Real Exchange Rate Variability Research Articles

External financial and monetary policy shocks: Do they matter for Korean macroeconomy?

Given Korea's status as a small, open economy, it exhibits a pronounced sensitivity to external shocks. Consequently, this article seeks to elucidate the impact of external financial and monetary policy shocks on the fluctuation of critical macroeconomic variables within Korea. Employing Bayesian estimation alongside the impulse response function for empirical analysis, the findings reveal that external financial and monetary policy shocks precipitate declines in exports, output, employment, real wages, consumption, investment, and imports. Conversely, these shocks are associated with increases in both the price level and inflation, highlighting the multifaceted effects of external pressures on the domestic economic landscape. Further, through forecast error variance decomposition, this study demonstrates that, relative to shocks stemming from productivity, terms of trade, and real exchange rate variations, external financial and monetary policy shocks exert a considerably milder impact on the fluctuations of Korea's key macroeconomic variables. This insight suggests a potential area for enhancement in the existing Korean literature on this topic, advocating for the integration of these findings to enrich understanding and analysis. In summary, by delving into the nuanced effects of external shocks on Korea's economy, this article contributes valuable perspectives to the discourse, suggesting avenues for further research and policy formulation. The integration of these results into the broader body of Korean economic literature could significantly augment current understandings and interpretations of Korea's economic dynamics in the face of global financial and monetary turbulence.

Fiscal policy and real exchange rate variations in India

Fiscal policy and real exchange rate variations in India

Demand for Money in the United States: Stability and Forward-Looking Tests

This study shows that demand for money is a function not only of interest rate, real exchange rate, and personal consumption but also of fiscal variables like deficit, debt, and foreign-financed debt. It is stable over the short and long run. This study also covers the investigation of policy invariance of money demand, an important issue ignored so far in the existing literature on the demand for money in the United States. It was found that the behavior of agents in the money market changes as the real exchange rate, consumption, and interest rate change. Namely, agents in the money market are forward-looking, and their expectations are formed rationally. This also means that even though the parameters of money demand are stable, according to the stability test results, they can be unstable, as agents adapt their behavior based on any change in the exchange rate, consumption, and/or interest rate. In other words, the contemporaneous real exchange and interest rate variables are not superexogenous in demand for M1, and the contemporaneous consumption is not superexogenous in demand for M2.

The Relationship between Energy Inflation and Exchange Rate: A Study on Türkiye

Energy is among the indicators that are taken into consideration in increasing the production levels of countries and increasing their welfare. Energy has become an indispensable resource for the industrialization of countries, increasing their industrial production and ensuring their development and growth in this direction. Today, the development and growth of countries have become linked to their energy consumption. However, countries that lack energy resources need to import the energy resources they need in order to realize their development and growth, and their economic activities for this purpose are closely related to other economic indicators, especially the exchange rate, and bring about a series of economic results. This study examines the existence of the relationship between energy inflation and the real exchange rate in Türkiye in light of the fact that Türkiye is heavily dependent on foreign energy consumption. Accordingly, the study utilizes monthly series of energy inflation and real exchange rate variables for the period 2012:M01-2021:M12 for Türkiye. In the study, firstly, the series of the variables are seasonally adjusted with the help of a computer package program, then the variables are logarithmically transformed and the stationarity of the series of the variables is analyzed. According to the results of ADF and PP unit root tests, it is concluded that the series of energy inflation and real exchange rate variables are not stationary at level, but both series become stationary after first differences are taken. In the study, Engle-Granger cointegration analysis was conducted in accordance with the unit root test results. According to the results of cointegration analysis, energy inflation and real exchange rate variables are found to move together in the long run. Finally, Granger causality test analysis was conducted and according to the results of this analysis, the existence of bidirectional causality in the Granger sense between energy inflation and real exchange rate was determined.

