Response Of Exchange Rate Research Articles

Effects of Variations in Government Fiscal Expenditure on Real Exchange Rate in Korea: ARDL-EC Model Estimation

The aim of this study is to investigate effects of changes in government expenditure on real exchange rate for Korea during the period of 1998. I - 2016. IV. We use Error Correction model based on Pesaran, Shin and Smith (2001)’s ARDL bounds test to estimate long run and short run relationship between changes in government expenditure and real exchange rate. The results show that changes in government expenditure during the period had a significant positive effect on real exchange rate in Korea. The long run response of real exchange rate was more than twice larger than the short run response. To be more specific, one percent increase of the ratio of government expenditure to GDP raised the real exchange rate by 0.99% in the short run while the same change raised the real exchange rate by more than 2.55% over the long run. The positive empirical effect of government expenditure increase on the real exchange rate found by the present study is broadly in line with many other previous studies. Theoretically, this result is in line with the assertion that an expansionary government expenditure would raise relative price of non-tradable goods when the government expenditure has a home bias and so a positive effect on the real exchange rate.

Can Trend Inflation Solve the Delayed Overshooting Puzzle?

We develop an open economy New Keynesian model with heterogeneity in price stickiness and positive trend inflation. The main insight of our analysis is that, in the presence of heterogeneity in price stickiness, there is a strong link between trend inflation and the timing of the peak response of the real exchange rate to a monetary policy shock. Without trend inflation, the real exchange rate peaks almost immediately. With trend inflation set at historical values, the peak occurs at around 2 years. Delayed overshooting is a consequence of the interaction between heterogeneity in price stickiness and trend inflation.

How Does Unconventional Monetary Policy Influence the Economy in Japan?

This paper investigates the transmission mechanism of unconventional monetary policies by estimating a time-varying parameter structural vector auto-regression (TVP-VAR) model using Japanese monthly data beginning with the implementation of quantitative easing in 2001. The results of the empirical study can be summarized in four points. First, the accumulated impulse responses of stock prices and exchange rates to a positive monetary policy shock are significant increases and significant depreciation, respectively, in the early days of all unconventional monetary policy periods. Second, a monetary policy shock does not increase bank lending for all unconventional monetary policies. Third, the relationship between an increase in stock prices and the depreciation of exchange rates and increase in GDP has changed since the beginning of Abenomics. Fourth, the accumulated impulse responses of the inflation rate to a positive monetary policy shock became a significant increase during and after the comprehensive monetary easing in October 2010 due to the clarification of the policy duration, and the responses become remarkable after inflation targeting was introduced in January 2013. The first and second results imply that the main transmission channel of unconventional monetary policy in Japan is stock prices and the exchange rate.

Does a Big Bazooka Matter? Central Bank Balance-Sheet Policies and Exchange Rates

We estimate the effects of quantitative easing (QE) measures by the ECB and the Federal Reserve on the US dollar-euro exchange rate at frequencies and horizons rele- vant for policymakers. To do so, we derive a theoretically-consistent local projection regression equation from the standard asset pricing formulation of exchange rate de- termination. We then proxy unobserved QE shocks by future changes in the relative size of central banks’ balance sheets, which we instrument with QE announcements in two-stage least squares regressions in order to account for their endogeneity. We find that QE measures have large and persistent effects on the exchange rate. For example, our estimates imply that the ECB’s APP program which raised the ECB’s balance sheet relative to that of the Federal Reserve by 35 percentage points between September 2014 and the end of 2016 depreciated the euro vis-`a-vis the US dollar by 12%. Regarding transmission channels, we find that a relative QE shock that ex- pands the ECB’s balance sheet relative to that of the Federal Reserve depreciates the US dollar-euro exchange rate by reducing euro-dollar short-term money market rate differentials, by widening the cross-currency basis and by eliciting adjustments in currency risk premia. Changes in the expectations about the future monetary policy stance, reflecting the “signalling” channel of QE, also contribute to the exchange rate response to QE shocks.

Does US quantitative easing affect exchange rate pass‐through in China?

AbstractIn this paper, we show theoretically and empirically that the US quantitative easing (QE) policy results in lower exchange rate pass‐through into the destination prices of Chinese exporters. In addition, the more the exchange rate in the export destination appreciates than the Chinese yuan, the stronger this effect becomes. Our model combines various marginal effects of QE policy on the destinations of Chinese exporters and variable markups of export firms due to strategic complementarities. The model predicts that the impact of US QE policy on the pass‐through of Chinese exporters depends on its spillover on the exchange rate between China and the export destination of different firms. We provide strong support for the model predictions using Chinese firm‐product‐level data with information on export destinations. The baseline result and the heterogeneity we find in the response of exchange rate pass‐through of Chinese exporters to US QE policy remain robust to alternative measures of samples and controls.

