Exchange Rate Shocks Research Articles

The Dark Side of the Boom: The Impact of Foreign Competition on R&D and Technology Upgrading

The natural resource boom of the 2000s spurred growth in income and consumption in commodity-exporting nations. However, this paper brings together a previously unused combination of data sets from Colombia to document evidence of a downside -- the currency appreciation associated with this boom led to a significant decline in R&D and technological upgrading of Colombian manufacturing firms. Our empirical strategy exploits differences in firms’ sales across products and export destinations to create firm-specific measurements of exchange rate appreciation that gauge firms’ exposure to exchange rate shocks both abroad and at home. We link these new measurements of exposure with Colombian micro data on R&D investment and technology upgrading. The key finding is that real exchange rate appreciation drives significant reductions in firm-level R&D investment and a broader measurement of technology upgrading that includes expenditure on machinery, equipment, and ICTs. The estimated effects are quite large: a one-standard deviation increase in the real exchange rate (a shift that lies well within the experience of some firms over our sample period) induces a R&D investment reduction of 12% to 43% and a technology upgrading reduction of 18.8% to 37.6%, depending on the specification. Currency appreciation generally exposes Colombian manufacturing firms to greater foreign competition, but we find the firms that experienced greater exposure to Chinese competition saw even greater declines in R&D. Our estimated effects suggest that the resource boom and associated appreciation could have a significant and persistent negative effect on the productivity growth and technological development of Colombian manufacturing firms. Similarities between Colombia and other commodity-exporters suggest that these effects may be widespread.

Examining the macro-determinants of tourist arrivals in India.

The present study analyzes the asymmetric association of exchange rate and world income with inbound tourism demand in India using a recently developed nonlinear autoregressive distributed lag model. For this purpose, the study uses monthly data from January 2003 to December 2020 for inbound tourism demand, real effective exchange rate, and world income as the variables of the model. The study used an asymmetric causality test on the lines of Hatemi-J. The findings confirm the existence of a nonlinear association between exchange rate and tourism demand in the long run. Furthermore, the increases in the world income have a positive and significant effect on tourist arrivals in India. In addition, the findings indicate that exchange rate shocks play a vital role in the long run. The cointegration test is supplemented with nonlinear causality analysis. The causal result depicted positive shocks in the exchange rate and world income sharing a unidirectional causal relationship with tourist arrivals. The result of this research can significantly facilitate the policymakers for devising short-run as well as long-run policies to consolidate the macroeconomic fundamentals such that tourism demand can be enhanced in India.

Inflationary effects of oil price and exchange rate shocks in South Africa: Evidence from time‐varying pass‐through coefficients

This paper estimates the exchange rate and oil price pass-through to South African domestic prices (ERPT and OPPT, respectively). This study adopts a novel approach to compute pass-through coefficients along the pricing channel using the time-varying responses of the time-varying parameter (TVP)-VAR model. Our findings show that both ERPT and OPPT are incomplete, despite varying responses to local and global economic events that cause fluctuations in the exchange rate and oil prices. The ERPT coefficients have peaked in 1998 and 2001, coinciding with the crisis that caused the excessive depreciation of the domestic currency. The OPPT coefficients, on the other hand, reach their maximum effect during the 2008 global financial crisis. Our findings do not reveal a significant decline in ERPT compared with the 1980s. In contrast to a significant first-stage effect, the direct ERPT and OPPT coefficients are found to be insignificant. The findings also show that direct OPPT to consumer fuel prices is significantly higher than that of import prices.

Real exchange rate shocks and new product margins in the export market

AbstractThis study examines the impact of industry real exchange rate (RER) shocks on plant and product exports using a comprehensive dataset for South Korea from 1990 to 1996. We find that RER changes have heterogeneous effects on real exports of existing exporters in terms of their productivity, and the positive RER depreciation effect on exports is more pronounced for less productive plants. At a product level, we find new evidence that a weak home currency prompts exporters to introduce new products to the export market, especially more remarkable for low‐productivity plants. In contrast, a strong home currency leads to product exit with less significance.

Impact of uncertainty and exchange rate shocks: Theory and global empirics

This paper offers two points on the impact of uncertainty and exchange rate shocks. (1) A conceptual model where behavioural frictions – rational inattentiveness and bounded expectations – interact with uncertainty, generating aggregate fluctuations. Central banks can target these behavioural frictions to stabilise output and prices. (2) Empirical findings from a panel of advanced and emerging economies. Output and inflation slow in response to uncertainty shocks. Government bond yields moderate and exchange rates depreciate, suggesting within-country and between-country flight-to-safety respectively. Exchange rate appreciation shocks generate similar responses. The Malaysia-specific analysis finds divergent responses in employment and output, likely reflecting compositional effects in more productive tradable and less productive non-tradable sectors.