Asymmetric response of domestic production to exchange rate changes: Evidence from southeast Asian countries

This study explores the asymmetric effects of real effective exchange rate variation on domestic output in nine South East Asian nations. The study is the first thorough study on this issue for these countries. The results show that exchange rate fluctuations have asymmetric long‐run and short‐run effects on production in most nations. However, the findings vary across nations. Appreciation has a contractionary effect on production in most countries, while depreciation has an expansionary effect. In certain economies, an appreciation boosts domestic output whereas a depreciation diminishes it. Such conclusions can only be reached if appreciations and depreciations are separated, using non‐linear models.

Determinants of Inflation in Ethiopia: Autoregressive Distributed Lag Model

Price stability is one of the major goals of monetary policy and the key indicators of macroeconomic stability. Pursuing of price stability is primary to long-run growth and development; it should be the concern of every economy. This study examine the factors in determining inflation in Ethiopia, using the autoregressive distributed lag (ARDL) model by employing the data series for the period ranging from 1974 to 2017. The ADF Unit root test confirmed that the variables in the model are integrated of order 0 I (0) and order one I (1)). The Bound F-test of co integration has confirmed the existence of long run relationships among the variables entered in the inflation model. ARDL regression result suggest that real gross domestic product, real effective exchange rate and budget deficit variables are important in determining inflation in the short run. In the long run inflation is determined by real effective exchange rate, budget deficit, gross national saving and lending interest rate. The error correction term coefficient is negative and significant at 1 percent level of significance suggesting that inflation adjusts to deviations from its long -term equilibrium. The estimated model passes diagnostic tests and the graphical evidence (CUSUM and CUSUMQ graphs) indicate that the model is stable during the sample period. Finally, investments in food and agricultural sectors could considerably support the process of ensuring price stability. Moreover, a credible and sustained fiscal adjustment, aiming to boost revenue generation can reduce fiscal deficit.

Estimation of the unemployment rate in Turkey: A comparison of the ARIMA and machine learning models including Covid-19 pandemic periods

The article focuses on analyzing the robustness of Auto Regressive Integrated Moving Average (ARIMA) and Artificial Neural Networks (ANN) methods in unemployment rate estimation. In this context, a stochastic trend in the unemployment rate was determined by using monthly data in Turkey. The oil price, real exchange rate, interest rate and unemployment rate variables are imported into the ARIMA and ANN models with 176 data samples for the period of 01.01.2008-31.08.2022. The results of the conventional linear ARIMA and nonlinear ANN regressor models are compared. The comparison results show that the ARMA (2,1) model is the most suitable model for the unemployment rate estimation. This conclusion was reached based on ARMA (2,1) and ANN's RMSE, MAE, MAPE and R2 parameters. From the results of the specified criteria, it was found that both models gave results close to the actual unemployment rate however ARMA (2,1) was the more appropriate model for the current data set. The actual unemployment data and the estimated values are also given verifying the better modeling of the developed ARMA (2,1) model. In addition, there are meaningful relationships between month variables and the employment rate. This result supports that the unemployment possesses chronic reasons in Turkey. On the other side, the unemployment rate forecasting error of the ARMA (2,1) is higher than the ANN model for the 2020–2021 period during the intense pandemic. This result is important because it shows that during the times of the economic uncertainty caused by the Covid-19 pandemic, forecasts employing the neural network model is observed to have lower errors than the results of autoregressive moving average model. Therefore, under an economic uncertainty, it is shown that modeling the unemployment rate using artificial neural network provides novel insights for economic forecasting.

Examining the Asymmetric Impacts of Interest and Exchange Rate on Investment in Egypt for the Period 1976-2020: Applying NARDL Model

Most of the studies conducted in the past decades focused on the effect of interest rates and exchange rates on domestic investment under the assumption that the independent variables have the same effect on the dependent variable, but there were limited studies that investigated the unequal effects of changes in interest rates and exchange rates, both positive and negative, on domestic investment. This study used a nonlinear autoregressive distributed lag (NARDL) model to assess the unequal effects of the real interest rate and real exchange rate variables on domestic investment in Egypt for the period 1976 - 2020. The results revealed that positive and negative shocks for both exchange rates have unequal effects on investment in the long and short term. In addition, the stability of the nonlinear model was tested using recursive estimate tests and found to be stable.