Government spending and the exchange rate

This paper studies the real exchange rate response to a government-spending shock in a two-country model with productive government purchases and non-Ricardian households. In this economy, the real exchange rate depreciates following an increase in domestic public spending, consistently with most empirical evidence. Importantly, and consistently with empirical evidence, the depreciation occurs both on impact and in the transition. The transmission mechanism works through an increase in domestic private-sector productivity, spurred by government purchases, which reduces real marginal costs at home allowing for accommodating monetary policy response.

The international transmission channels of US supply and demand shocks: Evidence from a non-stationary dynamic factor model for the G7 countries

We employ a multi-country non-stationary dynamic factor model to assess spillover effects and transmission channels of US supply and demand shocks on a variety of macroeconomic variables in individual non-US G7 countries. We find that trade, financial and confidence channels all play a significant role in the international transmission of US shocks. However, the results point to substantial heterogeneities of shock transmission across the individual G7 economies. In particular, we find negative transmission effects for Italy and Japan as the only two G7 countries not well integrated into global value chains. Moreover, the exchange rate responses of Germany, France and Italy turn out to be far less pronounced in comparison to the other G7 economies which we relate to their membership of the euro area and their coordinated monetary policies prior to the establishment of the euro. Whereas we document a close comovement of stock market dynamics across the G7 countries, we find credit and real estate markets to be less synchronized. We do not find the effects and transmission channels to be fundamentally affected by the post-2008 economic environment.

Variability in the effects of uncertainty shocks: New stylized facts from OECD countries

This study examines variability in the effects of uncertainty shocks using a panel of international data. It first evaluates variability in the effects of uncertainty shocks by applying rolling sample and time-varying parameter Vector Autoregression models to US data covering the past 70 years. The results reveal that the effects of uncertainty shocks on the US economy have changed substantially over time. First, the negative effect of uncertainty shocks on the output decreased until the recent period, in which monetary policy rules are constrained by the zero lower bound. Second, contrary to the negative aggregate demand interpretation in the recent literature, uncertainty shocks acted as a negative aggregate supply shock in the earlier periods. From the past 50 years’ data for 12 small open economies, I find that the negative effect of uncertainty shocks on output has increased, contrary to the US case. Additionally, the exchange rate and inflation responses are heterogeneous across countries, and the country’s commodity exporter or safe haven status is critical in determining the sign of these responses. Finally, the increased vulnerability of small open economies to uncertainty shocks is associated with an increase in international trade.

Asymmetric impact of monetary surprises on exchange rate

ABSTRACTThis paper examines the asymmetric response of exchange rate to monetary surprises. After controlling the type, direction and origin of the news as well as business cycle phase, a new asymmetry is found in the response of the exchange rate to news surprises. In specific, the US Dollar depreciates against major currencies as the response to the negative monetary surprises in the 2001 recession, while the Dollar appreciates responding to similar negative monetary surprises during the 2008 recession. The paper further explores possible causes and finds that time-varying status of the currency with higher financial returns may contribute to the new asymmetry.

Identification of Small Open Economy SVARs via Markov‐Switching Heteroskedasticity

Various identifying restrictions commonly used in small open economy structural vector autoregression (SVAR) models are tested against an SVAR model identified via Markov‐switching heteroskedasticity. The SVARs are estimated for three small open economies, Australia, Canada and New Zealand. The most supported model is the one that allows for simultaneity between monetary policy and the real exchange rate without restricting the long‐run response of the real exchange rate to a monetary policy shock. The impulse responses to a monetary policy shock and an exchange rate shock identified from such model are consistent with theoretical predictions.

