted growth must be fully investigated in order to mitigate instability, and inherent flaws must be addressed.

Singling Out the Pull Factors of Brain Gain in Pakistan

Brain Gain is the rise in the number of highly educated foreign nationals moving to a country where there are many opportunities to survive and get a job. This study has focused on the effect of pull factors on brain gain in Pakistan. We have used data from 1990 to 2023 in this analysis. The dependent variable is the brain gain. The Johanson cointegration test result showed that investment and the real effective exchange rate had inverse significant effects on brain gain. However, political stability and wage differences influenced brain gain positively in Pakistan. It is suggested that the Government should provide a more economic and stable political environment in the country to encourage skilled, highly skilled, and highly qualified labor to migrate back to Pakistan. The government may also give them infrastructure in the form of setting up skill development centers, giving financial support, providing them tax incentives, and forming a forum that will connect the return migrants with employers in order to get jobs according to their skills. Moreover, there is a serious need to provide more employment chances to people for high growth and development.

Makroekonomske, institucionalne i financijske odrednice deficita tekućeg računa u Sjevernoj Makedoniji

The role of current account balances in macroeconomic policy is progressivelyhigh, especially in transition countries. Using yearly level data for a 1994-2022period, based on co-integration analysis, this research empirically investigates themacroeconomic, institutional, and financial determinants of the current accountdeficit in North Macedonia. The results of the study reveal that a country’s currentaccount deficit is significantly affected by domestic demand factors like realeffective exchange rate, output gap, and trade openness, the fiscal-related factor ofgross debt position, the institutional-related factor of economic freedom, legal andproperty rights, regulatory index, control of corruption, government effectiveness,as well as financial development captured by money supply. The study also findsout that the country has recorded more deficit in the current account thanpotentially expected during two time periods, the pre-financial crisis period 2001-2008 and during the COVID-19 crisis period 2019-2022.

Asymmetric Impact of Real Effective Exchange Rate Shocks on Economic Growth in Africa: Evidence From Symmetric and Asymmetric Panel ARDL-PMG Model

Asymmetric Impact of Real Effective Exchange Rate Shocks on Economic Growth in Africa: Evidence From Symmetric and Asymmetric Panel ARDL-PMG Model

Analysis of the optimal inflation rate in the economic growth process of a developing country: The case of South Africa

The consensus is that price stability promotes sustainable economic growth while excessive inflation harms growth. This study assesses the linkage between inflation and economic growth in South Africa to determine the optimal inflation rate threshold for the sustainable growth of the economy. Quarterly data from 1995 to 2022 was analysed through the ARDL and threshold regressions. The ARDL and threshold regressions estimate established a relationship between inflation and economic growth and computed the optimal inflation rate threshold for economic growth at 6 percent. The results also established that both the repo rate (repurchase rate) and real effective exchange rate have a negative relationship with economic growth. The Toda-Yamamoto causality test result indicated a unidirectional causality runs from inflation to economic growth. These results are crucial for the South African Reserve Bank to discharge its monetary policy functions to attain and maintain price stability. Therefore, this study offers the Bank a roadmap for targeting an inflation rate that aligns with the nation’s long-term objectives for sustainable economic growth.

Dynamics of deposit dollarization in Turkey

<p style="text-align:justify"><span style="font-size:16px"><span style="font-family:Times New Roman,Times,serif"><span dir="ltr" lang="EN-US"><span style="color:black">Deposit dollarization in Turkey has been on the rise, reaching record levels in 2022. This was caused by the worsening macroeconomic fundamentals along with the transition to the presidential system in 2018 and the associated deviation from the monetary policy stance afterward. The unique case of Turkey presents an excellent natural experiment to explore the dynamics of deposit dollarization and how it is affected by the changes in the institutional structure as well as various social, economic, and financial shocks in a relatively short time. This study examines the time varying reactions of deposit dollarization for the period between 2013 and 2022 based on rolling window maximum entropy bootstrap estimates. Our findings reveal that all the model variables had significant and sometimes asymmetric effects on deposit dollarization during the different stages of this turbulent period. In particular, we observe diminishing effects of real exchange rate, policy credibility and consumer confidence over time. The findings provide ample new evidence regarding the dynamics of deposit dollarization in general, and how it is affected by loss of monetary policy credibility.</span></span></span></span></p>