Exchange rates and purchasing power parity: the case of Central European

Introduction. The question of how exchange rates adjust is central to exchange rate policy, since countries with fixed exchange rates need to know what the equilibrium exchange rate is likely to be and countries with variable exchange rates would like to know what level and variation in real and nominal exchange rates they should expect. In broader terms, the question of whether exchange rates adjust toward a level established by purchasing power parity helps to determine the extent to which the international macroeconomic system is self-equilibrating Analysis of recent researches and publications has shown that the published up to date papers aren’t systematic and can’t claim to be a complete analysis in the chosen field. The aim is to test the validity of PPP hypothesis in the long run in former and current European transitional economies. Methods. General scientific methods such as the systematic approach, theo­retical generalization and comparison, analysis, synthesis and the Levin–Lin–Chu (LLC) panel unit root test have been used in the research. Research results. This paper tests the validity of purchasing power parity (PPP) hypothesis in the long run in selected European transitional economies. The database used in this paper contains monthly data on real effective exchange rate (REER) observed over 23 years, from March 1995 till November 2017. To test the hypothesis, the Levin–Lin–Chu (LLC) panel unit root test was employed. The results confirm that PPP holds both for Central European and Western Balkan states in the long run. Conclusions. The equilibrium exchange rate question is central question to exchange rate policy. Purchasing power parity hypothesis was tested on the sample of 14 European countries form the Central and Eastern Europe and Western Balkan region. The database used in this paper contains monthly data on real effective exchange rate –REER observed over 23 years, from March 1995 till November 2017. As PPP holds if the real exchange rate reverts to its equilibrium value over time, the unit root test was applied on panel REER dataset. The results of applied Levin–Lin–Chu (LLC) panel unit root tests confirmed that the PPP hypothesis holds for selected countries during the observed period. Additionaly, results confirmed that PPP hypothesis holds both for CEE and Western Balkan countries separately.

Non-linear Effect of Real Exchange Rate Variability with Macroeconomic Variable on Non-Petroleum Commodities of India– US Trade

This article aims to explore the asymmetric influence of real exchange rate volatility on India–US trade commodity-wise. In this study, the assumption of symmetric relation is neglected and assessed on the asymmetric effect of real exchange rate volatility on 90 commodities distributed under 6 industries. This study verifies short-run and long-run asymmetry effects, the short-run effect in 21 Indian exporting commodities and 19 Indian importing commodities. However, the short-run effect lasting onto the long run in 16 exporting commodities and 27 importing commodities strongly supports the J-curve. Also, non-linear causality is witnessed in this study running from real exchange rate variability to export trade and import trade. The empirical analyses explain that commodities will benefit the export or import growth with the depreciation of exchange rate or discouraging with the appreciation of exchange rate. The findings of the study provide a view for policy making. JEL Codes: C22, F1, F14, F31, O19

Autoregressive Distributed Lag Transformation for Exchange Rate and Trade Balance

In this study the prime objective is to initiate autoregressive distributed lag transformation for exchange rate and trade balance to avoid the possible existence of multicollinearity among the explanatory variables and to analyze the variation in real exchange rate and its impact on trade balance in Pakistan. The Koyck model was used for studying the immediate impact and long run relationship between the variables by using time series annual data ranging from 1981 to 2021. The result showed that there is an inverse association between the trade balance and the exchange rate. It is evident from the results that the depreciation in exchange rate will bring upward movement in the trade balance.