Variations of N2O fluxes in response to warming and cooling in an alpine meadow on the Tibetan Plateau

Little is known about the impacts of climate change especially for cooling on N2O emissions from alpine meadows on the Tibetan Plateau. Along a slope of Qilian mountains, China, we transferred intact soil cores covering different vegetation types (graminoid, shrub, forb, and sparse vegetation) downhill (warming) and uphill (cooling) across a 600-m elevation gradient to examine the responses of soil-atmosphere N2O exchange rates to climate warming and cooling. N2O fluxes were measured during two growing seasons from May to October in 2008 and 2009. The Tibetan alpine meadow acted as a net N2O source at an average rate of 5.2 μg m−2 h−1 (ranging from 2.0 to 11.5 μg m−2 h−1). In situ N2O emission generally decreased with elevation increase except for sparse vegetation, but significant differences were only found between graminoid and other three vegetations in 2008 and between graminoid and shrub vegetation in 2009. Warming averagely increased mean N2O fluxes by 219% (ranging from 126 to 287%) while cooling decreased it by 75% (ranging from 57 to 95%) across four vegetation types over the variation of soil temperature from 1.3 to 5.5 °C. However, opposite effects were also observed in some cases due to modification of variations in soil moisture. Soil temperature and moisture had a positive effect on N2O fluxes and explained 48 and 26% of the variation in mean N2O fluxes across the four vegetation types, respectively. No relationship was found between mean N2O fluxes and aboveground biomass. Our results suggest that more N2O-N would be released from soil in a warmer future and that less N2O emission during cool and dry years is expected in the Tibetan alpine meadow.

Modeling the real ruble exchange rate under monetary policyregime change

The paper estimates vector error correction model (VECM) for the real ruble exchange rate and real oil prices. The VECM model takes into account the structural break in short-term parameters due to the Bank of Russia monetary policy regime change in November 2014. Estimates show that the real exchange rate response to oil price shocks has dramatically changed. Before November2014 it took approximately one year to correct 50% of the real exchange rate gap due to oil prices permanent change. From November 2014 the real exchange rate adapts to oil price shocks almost instantly. The estimate of long-run elasticity of the real exchange rate on real oil prices is 0.33.

Do terror attacks affect the dollar-pound exchange rate? A nonparametric causality-in-quantiles analysis

While much significant research has been done to study the effects of terror attacks on stock markets, less is known about the response of exchange rates to terror attacks. We suggest a non-parametric causality-in-quantiles test to study whether (relative) terror attacks affect exchange-rate returns and volatility. Using data on the dollar-pound exchange rate to illustrate the test, we show that terror attacks mainly affect the lower and upper quantiles of the conditional distribution of exchange-rate returns, while misspecified (due to nonlinearity and structural breaks) linear Granger causality test show no evidence of predictability. Terror attacks also affect almost all quantiles of the conditional distribution of exchange-rate volatility (except the extreme upper-end), with the significance of the effect being particularly strong for the lower quantiles. The importance of terror attacks is shown to hold also under an alternative measure of volatility and for an important emerging-market exchange rate as well.

Long-run convergence in a neo-Kaleckian open-economy model with autonomous export growth

ABSTRACTThis study combines a neo-Kaleckian growth and distribution model with a sort of Sraffian supermultiplier mechanism in which autonomous demand is driven by foreign exports. Short-, medium- and long-run equilibria are considered. In the long-run case, the expectations of sales growth governing investment change adaptively, and this, combined with the autonomous growth rate of exports, produces convergence of the actual rate of capacity utilization to its normal rate. It is demonstrated that some aspects of the main Kaleckian results can be preserved not only in the short or medium run but also in the long run, in the sense that both (1) a decrease in the propensity to save, and (2) a change in income distribution favoring labor, bring about higher average rates of production growth and capital accumulation. However, the impact of a change in the profit share is shown to be subjected to the condition that the responsiveness of the real exchange rate with respect to the profit share has to be bounded from above, confirming that the scope for wage-led demand or wage-led growth can be limited by open-economy considerations, even within the supermultiplier context.

The impact of changes in monetary aggregates on exchange rate volatility in a developing country: Do structural breaks matter?

Theoretical models of exchange rate determination predict that increases in monetary aggregates lead to depreciation. However, several empirical studies do find exchange rate response anomalies to innovations in monetary policy. In this paper, we show that accounting for major structural break points in monetary variables leads to empirical results that are statistically consistent with predictions from theoretical monetary models of exchange rate determination.

Thick vs. Thin-Skinned: Technology, News, and Financial Market Reaction

We study the impact of technology on the reaction of financial markets to information, focusing on the foreign exchange market. We contrast the “thin-skinned” view that technological improvements cause markets to react more to new information with the “thick-skinned” view that they react less. We pinpoint exogenous technological changes using the timing of the connection of countries via the submarine fiber-optic cables used for electronic trading. Cable connections dampen the response of exchange rates to macroeconomic news, consistent with the “thick-skinned” hypothesis. This is in line with the view that technology eases access to information and reduces trend-following behavior. According to our estimates, cable connections reduce the reaction of exchange rates to U.S. monetary policy news by 50 to 80 percent.