The Impact of Non-Oil Exports on the Economic Growth in Saudi Arabia: An Empirical Analysis

This study aims to investigate the impact of non-oil exports on the economic growth of Saudi Arabia during the period 2000-2022. Since Saudi Arabia targets to transform their economy from dependence to the diversification of economic resources, it is important to evaluate the impact of non-oil exports on the gross domestic product (GDP) in the long run. This study used multivariate time series analysis, including Johansen-Juselius co-integration and Vector Error Correction Model to determine the long-run relationship between them. The findings of the study revealed that non-oil exports have a statistically significant impact on economic growth in the long run. However, oil exports have a negative relationship with economic growth in the long run. Moreover, it also observed that a real effective exchange rate negatively affects economic growth while gross capital formation has a positive impact on economic growth in the long run. It is recommended that the non-oil sectors should be considered as a prime concern regarding infrastructural development due to their instant return to the country and should provide loans at minimal or zero interest to support them in the effective production of non-oil exports. Moreover, also makes legislation in the favor of domestic and foreign stakeholders so that they can encourage them to invest in non-oil exports and expand the non-oil sector. 

The Implication of Political Risk and Specific Macroeconomic Variables on Total Revenue in Tourism Industry

Political risk is one factor that influences tourism performance as a tourist is more sensitive to the hosting country’s political environment. In addition, to the effect of country risk on the tourism industry, the global economy has recently experienced severe shocks due to high inflation rates, political risk, and currency volatility. This paper aims to investigate the implications of political risk, inflation, and exchange rate volatilities on tourism revenue in South Africa. A sample of 144 monthly data was used to assess both long-run and short-run relationships amongst the study variables using the ARDL cointegration and error correction model approaches to achieve the study objective. Results indicated that political risk, inflation rate, and exchange rate volatility influence long-term revenue changes in the tourism industry. In contrast, real effective exchange rates and inflation significantly impact total revenue in the tourism sector. The findings also indicated that political risk has no short-term effect on tourism revenue. Based on these findings, the study recommends that the country's political stability increase, increasing the number of tourist arrivals and resulting in growing revenue for the tourism industry in S.A. Additionally, the South African reserve bank should revise its exchange-rate pegging, monetary targeting, and inflation targeting to reduce the effects of inflation on tourism revenue.

The Impact of Economic Policy Uncertainty on Real Effective Exchange Rate and Systemic Risks --Based on TVP-VAR Modeling

Today's international situation is complex and volatile, and the impact of economic policy uncertainty on systemic financial risk has attracted much attention. In this essay, the TVP-VAR model is used to investigate the mechanism of economic policy uncertainty on systemic financial risk and real effective exchange rate. It is found that its effect on both was characterized by time-varying and nonlinear, and the impact on systemic financial risk is mainly long-term, while the impact of real effective exchange rate is mainly short- and medium-term as long as. Meanwhile, the impact of economic policy uncertainty on systemic financial risk and real effective exchange rate under some specific risk events is more lasting.

Asymmetric Exchange Rate Effects on Trade Flows in India

This paper examines the role of exchange rate changes on India’s trade. The drivers of exports and imports (income, exchange rate including sectoral differences, and exchange rate variability) are estimated for the short and long run including a structural break. Using annual data from 1994 to 2022, the results of dynamic fixed effects estimation show that both exports and imports are income-elastic in the short and long run, but income elasticity is far stronger for exports. Moreover, exports are responsive to the real effective exchange rate in the short run but not in the long run, and the reverse is true for imports. Furthermore, exchange rates have asymmetric effects for high-volume and primary sectors for exports and imports. The combined impacts show the ineffectiveness of using currency depreciation to address trade imbalances.