Determinants of trade flow of some selected non-traditional agricultural export commodities in Nigeria

This study analysed the determinants of trade flow of some selected non-traditional agricultural export commodities in Nigeria, for the period 2007 to 2017. The objective of the study was to analyse the factors that determine the export of these commodities. The study used trade data of thirty-six importing countries of these commodities around the world. The secondary data used was sourced from various institutions’ databases. A balanced panel data from 36 countries for the years 2007-2017 were used with one dependent variable and ten explanatory variables (a total of n=396, N=36, and T=11); all variables were expressed in natural logarithm. The gravity estimation model was used in data analysis. The Hausman test was used in model selection and the test rejected the null hypothesis (random effects were efficient). Therefore, the fixed effects model was used in the gravity model results’ interpretation. The gravity model results indicate that Nigeria’s export of non-traditional commodities (classified as HS12 in the United Nations International Trade Statistics) follows the basic gravity model apriori expectations, implying that bilateral trade flows will increase in proportion to the trading partner’s Gross Domestic Product (GDP) and decrease in proportion to the distance involved.The level of openness of Nigeria’s economy and that of the importing countries were major determinants of trade flow of Nigeria’s HS12 commodity exports. This variable carried the expected positive sign for both Nigeria and its trading Partners and was also statistically significant at the 5% level. However, the real exchange rate variable was not a major determinant of HS12 commodity trade. The distance variable was statistically significant indicating the need for regional trade expansion. The dummy variable of the trading partner being an African country was positive and a significant factor in the determinants of the HS12 commodities. However, colonial or official language ties were negatively signed and significant, implying that this was not a major contributor to trade in these commodities. The study recommends that favorable import and export promotion policies and trade openness to boost growth in the quantity of non-traditional exports should form part of government trade policies; and Nigeria should also take advantage of the proposed African Free Trade Area considering the gains she stands to make through proximity in distance.

Yield response of Nigerian rice agriculture (1970-2017)

Over the years, the domestic supply of rice has wielded great influence on the food security and self-sufficiency status of Nigerian households, making it one of the principal staple crops in the country. Against this backdrop, this study examines the yield response of rice to climate and non-climate variables in Nigeria. The study was conducted from data extracted from the Food and Agriculture Organization (FAO) database from 1970 to 2017. The data was augmented with rainfall data from National Meteorological Center (NIMET). The Johansen Error Correction Model in a cointegration framework was employed to test the responsiveness of supply to the factors considered. The study revealed that rice yield in Nigeria is non-responsive to real price, exchange rate and climate variables. However, fertilizer consumption significantly influences rice yield in Nigeria.

Optimum Currency Area in Asean 5 Countries: Is it Appropriate to Use American Dollar As the Standar Currency?

Many times ASEAN countries experienced economic crisis in 1997/1998 and financial crisis in 2008. The similar patterns of cisis among those countries make some researchers conduct research of single currency unification. This research has a purpose to analyze the impact of ASEAN 5’s currencies (Rupiah, Ringgit, Singapore Dollar, Baht, and Peso) to a currency shock in the other ASEAN countries. The concept of this study uses the exchange rate approach pegged of ASEAN countries with American Dollars and Singapore Dollars. Furthermore, this research analyzes a symmetrical currency response to the currency shock in the other countries. The method of the study comes closer short-term and long-term models of Vector Auto regression (VAR) by using monthly data in real exchange rate variables from 1990 to 2019. The result of impulse response function (IRF) shows that responses to ASEAN currency pegged the currency to Singapore Dollars rather than US Dollars

Input quality and skills are complementary and increase output quality: Causal evidence from Ecuador’s trade liberalization

This paper tests for the production complementarity between firms’ access to high-quality intermediate inputs and their skill composition and their joint impact on output quality. Using census data at firm-product level for Ecuador for 1997–2007, we exploit exogenous tariff changes at Ecuador’s entry to the World Trade Organization to show that input tariff cuts allow firms to upgrade their input quality. Next, we demonstrate by means of within-firm instrumental variable estimations that firms’ choices of imported input quality drive their relative demand for skilled labor and the skill premium. Imported input quality and firms’ skill-composition jointly boost firms’ output quality. Moreover, we show that firms that source domestic inputs produced by industries that import high-quality inputs also upgrade their skills and output quality. Our findings are not driven by our measures of quality, foreign demand shocks (export opportunities), Ecuador’s financial crisis, real exchange rate variations, financial liberalization and other industry-level reforms.