Spillovers from the ECB's Non-Standard Monetary Policy Measures on South-Eastern Europe

This paper is the first to comprehensively assess the impact of the euro area’s non-standard monetary policy measures on south-eastern Europe. By employing bilateral BVAR models, I am able to estimate the response of output and prices for each country, as well as to shed more light on potential shock transmission channels. The results suggest that the ECB’s non-standard monetary policy measures have had pronounced price effects on all south-eastern European countries, and output effects on approximately half of them. While I also find exports to be a relevant transmission channel in most cases, the interbank market rate responds significantly only in a few cases as the region was subject to significant cross-border bank deleveraging after the crisis. Furthermore, the results suggest that the exchange rate regime does not play a role in determining the sign and magnitude of price level and output responses. This is in line with the absence of distinct exchange rate responses in the model output, suggesting that exchange rates did not act as buffers for spillovers of euro area non-standard monetary policy measures on south-eastern Europe. JEL Classification: C11, C32, E52, F42

Exchange Rate Pass through and Pricing to the Market at Individual Product Level: Evidence from India

This paper investigates the degree of responsiveness of exchange rate with respect to prices of top 10 imported commodities. To test the hypothesis, we use monthly and quarterly dataset for the period from 2002 to 2014 and for four countries namely, US, UK, India and China. We use Autoregressive Distributive Lag model (ARDL) to measure the degree of responsiveness. We find the results both in long run and short run, and the corresponding degrees of responsiveness of commodities. We measure the degree of responsiveness of commodity prices into the import index and found that Non-ferrous metal shows a high degree of responsiveness followed by metalic tools, metals etc. whereas, organic chemical, machinery electrical, plastic etc. shows a negative sign. In long run, almost every commodity shows a high degree of responsiveness in comparison with short run results. The paper also attempts to recommend some policy implications based on the literature.

Fiscal multipliers: new evidence from a large panel of countries

This paper evaluates the effectiveness of fiscal policy by employing a structural panel vector autoregression model with a shock to fiscal spending identified via theoretical robust sign restrictions. Using an annual data set of 120 countries over the period 1960–2014, the results show that fiscal multipliers are larger in advanced economies, when public debt is low, at a high level of financial development, in a financial crisis, and during business cycle downturns. Contrary to conventional wisdom, fiscal multipliers are not necessarily smaller in countries that are relatively open to trade and capital flows and operating under flexible exchange rate regimes. The relationship between the size of fiscal multipliers and the three dimensions of openness—trade openness, capital mobility, and exchange rate flexibility—hinges on the response of the real exchange rate and the domestic monetary policy pursued.

SUATU PENDEKATAN MONETER TERHADAP PERTUMBUHAN EKONOMI PADA PEREKONOMIAN TERBUKA KECIL DENGAN KONTROL MODAL: STUDI KASUS INDONESIA 2010.1-2014.12

The purpose of this study is to formulate the monetary model of the economic growth in a small open economy (small open economy) with a free exchange rate system (flexible exchange rate system) and capital mobility is not perfect (imperfect capital mobility), as well as the factors that influence economic growth, exchange rates and interest rates with monetary approach (mathematically and empirically).This study uses a structural analysis approach to vector autoregresion with monthly data Indonesia in 2010-2014. The empirical results reveal that changes in the money supply is a significant negative effect on economic growth 0.1008 Indonesia. Moreover, economic growth is affected by the magnitude of the previous period of economic growth significantly by 0.391825, where the magnitude of the effect is determined by the strength of the exchange rate in response to changes in interest rates Indonesia, the greater the exchange rate response to changes in interest rates, the weakening influence of the period of economic growth prior to economic growth. For a small open economy (small open economy) with a free exchange rate system (flexible exchange rate system), then the value of the rupiah per dollar exchange rate is influenced significantly by the amount of money in circulation (0.063318), the exchange rate value of the last period (0.746), and the interest rate the previous period (0.3424), the interest rate two previous periods (-0.305848).For situations of capital mobility is not perfect, then the variable interest rate is treated as endogenous variables, the empirical results show that the level of BI rate significantly influenced only by the BI rate the previous month (1.4526) and the interest rate of the previous two months (0.524)