Real Exchange Rate Variability Research Articles

The Franc Shock and Swiss GDP: How Long Does it Take to Start Feeling the Pain?

The paper addresses the question on what is the typical time horizon over which a full transmission of movements in the real exchange rate into real economy takes place. To this end, we base our analysis on the mixed-frequency small-scale dynamic factor model of Siliverstovs (2012) fitted to the Swiss data. In this paper, we augment the benchmark model with the real exchange rate of the Swiss franc vis-a-vis currencies of its 24 trading partners, while keeping the rest of model specification intact. We are interested in investigating the relationship between the common latent factor, representing the Swiss business cycle, and the real exchange rate. We explore the temporal relationship between these two variables by varying the time lag with which the real exchange rate enters the factor model by recording magnitude and statistical significance of the factor loading coefficient in the equation pertaining to the real exchange rate variable. Our main conclusion is that the fluctuations in the exchange rate start influencing real economy after one month and their effect is practically over after thirteen months. The largest effect is recorded at the time horizon of about six to nine months.

The franc shock and Swiss GDP: how long does it take to start feeling the pain?

ABSTRACTThe article addresses the question on what is the typical time horizon over which a full transmission of movements in the real exchange rate takes place into real economy. We base our analysis on the mixed-frequency small-scale dynamic factor model (DFM) proposed by Siliverstovs in 2012 fitted to the Swiss data. In this article, we augment the benchmark model with the real exchange rate of the Swiss franc vis-a-vis currencies of its 24 trading partners, while keeping the rest of model specification intact. We are interested in investigating the relationship between the common latent factor, representing the Swiss business cycle, and the real exchange rate. We explore the temporal relationship between these two variables by varying the time lag with which the real exchange rate enters the factor model by recording the magnitude and statistical significance of the factor loading coefficient in the equation pertaining to the real exchange rate variable. Our main conclusion is that the fluctuations in the exchange rate start influencing real economy after 1 month and their effect is practically over after 13 months. The largest effect is recorded at the time horizon of about 6 to 9 months.

MONETARY, REAL SHOCKS AND EXCHANGE RATE VARIATIONS IN INDIA

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONVariability of major world currencies in the post Britton Woods exchange rate era drew considerable attention to the economists, monetary authorities and market participants. Economists proceeded to provide theoretical explanations for this phenomenon. Consequently, international economics, over the last four decades, saw the growth of a plethora of economic theories on exchange rate. A number of fundamentals have been identified. A large number of empirical research studies have examined if the nominal and the real exchange rate variations are due to the real or nominal, the anticipated or unanticipated shocks in countries concerned.India has been experiencing, since the early phase of 1970's, a spell of depreciation of rupee against major currencies like the U.S. dollar. The rate of depreciation, however, displayed variation over the period. Such depreciation became spectacular since the recent past when India has been initiated into the market based exchange rate regime. The exchange rate regime that India has followed since 1993 is virtually the market-based system. The phenomenon of excess variability and continuous depreciation (with some occasional breaks) of exchange rate, particularly in the market-based exchange rate regime, constitutes an issue of interest to the researchers and monetary authority of India. This is because the exchange rate is a key instrument to the monetary policy particularly in such an emerging open economy having growing global integration. Movements of exchange rate influence portfolio investment, volume of trade, cost of debt payments and even price level in India.It has been found that macroeconomic fundamentals, sharply deteriorating merchandise trade balance, and large and growing current account deficit, speculation and central bank intervention, volatility in capital flows and forward premium are some of the important factors responsible for large depreciation and increased volatility of the Indian rupee (a more detail discussion is in Section 3: a review of related literature). The present study examines whether the variations of the Indian rupee against the US dollar that have been observed in the market-based exchange rate regime are related to the unanticipated shocks generated through money supply process and output production of India. This paper also presents a theoretical relation that variation in exchange rates is related to an unanticipated shock generated through the money supply process and output production of home country. This theoretical relation has been used as the base of the empirical analysis.The remaining part of the paper is structured as follows: Section 2 presents theoretical exposition. A review of related literature is presented in Section 3. Section 4 deals with variables, data and methodological issues. Analysis and discussion of the results are presented in Section 5 and Section 6 concludes the article.2. THEORETICAL EXPOSITIONDornbusch (1976) explained how exchange rate makes a dynamic adjustment to an unanticipated monetary shock. An unanticipated increase in the domestic money supply leads a rise in the exchange rate from its initial position. Domestic currency overshoots from the long run Purchasing Power Parity line. In short, monetary expansion leads to a depreciation of the domestic currency. Following Dornbusch, monetary approach to exchange rate determination (MAER) postulates that exchange rate is negatively related to domestic money growth. According to MAER (given sufficient capital mobility and sticky price level) the asset market bears the entire (unanticipated) shock transmitted through the monetary channel. More specifically, an unanticipated increase in domestic money supply leads to fall interest rate and, as result, opportunity cost of holding money falls. Investors, therefore, sell domestic bonds and money balances and purchase foreign bonds. …