Cocoa Export Performance to Economic Growth in South Sulawesi

This research aims to analyze the factors influencing cocoa export performance to economic growth in South Sulawesi. The factors include foreign direct investment (FDI), real exchange rate (RER), and the growth of GDP in export destination countries. The research was completed by processing quarterly data about export trading from South Sulawesi in 2008 – 2015 to top ten main destination countries of cocoa export. Path analysis method was used in this research; export performance as an intervening variable; and economic growth is an endogenous variable. The results reveal that the export performance has a positive and significant influence on the economic growth. Furthermore, the growth of GDP in partner countries has a positive and significant influence on the economic growth indirectly through the export performance, while both FDI and RER variables does not have a significant influence.

Integration Effects in Exports Induced Economic Growth: Evidence from Extended ELG Model in BRICS

This research aims to assess the competitiveness of BRICS nations and to investigate its effects on their export performance and economic growth. Our fixed-effects panel regression procedure proves the competitiveness effects on export performance, where the influence of terms of trade and relative profitability of exports are dominant. The export-led-growth (ELG) model seems to be valid in estimating BRICS growth and the inclusion of inward foreign direct investment (FDI) and real effective exchange rate (REER) variables in the model as additional predictors enhance the robustness in forecasting. The study suggests that the multifaceted and interlinked dimensions of competitiveness are crucial to further enhancement in competitiveness and to ensure the even spread of growth and development in the partnership.

Determinants of Inflation in Ethiopia: An Autoregressive Distributed Lag Model.

Price stability is one of the major goals of monetary policy and the key indicators of macroeconomic stability. Pursuing of price stability is primary to long-run growth and development; it should be the concern of every economy. This study examine the factors in determining inflation in Ethiopia, using the autoregressive distributed lag (ARDL) model by employing the data series for the period ranging from 1974 to 2017. The ADF Unit root test confirmed that the variables in the model are integrated of order 0 I(0) and order one I(1)). The Bound F-test of co integration has confirmed the existence of long run relationships among the variables entered in the inflation model. ARDL regression result suggest that real gross domestic product, real effective exchange rate and budget deficit variables are important in determining inflation in the short run. In the long run inflation is determined by real effective exchange rate, budget deficit, gross national saving and lending interest rate. The error correction term coefficient is negative and significant at 1 percent level of significance suggesting that inflation adjusts to deviations from its long term equilibrium. The estimated model passes diagnostic tests and the graphical evidence (CUSUM and CUSUMQ graphs) indicate that the model is stable during the sample period. Finally, investments in food and agricultural sectors could considerably support the process of ensuring price stability. Moreover, a credible and sustained fiscal adjustment, aiming to boost revenue generation can reduce fiscal deficit. Besides, it is better for the government to rely more on other methods (rather than seigniorage) to finance its deficits.

Türkiye’de Banka ve Kredi Kartı Harcamalarının Reel Döviz Kuru Üzerindeki Etkisi: VAR Analizi ve Toda-Yamamoto Nedensellik Testi