Effects of Exchange Rate Variability on Coffee Export Growth in Tanzania

Exchange rate movement is perceived as a very important factor in influencing the performance of the agriculture sector. When the currency of the exporting country depreciates against the trading partners’ currencies tends to stimulate demand and improve export earnings. An increase in value of the currency against the other trading partners’ currencies (e.g. USD) tend to affect the costs of production that may affect aggregate agricultural supply. However, the linkage of the exchange rate and agricultural export growth in particular traditional exports such as coffee has never been properly and intensively documented for appropriate decision-making in Tanzania. Therefore, this study was set to assess how exchange rate variability has affected coffee export growth in Tanzania. The study made use of time series data from 1991 to 2022 using the vector error collection model (VECM). Given the influences other than the real effective exchange rate on the export of coffee growth, we discriminately incorporated inflation rate, discount rate, and money supply, as the independent variables. Yearly data (1991-2022) obtained from the Bank of Tanzania and the International Coffee Organization were used for the analysis. The results from this study reveal that the real effective exchange rate has an enormous positive impact on coffee export growth in the long run. This implies that, the depreciation of the domestic currency against USD has advantage on coffee export growth when considering the demand side as it tends to stimulate coffee demand in the rest of the world, thus leading to an increase in export volume and revenue which helps to foster coffee export growth. However, in the supply side, this depreciation should be carefully monitored as excess depreciation may end up by rising inputs prices especially those inputs imported such as fertilizers, agrochemical, aggrotech and agro machineries that may intern affect the production level. The study ends by concluding, that it is imperative for the Central Bank to carefully observer exchange rate fluctuations and implement appropriate monetary policy strategies in favour of the agriculture sector in particular exportable crops such as coffee. This will help to manage the risks and opportunities that may arise in coffee export growth associated with currency movement.

An analysis of the geopolitical and economics influence on tourist arrivals in Russia using a nonlinear autoregressive distributed lag model

PurposeThe COVID-19 pandemic and the onset of the conflict in Ukraine led to a sustained downturn in tourist arrivals (TA) in Russia. This paper aims to explore the influence of geopolitical risk (GPR) and other indices on TA over 1995–2023.Design/methodology/approachWe employ a nonlinear autoregressive distributed lag (NARDL) model to analyze the effects, capturing both the positive and negative shocks of these variables on TA.FindingsOur research demonstrates that the NARDL model is more effective in elucidating the complex dynamics between macroeconomic factors and TA. Both an increase and a decrease in GPR lead to an increase in TA. A 1% negative shock in GPR leads to an increase in TA by 1.68%, whereas a 1% positive shock in GPR also leads to an increase in TA by 0.5%. In other words, despite the increase in GPR, the number of tourists coming to Russia increases by 0.5% for every 1% increase in that risk. Several explanations could account for this phenomenon: (1) risk-tolerant tourists: some tourists might be less sensitive to GPR or they might find the associated risks acceptable; (2) economic incentives: increased risk might lead to a depreciation in the local currency and lower costs, making travel to Russia more affordable for international tourists; (3) niche tourism: some tourists might be attracted to destinations experiencing turmoil, either for the thrill or to gain firsthand experience of the situation; (4) lagged effects: there might be a time lag between the increase in risk and the actual impact on tourist behavior, meaning the effects might be observed differently over a longer period.Originality/valueOur study, employing the NARDL model and utilizing a dataset spanning from 1995 to 2023, investigates the impact of GPR, gross domestic product (GDP), real effective exchange rate (REER) and economic policy uncertainty (EPU) on TA in Russia. This research is unique because the dataset was compiled by the authors. The results show a complex relationship between GPR and TA, indicating that factors influencing TA can be multifaceted and not always intuitive.