Dynamic Shocks of Crude Oil Price and Exchange Rate on Food Prices in Emerging Countries of Southeast Asia: A Panel Vector Autoregression Model

This paper empirically analyzes food price responses to shocks from crude oil price and exchange rate volatility in five emerging Southeast Asian nations between 2000 and 2020 using impulse response functions and variance decomposition analysis of the dynamic panel Vector Autoregression approach. Based on the findings of the impulse response functions analysis, food prices respond positively to both oil price and exchange rate shocks. Meanwhile, the results of variance decomposition analysis show that food prices account for a significant portion of volatility in its own shock. The contribution of oil price shock to food price volatility is found to be greater than the contribution of exchange rate shock. Hence, the study recommends that policymakers in these nations should be vigilant about the impacts of oil price and exchange rate shocks on food prices since these factors may undermine price stability and exacerbate food security.

An Analysis of Exchange Rate Pass-Through to Domestic Prices: Evidence from Turkey

Assessing the impact of exchange rate shocks on domestic prices (Exchange Rate Pass-through) has a crucial role, particularly for the inflation targeting countries. This paper aims to clarify some aspects of ERPT to domestic prices in Turkey, an emerging country. Specifically, this study investigates if ERPT in Turkey is complete and how the behavior of ERPT has changed after the adoption of a flexible exchange rate regime in 2001. A Vector Auto Regression (VAR) framework is used to analyze the impact of exchange rate shocks on CPI Inflation. This study provides empirical evidence on the incompleteness and the pattern of ERPT on Turkey’s CPI inflation based on the VAR Model. The findings demonstrate that ERPT is not only incomplete but also has a different pattern during the floating exchange rate period. The pass-through has decreased from 2001 to 2017, and it has increased dramatically after 2017 to a large extent because of very high inflation and high exchange rate volatility in this period.

Oil prices, exchange rates and interest rates

There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of traditional oil demand and oil supply shocks from the effects of exogenous variation in the U.S. real interest rate and in the real value of the U.S. dollar. Our approach exploits a combination of sign and zero restrictions and narrative restrictions motivated by economic theory and extraneous evidence. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between these variables.

Estimating Structural Shocks with the GVAR-DSGE Model: Pre- and Post-Pandemic

This paper investigates the possibility of using the global VAR (GVAR) model to estimate a simple New Keynesian DSGE-type multi-country model. The long-run forecasts from an estimated GVAR model were used to calculate the steady-states of macro variables as differences. The deviations from the long-run forecasts were taken as the deviation from the steady-states and were used to estimate a simple NK open economy model with an IS curve, Philips curve, Taylor rule, and an exchange rate equation. The shocks to these equations were taken as the demand shock, supply shock, monetary shock, and exchange rate shock, respectively. An alternative model was constructed to compare the results from GVAR long-run forecasts. The alternative model used a Hodrick–Prescott (HP) filter to derive deviations from the steady-states. The impulsive response functions from the shocks were then compared to results from other DSGE models in the literature. Both GVAR and HP estimates produced dissimilar results, although the GVAR managed to capture more from the data, given the explicit co-integration relationships. For the IRFs, both GVAR and HP estimated DSGE models appeared to be as expected before the pandemic; however, if we include the pandemic data, i.e., 2020, the IRFs are very different, due to the nature of the policy actions. In general, DSGE–GVAR models appear to be much more versatile, and are able to capture dynamics that HP filters are not.

Shocks and volatility transmission between oil price and Nigeria's exchange rate.

The study examined shock and volatility transmission between oil price and exchange rate markets using daily data covering the period from 23rd October 2009 to 30th November 2020. The contributions of the paper include (i) implementation of VAR-AGARCH model to capture spillover effect of shock and volatility; (ii) examining the nature of shock impact in oil price and exchange rate market; (iii) adopting of two measured of oil price (WTI and Brent); (iv) employing two measures of the exchange rate (USD/Naira and effective/Naira). The study revealed that past own shocks and volatilities significantly contribute to current volatilities in exchange rate and oil price markets. Also, there is bidirectional shock and volatility spillover between the exchange rate (USD/Naira and effective/Naira) and WTI oil price markets. There were bidirectional shock and volatility spillover between USD/Naira and Brent oil price and unidirectional shock and volatility from Brent oil price to effective exchange rate market. We found asymmetric shocks impacting exchange rates and WTI oil price while symmetric shock was observed in Brent oil price. Including innovation in oil price is essential in exchange rate policy formulation and modelling exchange rate shock and volatility.