Döviz kuru, özellikle küreselleşme eğiliminin artması ile birlikte makroekonomik alanda önemli bir belirleyici haline gelmiştir. Bu anlamda, döviz kurlarının oluşumunu ya da değişmesini etkileyen etmenleri belirleyip, bu doğrultuda döviz kuru politikaları izlemek son derece önemlidir. Bu çalışmanın amacı, banka ve kredi kartı harcama tutarı ile reel döviz kuru arasındaki ilişkiyi incelemektir. Bu bağlamda, kur üzerine yapılan çalışmaların bulgularına göre reel döviz kurunu en fazla etkileyen diğer bağımsız değişkenler de modele dâhil edilmiştir. Çalışmada; bağımsız değişken olarak enflasyon oranları (TÜFE, yıllık % değişim), Merkez Bankası brüt döviz rezervleri, M2 para arzı, işsizlik oranı, faiz oranı için vekil değişken olarak Türkiye Cumhuriyet Merkez Bankası (TCMB) ortalama fonlama maliyeti, banka ve kredi kartı harcama tutarı kullanılırken bağımlı değişken olarak ise TÜFE bazlı reel efektif döviz kuru kullanılmıştır. Verilerin tümü TCMB Elektronik Veri Dağıtım Sistemi’nden temin edilmiştir. Çalışmada 2014:3-2019:5 dönemini kapsayan aylık veriler kullanılmıştır. Çalışma, temel olarak zaman serisi analizine dayanmaktadır. Bu anlamda Genişletilmiş Dickey-Fuller testi kullanılarak değişkenlerin durağanlık dereceleri belirlenmiştir. Sonrasında, ARDL sınır testi analizi gerçekleştirilerek reel efektif döviz kuru ile modelde kullanılan bağımsız değişkenler arasında uzun dönemli ilişki olmadığı sonucuna varılmıştır. Ardından modelin uygun gecikme uzunluğu belirlenmiş ve modele VAR analizi uygulanmıştır. İlaveten, değişkenler arasındaki nedensellik ilişkisini analiz etmek için Toda-Yamamoto nedensellik testi kullanılmıştır. Çalışma sonucunda, kart harcamalarından döviz kuruna doğru tek yönlü bir ilişki saptanmıştır. Buna karşın; döviz kurundan kart harcamalarına doğru doğrudan bir nedensellik ilişkisi bulunamamıştır. Çalışmada ulaşılan sonuçlar, daha önce yapılan çalışmalar ile de tutarlıdır. Ayrıca bu çalışma, Türkiye’de banka ve kredi kartı harcama tutarı ile reel döviz kuru arasındaki ilişkiyi incelemesi bakımından daha önce yapılan çalışmalardan farklılaşmakta ve bu yönüyle literatüre katkı sağlamaktadır.

Asymmetric impact of exchange rate pass-through into employees' wages in sub-Saharan Africa: panel non-linear threshold estimation

PurposeThe purpose of this article is to investigate the asymmetric impact of exchange rate pass-through (ERPT) on employees' wages via consumer prices in 15 major oil-exporting countries from sub-Saharan Africa over the period 1996-2017 using the panel threshold regression model.Design/methodology/approachThe methodology used in this article was built on non-linear panel threshold regression models developed by Hansen (1996, 1999) threshold regression. The authors first tested for the existence of threshold-effect in ERPT and wage nexus using 1,000 bootstrap replications and 400 grid searches to obtain an optimal threshold. We also estimated that asymmetric ERPT on employees' wages reacts differently when the inflation-threshold exceeds beyond a 15.12% threshold level.FindingsOur findings showed that asymmetric ERPT is incomplete and indicates that an increase by one standard deviation in real exchange rate causes a decline in employees' wages by 2.69%.Research limitations/implicationsThe policy implications of our results are drawn from the significant threshold estimates. However, a significant threshold value of 15.12 is an inflation-threshold estimates that split our 330 observations into the lower (upper) regimes. Further, an inflation rate beyond the threshold value is likely to have an asymmetric ERPT on employees' wages in the 15 major oil-exporting sub-Saharan African (SSA) countries.Practical implicationsThe practical implication of the study is when ERPT exceeds the threshold, the effect of real exchange rate variations is passed on to employees' wages. It is widely believed that labor productivity increase with increased minimum wages. Nevertheless, there is contention as regards the effects on employment and poverty. As rising goods prices make the minimum wage increased homogeneous of degree zero.Social implicationsConsiderable increased ERPT on imported goods reduces employees' wages purchasing ability from import-dependent countries through import prices. Once it has documented, this also reduces welfare via deteriorations of marginal propensity to consume (MPC) and marginal propensity to savings (MPS).Originality/valueThis article integrates labor purchasing power into the analysis of ERPT using non-linear dynamic panel heterogeneous threshold regression. It extends the Hansen (1996, 1999) dynamic panel threshold models to exchange rate pass-through in SSA economies.