Art collections and taste in the Spanish Siglo de Oro

We analyze art pricing in a unique dataset on Madrid inventories between 1600 and 1750. We estimate a price index for the Spanish art market that is used for a general historical analysis of art during this period, showing a large increase in the real price of paintings during the XVII century. Then we examine the price differential between domestic and foreign paintings: At the beginning of the century domestic production was priced substantially below imported paintings, but the price gap was gradually reduced during the century. We argue that such a price convergence was not the fruit of variations in real exchange rate, relative supply or home bias, but was associated with increasing prices for the new domestic painters of the XVII century. Increasing remuneration for painting may have induced artistic innovations by domestic producers and created the conditions for the development of the Siglo de Oro of Spanish art.

Understanding the Sources of Exchange Rate Fluctuation in Sudan

This paper examines the sources of real exchange rate fluctuations in Sudan using Structure Vector Autoregressive technique, over the period 1979–2010. The analysis has focused on the impact of three macroeconomics shocks on fluctuations of real exchange rate, namely, supply, real demand and nominal shocks. The result shows that the real demand shocks play a significant role in explaining the variations in real exchange rate. This implies that the real demand factors such as, government spending and money supply are the major sources of depreciation of real exchange rate. By contrast, supply shocks and nominal shocks have small impact of real exchange rate.

On Domestic Demand and Export Performance in the Euro Area Countries: Does Export Concentration Matter?

During economic downturns, weak domestic demand developments seem to be an additional driver of exports, as firms increase their efforts to serve markets abroad to compensate the fall in domestic sales. This may constitute an additional mechanism adjustment for the euro area countries where real exchange rate variations are limited by the common currency itself and the present low inflation environment. However, this substitution effect between domestic and foreign sales could be different across euro area members. This paper uses panel data techniques to assess the role of the export structure in explaining these differences. Building a novel indicator for product concentration, the results suggest that domestic demand developments are more relevant to explain exports in countries with a lower product concentration index (that is, more diversified exports). This contributes to explain why euro area countries under stress registered different economic performance during the most recent years. JEL Classification: C22, E03, F10

Turizm Gelirinin Türkiye nin Makroekonomik Performansına Katkısı: Ekonometrik Bir Çözümleme

The tourism sector in both developed and emerging economies are the top of the income generating factors.Today, tourism has become largely invested and growing sector.Tourism regarded as one of the important services sectors, a country's economic, social and cultural fields.Turkey is a tourist attraction with its geographical, historical and cultural resources. Tourism industry revenue is a major foreign exchange earning item in Turkey's current account.Turkey is one of the most important tourism centers in the world, which multiple tourist activities can be done at the same time, which can be visited in any season and offering attractive option in terms of tourism diversity. In this study, examined empirically the causal relationship between tourism revenues and macroeconomic variables such as the current account deficit, growth rate and real exchange rate variables in Turkey the period of 1980-2014. For this purpose, short- and long-term relationships have been tested by Granger causality analysis. According the results obtained from tourism revenues to the current account deficit unidirectional, between the growth and tourism revenue bidirectional and from tourism revenue to the foreign currency unidirectional causal relationship has been identified.