Dynamics of Exchange Rate Fluctuations in Turkey: Evidence from Symmetric and Asymmetric Causality Analysis

This study examines the factors affecting exchange rate fluctuations in Turkey by employing the quarterly data from 2008 to 2020. In this context, linear and nonlinear unit root tests were used to determine the stationarity levels of the variables. Then, symmetric and asymmetric causality analysis was preferred to ascertain the relationship between the variables. Symmetric causality analysis results indicated a causality relationship from the exchange rate to the long-term debt stock, from the credit default swap (CDS) to the exchange rate, and from the exchange rate to the uncertainty index. The asymmetric causality analysis showed a causality relationship from positive shocks in the short-term debt stock to negative shocks in the exchange rate. Also, it was proven that there exists a causality relationship from negative shocks in the short-term external debt stock to positive and negative shocks in the exchange rate. Another result demonstrated a causality relationship between positive shocks in the exchange rate to negative shocks in the long-term debt stock. In addition, it was found that negative shocks in net capital investment were the cause of negative shocks in the exchange rate, while it was determined that there was a causality relationship from positive shocks in the net reserves to positive shocks in the exchange rate. In conclusion, the asymmetric causality relationship from positive shocks in CDS to positive shocks in exchange rates was detected.

Foreign exchange rate shocks and stabilizing role of interbank markets: evidence from Turkey

ABSTRACT We study the transmission of exchange rate shocks in the Turkish interbank loan market using high-frequency bank-level data. Our results suggest that interbank market plays a stabilizing role: following large domestic currency depreciations, banks with a higher share of foreign currency liabilities borrow more in the interbank market, with a higher but insignificant effect on borrowing costs. The results are stronger the larger the exchange rate shock is and the lower the capital adequacy or liquidity ratios of borrower banks. Interbank markets play a weaker stabilizing role for banks with higher short-term rollover risks.

Time Varying Impact of Oil Prices on Stock Returns: Evidence from Developing Markets

In this study, we provide new evidence on the relationship between crude oil, exchange rate and stock returns before and after the official announcement of COVID-19 as a pandemic by WHO. Data for the present study consists of the major stock indices of ten emerging markets (Brazil, China, India, Indonesia, Mexico, Russia, Saudi Arabia, South Africa, Taiwan and Thailand), their exchange rates, And prices of Brent crude oil. We employ panel vector autoregression and provide evidence based on panel granger causality, impulse response function and forecast error variance decomposition. Panel granger causality reveals that after the declaration of COVID-19 as pandemic, interdependence between oil price changes and stock returns has increased. We find positive (negative) impact of oil market (exchange rate) shocks on stock returns. Analysis of impulse response suggests that during pandemic shocks to crude oil, exchange rate and stock market have larger and longer own and cross-market impact. Thus, there is a need for sharing timely and adequate information to minimize uncertainties in financial and commodity markets. This would benefit investors by lessening the transmission of shocks during the times of crisis.

The Nonlinear Interaction of Oil Prices, Exchange Rates, and Institutional Quality on Tourist Arrivals in Bangladesh

This study investigates the nonlinear effects of oil prices, the exchange rate, and institutional quality on tourist arrivals in Bangladesh. The Nonlinear Autoregressive Distributed Lag (NARDL) approach, which was petitioned for time series data from 1995 to 2019, was used in this study. Crude oil prices and exchange rates have a long-and short-run negative and significant impact on tourism demand, according to the findings, whereas increases in institutional quality are favourably associated with tourist arrivals in Bangladesh. According to the Wald test, there are asymmetries among variables. Negative oil price shocks, positive exchange rate shocks, and poor institutional quality were the factors that had the greatest impact on tourist arrivals, according to all of the dynamic multipliers' estimates. For Bangladeshi politicians and investors, the implications of this study are critical.

Exchange rate pass-through to domestic inflation in a pricing model incorporating distribution chain structure

ABSTRACT This study investigates the pass-through of exchange rate shocks to different aggregate prices in China. The baseline analysis is carried out with vector autoregressive models incorporating a distribution chain of pricing, and various modifications are examined for robustness. The central results show an appreciation of the local currency tends to suppress domestic inflation at the early production stages, although the pass-through effect only amounts to a moderate degree for consumer prices. As the contribution of external factors to the persistently low inflation environment mostly has been modest, the paper suggests that the monetary authority can contribute to the permanent component of low exchange rate pass-through to domestic inflation, by continually conducting a credible and efficient stable-inflation policy.