Sources of asymmetric shocks: The exchange rate or other culprits?

We analyze and quantify the determinants of medium-term real exchange rate (RER) changes. First, we discuss the sources of asymmetric shocks causing exchange rate variability and the role of the RER as a shock absorber or generator. Secondly, we use data for 21 advanced and late transition economies to gauge the extent to which medium-term bilateral real exchange rate variability can be explained by various fundamental factors. Using Bayesian model averaging, we find that out of 22 factors under consideration, four types of dissimilarities within a given pair of economies are likely to be included in the true model: dissimilarities as regards (i) financial development, (ii) per capita income growth, (iii) central bank autonomy, and (iv) the structure of the economy. A regression based on these four factors indicates that they explain about 96 percent of the sample average level of three year RER variability. In the logic of our approach, the remaining part of the total variability represents an upper estimate of the influence of the foreign exchange market itself. For our sample, the contribution of the real exchange rate itself to asymmetric shocks therefore appears to be very low.

The Adverse Effects of Real Exchange Rate Variability in Latin America and the Caribbean

The paper examines the pros and cons of anticipated appreciation and the asymmetric effects of short-term exchange rate fluctuations in a sample of countries in Latin America and the Caribbean. On the demand side, exchange rate depreciation increases competitiveness and export growth, expanding output growth. On the supply side, depreciation increases the cost of imported inputs, increasing output capacity constraints and accelerating price inflation. The time-series evidence indicates that output expansion (contraction) and price deflation (inflation) predominate with anticipated currency appreciation (depreciation). The cross-country results show that exchange rate variability exacerbates the variability of economic activity across countries. Short-term fluctuations of the exchange rate may reflect the adverse effects of unanticipated currency fluctuations. Therefore, more flexibility towards aligning the real effective exchange rate with the underlying fundamentals could help mitigate the adverse effects of higher cost of imports and loss of competitiveness on real growth, and ease inflationary pressures.

The Rise Of China And Its Implication on Indonesia-United States Trade

The purpose of this study is to analyze the impact of Chinese renminbi exchange rate againts the United States (US) dollar, on the bilateral export of Indonesia to the US. Johansen cointegration test and Ordinary Least Square (OLS) regression are employed to examine one impact. This research is limited only in the long-run aspect. The Johansen test shows that there are long-run relationships amongs variables involved such as GDP, Real Exchange Rate (RER), RER Volatility, and dummy variables. Empirical test result shows that there are positive significant impacts of the Chinese renminbi on the Indonesia’s exports to the US, implying that the relationship between Chinese exports and Indonesia export are complementary in the US market. Keywords: Indonesia, China, the United States, renminbi, cointegration, OLS

Impact of Ethiopian Trade Balance: Bound Testing Approach to Cointegration

This study is an attempt to examine the short and long-run relationship between the trade balance, income, money supply, and real exchange rate in the case of Ethiopian economy. The bounds testing approach to co integration and error correction models, developed within an autoregressive distributed lag (ARDL) framework is applied to annual data for the period 1979/80 to 2012/13. Additionally, variance decompositions (VDCs) are used to draw further inferences. The result of the bounds test indicates that there is a stable long-run relationship between the trade balance and income, money supply, and exchange rate variables. The estimated results show that the coefficient of the real exchange rate variable is positive and statistically significant at a 10 percent level confirming the hypothesis that real depreciation succeeds in improving trade balance of Ethiopia in the long run. Similarly, The coefficients of money supply and income positive and statistically significant at 1and 5 percent level it provides that money supply and income play a strong role in determining the behavior of the trade balance. The error correction model result indicates all of the coefficients of variables are statistically insignificance. This implies that all variables do not affect trade balance in the short run. Based on the coefficients of the variables statistically significant level exchange rate policy can help improve the trade balance but it will have a weaker influence than economic growth and monetary policy.

Commodity and Non-Commodity Trade Dynamics in Colombia

This paper studies the dynamics between the Colombian external trade sector and real exchange rate variations of the Colombian currency within the theoretical framework of the Marshall-Lerner condition. To comprehensively study these dynamics, the analysis is disaggregated for commodity trade, i.e. goods with prices set in the international market, and trade of non-commodities, for which prices are formed at an exporter-importer level. In addition, Colombian bilateral trade with the U.S. and Venezuela, its two main trading partners, is provided distinct attention alas to consider two distinct trade scenarios, one where a country transacts internationally in its local currency versus another where the country does not. The M-L condition holds for the cases of Colombian non-commodity trade between with the U.S., and with Venezuela. Colombian commodity trade showed being unresponsive to changes in the Colombian terms of trade.

Inflation targeting and real exchange rates: A bias correction approach

This paper examines whether inflation targeting (IT) influences purchasing power parity (PPP) by a bias correction approach under cross-sectional dependence. The recursive mean adjustment (RMA) method proposed by So and Shin (1999) and Shin and So (2001) is employed to correct a downward bias in half-life estimates of real exchange rates. More importantly, the empirical results show that IT lowers variability of real exchange rates and plays an important role in providing favorable evidence for long-run PPP.

Inflationary or Deflationary Consequences of an Exchange Rate Floor

We study the course of the Swiss price level during the recent episode where Switzerland enforced a floor on the Swiss Franc exchange rate relative to the Euro. Given the strong nominal upward pressure on the Swiss currency the introduced limit of 1.20 Francs per Euro led to a quasi-fixed exchange rate from 2011 until early 2015. This measure was specifically aimed at helping the firms of the Swiss export sector to compete internationally. A further reason for imposing this floor was the Swiss National Bank’s concern with deflationary pressures. Interestingly, it turned out that during the episode with a quasi-fixed exchange rate the Swiss price level came under downward pressure. We offer an analysis that helps to understand this depreciation of the Swiss currency in real terms which in fact contributed to the exchange rate floor being eventually abandoned. The article thus clarifies some intricate mechanisms affecting the choice of exchange rate policies which are so important for firms in the export sector. As a theoretical contribution (complementing the well-known Balassa-Samuelson analysis) the article presents a computable equilibrium model that explains real exchange rate variations with diverging trends in the productivity growth of the non-traded goods sectors of economies.

The Sources of Indonesia’s Current Account Balance Fluctuations: An Empirical Test of the Vector Error Correction Model (VECM)

Identifying the sources of current account balance fluctuations is critical to formulating Indonesia’s macroeconomic policies which maintain both internal and external balance to guarantee sustainable economic development as mandated by The Central Bank of Indonesia Act. This study is an attempt to investigate the long-run relationship between the current account balance (including total trade balance and non-oil and gas trade balance), world exports, domestic income (a proxy by industrial production index), and real effective exchange rate in the case of Indonesia’s economy. Based on the traditional approach of elasticity (Marshall Lerner condition) and by applying the VECM method to monthly data for the period January of 2008 up to December 2012, the investigation to examine the existence of a long-run equilibrium relationship between the current account balance and its sources is conducted. Additionally, variance decompositions (VDCs) and impulse response functions (IRFs) are used to draw further inferences. The result of the VECM method indicates that there is a stable long-run relationship between the current account balance and real effective exchange rate, domestic income and world exports variables. The estimated results show that real effective exchange rate depreciation is positively related to the current account balance in the long run, consistent with the Marshall Lerner condition. This study also finds evidence of the J-curve on Indonesia's current account balance. This suggests that following a real effective exchange rate depreciation, the Indonesia current account balance will initially deteriorate but improve in the long-run. Thus the exchange rate policy can help improve the current account balance. Furthermore, the results provide strong evidence that world exports and domestic income play a strong role in determining the behavior of the current account balance.