Drivers of Turkish inflation

This paper investigates the drivers of Turkish inflation by using a structural vector autoregression model, where monthly data on global oil prices, unemployment rates, inflation rates, policy rates and exchange rates are used. The empirical results show that Turkish inflation increases following a negative policy rate shock, a positive exchange rate shock, or a positive global oil price shock. The volatility of Turkish inflation is mostly explained by global oil prices and exchange rate movements in the long run, while the contribution of exchange rate shocks to Turkish inflation has continuously increased over time. As additional empirical results show that exchange rate depreciation can be reduced by positive policy rate shocks, it is implied that a conventional monetary policy increasing policy rates following an increase in inflation or a depreciation of Turkish lira would be optimal to achieve and maintain price stability in Turkey, which is the primary objective of the Central Bank of the Republic of Turkey.

Exchange Rate Shocks and Sectoral Stock Returns in Nigeria: Do Asymmetry and Structural Breaks Matter?

Exchange Rate Shocks and Sectoral Stock Returns in Nigeria: Do Asymmetry and Structural Breaks Matter?

Asymmetrical Effects of Real Exchange Rate Volatility during Covid-19 Pandemic on the Demand for Money in Zimbabwe

The understanding of symmetrical or asymmetrical effects of exchange rate volatility improves the effectiveness of macroeconomic management policies. This study examines the long-run asymmetrical effects of exchange rate volatility on real demand for money in Zimbabwe, using monthly data from January 2018 to September 2020. Exchange rate shocks are calculated by decomposing exchange rate volatility measure into positive and negative components to examine their short-run and long-run effects and to determine whether the long-run effects of the components of exchange rate movements are symmetrical or asymmetrical. The linear ARDL and the non-linear ARDL models are estimated. The study employs the F-bounds test to confirm the longrun relationship and the Wald test for the asymmetrical effect. The results show that exchange rate depreciation in Zimbabwe has symmetrical effects on real demand for money. Thus, exchange rate policies in Zimbabwe should assume linearity in the passthrough effects on real demand for money.
 JEL Classification: E41; E52; E6

Household consumption and exchange rate extreme dynamics: Multiple asymmetric threshold non‐linear autoregressive distributed lag model perspective

AbstractThis study re ‐evaluates the relative adjustments of household's consumption expenditure to extremely small and extremely large variations in exchange rate in African emerging economies (AEE). For this purpose, we used a modified version of non‐linear autoregressive distributed lag (ARDL) and multiple threshold non‐linear ARDL models that specifically captures the differential effects of extremely small and extremely large positive and negative variations of the explanatory variable(s) on the explained variable. Consequently, the empirical estimates reveal that changes in exchange rate has asymmetric effects on consumption expenditure in all the countries except in Nigeria. Furthermore, consumption expenditure in Algeria, Egypt and Morocco increases significantly at the upper quantile of exchange rate appreciation, whereas, it declines significantly at all quantiles of exchange rate depreciation, implying that consumption expenditure in these three North African countries are more sensitive to large positive shocks in exchange rate. In Kenya, Nigeria and South Africa, consumption expenditure are exchange rate inelastic as households maintain their consumption levels regardless of the direction and degree of exchange rate deviations. Overall, the diagnostics tests prove the superiority of this enhanced technique over the standard non‐linear ARDL technique. Based on the outcomes of this study, policy recommendations that could ensure optimal exchange rate alignment for the African countries, as well as other emerging economies have been proposed.

Invoicing Currency and Symmetric Pass-Through of Exchange Rates and Tariffs: Evidence from Malawian Imports from the EU

The response of import prices to exchange rates can be used to predict the effect of changes in trade policy, as the symmetric hypothesis asserts that the effect of tariffs and exchange rates on prices are identical. This paper examines whether the hypothesis holds in the context of various invoicing currencies, using transaction-level data of Malawian imports from the European Union (EU). The findings show that the U.S. dollar has the highest invoicing share, and the pass-through of exchange rate and tariff shocks on importers is high, but not necessarily equal, when the currency of invoicing is considered. Crucially, the tariff pass-through to prices is higher than the exchange rate pass-through, with important differences across countries, currencies and sectors. Thus, in order to predict the effects of trade policy, bilateral exchange rates may not be suitable for capturing exchange rate pass-through for small developing countries, especially import-dependent ones such as Malawi.