The Impact of Market Regulations on Intra-European Real Exchange Rates

We study the contribution of market regulations in the dynamics of the real exchange rate within the European Union. Based on a model proposed by De Gregorio et al. (1994a), we show that both product market regulations in nontradable sectors and employment protection tend to inflate the real exchange rate. We then carry out an econometric estimation for European countries over 1985-2006 to quantify the contributions of the pure Balassa-Samuelson effect and those of market regulations in real exchange-rate variations. Based on this evidence and on a counter-factual experiment, we conclude that the relative evolution of product market regulations and employment protection across countries play a very significant role in real exchange-rate variations within the European Union and especially within the Euro area, through theirs impacts on the relative price of nontradable goods.

Drivers of Growth: Evidence from Sub-Saharan African Countries

This study examines the drivers of growth in Sub-Saharan African countries, using aggregate data, from the past decade. We correlate recent growth experience to key determinants of growth, including private and public investment, government consumption, the exchange regime and real exchange rate, and current account liberalization, using various econometric methodologies, including fixed and random effects models, with cluster-robust standard errors. We find that, depending on the specification, higher private and public investments boost growth. Some evidence is found that government consumption exerts a drag on growth and that more flexible exchange regimes are beneficial to growth. The real exchange rate and liberalization variables are not significant.

Drivers of Growth: Evidence from Sub-Saharan African Countries

This study examines the drivers of growth in Sub-Saharan African countries, using aggregate data, from the past decade. We correlate recent growth experience to key determinants of growth, including private and public investment, government consumption, the exchange regime and real exchange rate, and current account liberalization, using various econometric methodologies, including fixed and random effects models, with cluster-robust standard errors. We find that, depending on the specification, higher private and public investments boost growth. Some evidence is found that government consumption exerts a drag on growth and that more flexible exchange regimes are beneficial to growth. The real exchange rate and liberalization variables are not significant.

Central Bank Financial Strength and Macroeconomic Outcomes

Central bank financial strength has not been a significant issue for a substantial period of time. However, recent theoretical and empirical literature argues that even central banks require sufficient level of financial strength to perform functions effectively and achieve their objectives. In this study, we examine the relationship between central bank financial strength and selected macroeconomic outcomes using an unbalanced panel dataset for selected advanced and emerging countries. We empirically model macroeconomic outcomes represented by price stability, output growth, real interest rate variability and nominal exchange rate variability with the measures of central bank financial strength. We observe that price stability is broadly related to central bank financial strength and find evidence to suggest that real interest rate variability can also be explained to a certain extent using central bank finances. Hence, empirical evidence suggests that weak central bank finances negatively impact the ability of policy makers to react inflationary pressures and interest rate instability. Our results have important implications for policy makers and central bankers. Particularly we suggest that maintaining health of central bank balance sheets and avoiding undue and persistent losses remain vital pre-conditions for desirable policy outcomes.

The Sources of Real Exchange Rate Fluctuations in Sub-Saharan Africa

This paper looks into the sources of real exchange rate fluctuations in Sub-Saharan African (SSA) countries. This issue is investigated in a context of small open economies of SSA using a structural Vector Auto Regression (VAR) approach with limited capital mobility and a weak-banking system in Africa. A structural VAR implies long run restrictions of a small open economy model to identify the shocks. The results suggest that the real exchange rate (RER) variability is mostly driven by real disturbances in both the ”Communaute Financiere Africaine” (CFA) and non-CFA countries at long term forecasting horizons. The findings show evidence that nominal shocks seem to matter more in the non-CFA countries in the short run in explaining RER and price level fluctuations as a result of the diverse fiscal and monetary policies in the non-CFA countries in contrast to the CFA countries.