Flexible Exchange Rate System Research Articles

Achieving Exchange Rate Stability Targeting the 2010- 2015 Era for Economic Resilience

The continuous fall in the value of Naira against foreign denominated assets is somewhat worrisome. Policy strategy is of essence to adjust the exchange rate to pre 2010 regime. Hence, this paper appraises the exchange rate policy measures, especially the most recent ones in addressing volatility in or national currency and restore equilibrium purchasing power. A stylized fact was deployed to draw inferences on the nuanced policy models pre and post 2010 regime. This study reported that, managed float mechanism sought to achieve exchange rate stability within upper and lower fluctuation margins. Whereas, flexible system, in operation now, allows the CBN to intervene in the market when necessary while upholding high levels of transparency and accountability. This has ensured that while the flexible exchange rate system is sustained, the exchange rate is prevented from excessive volatility. Therefore, mixture of flexible and partially interventionist policy is recommended. Keyword: Equilibrium, Exchange rate management, Trend analysis, macroeconomic policy.

Exchange Rate Management and Sectorial Export-Financing in Nigeria

The monetary authorities in Nigeria adopted the flexible exchange rate system to stabilise the foreign exchange rate market and enable banks to finance the real sector of the economy. The impact of exchange rate management on export financing in the form of agricultural, manufacturing, and solid mineral sector loans was analysed to ascertain if exchange rate management influences the availability of loans to exporters in the agro-sector, manufacturing, and solid mineral sectors. The study used the Augmented Dickey-Fuller (ADF) test for stationarity of the time series, the Bound Test for Co-integration to check the long-term relationship, and the Autoregressive Distributed Lag model to test the relationship among the variables. The result showed that changes in the exchange rate have a short-run negative significant impact on export loans to the three sectors and a long-run positive significant impact on the agro sector. The study recommended that policymakers introduce monetary policies that encourage investors, reduce interest and inflation rates, and stabilise exchange rates.

Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

The choice of a foreign exchange regime hinges primarily on whether the real exchange rate acts as a shock absorber or reverberator for macroeconomic fluctuations. This policy choice is considered central especially prior to joining currency areas such as the Eurozone. We investigate whether Albania’s current floating exchange rate regime contributes to macroeconomic stability, or generates volatility. Using three different structural vector autoregression techniques, and an expanded five-variable model, we show that the real exchange rate has played a shock absorbing role, buffering the Albanian economy primarily from real demand shocks. The analysis reveals that monetary shocks and supply-side shocks have modest contributions in real exchange rate volatility. This evidence in favor of the “shock absorbing” view of exchange rates lends support to Albania’s policy choice of a flexible exchange rate system. If in future Albania considers joining a currency area, its monetary authority will need to pay attention to real currency misalignments as well as the availability and flexibility of alternative adjustment mechanisms.

Volatility of Exchange Rate and Export Growth in Pakistan: The Structure and Interdependence in Regional Markets

Pakistan follows the flexible exchange rate system since July 2000. Prior to this period it followed a managed floating exchange rate since 1982 and a fixed rate prior to 1982. Due to controlled exchange rate a little fluctuation in exchange rate was observed. It is empirical concluded that the Pakistan’s share of exports in world market did not indicate any significant change during fixed and managed floating exchange rate regimes [Kumar and Dhawan (1991)]. Pakistan’s share in world exports was stable during the last 24 years, ranging between a minimum of 0.12 percent in 1980 and a maximum of 0.18 percent in 1992. After introduction of floating exchange rate during 2002-2003 (the share was 0.17 percent) Pakistan’s exports performance was related to the volatility of exchange rate. Only one empirical study is available regarding to Pakistan’s context by Kumar and Dhawan (1991) who estimated the impact of exchange rate volatility on Pakistan exports to the developed world from 1974 to 1985. They found that volatility of exchange rate adversely effect on export demand. They also investigated the third country effect and suggested that Japan and West Germany act as the alternate market for Pakistan’s export to the United States and United Kingdom. The high degree of volatility and uncertainty of exchange movements observed in Pakistan is of great concern of policy-makers and researchers to investigate the nature and extent of the impact of such movements on Pakistan’s volume of trade. In many countries it is experienced that higher exchange rate volatility reduced the trade by creating uncertainty about future profit from exports.

Dış Ticaret Açığı Veren Ülkelerde Döviz Kurunun Dış Ticaret Performansı Üzerindeki Etkisi

Serbest ticaretin yükselişini küreselleşmenin ve teknolojik gelişmelerin desteklemesiyle döviz kurlarının önemi giderek artmıştır. Esnek kur sistemlerinde döviz kurunun dış ticaret hacmine ve dolayısıyla toplam üretime etki etmesi beklenmektedir. Bu kapsamda ekonomi politikası uygulamalarında döviz kurunun dış ticaretle ilişkisinin anlaşılabilmesi önemlidir. Çalışmanın amacı, seçilmiş ülkelerde döviz kuru ve dış ticaret hacimleri arasındaki ilişkinin karşılaştırmalı olarak incelenmesiyle literatüre katkı sağlanmasıdır. Bu doğrultuda 2020 yılında en fazla dış ticaret açığı veren sekiz ülkenin (ABD, İngiltere, Hindistan, Fransa, Türkiye, Mısır, Filipinler ve Pakistan) reel efektif döviz kuru (REDK) ile ithalat ve ihracat hacimleri arasındaki ilişki, Ocak 2003–Ocak 2022 döneminde aylık veriler kullanılarak tahmin edilmiştir. Analize döviz kurunu temsilen REDK’nın dahil edilmesiyle dış ticarette önemli belirleyiciler olan yurtiçi fiyatlar ile ticaret yapılan ülkelerdeki fiyatlar da değerlendirilmiştir. Analiz yöntemi tercihinde ülkelerin heterojen yapıları ve seriler arasındaki yatay kesit bağımlılık dikkate alınmıştır. Serilerin özellikleriyle uyumlu olan yeni nesil ekonometrik yöntemlerin kullanıldığı analizde sırasıyla CADF ve CIPS birim kök testleri, ardından Westerlund (2008) Durbin-Hausman Eşbütünleşme Testi, devamında Pesaran’ın (2006) geliştirdiği Ortak İlişkili Etkiler (CCE) Tahmincisi ile Emirmahmutoğlu ve Köse’nin geliştirdiği (2011) Panel Nedensellik Testi uygulanmıştır. Analiz bulguları şu şekilde sıralanmıştır. Eşbütünleşme Testi sonuçlarına göre analize dahil edilen ülkelerin tamamında REDK, ithalat ve ihracat hacmi arasında eşbütünleşme ilişkisi tespit edilmiştir. Ardından modellerin uzun dönem katsayıları tahmin edilmiştir. CCE tahmin bulgularına göre ihracat hacmi uzun dönemde REDK’dan negatif, ithalat ve ihracat hacimleri ise birbirlerinden pozitif yönde etkilenmişlerdir. Panel Nedensellik Testi'nin Panel Fisher test istatistiği sonuçlarına göre, ihracat hacmi ve REDK arasında çift yönlü nedensellik ilişkisi tespit edilmiştir. REDK ile dış ticaret hacimleri arasındaki ilişkilerin kısa dönemde çift yönlü olması değişkenler arasındaki etkileşimin döngüsel olduğunu göstermiştir.

Asymmetric long-run effect of exchange rate on bilateral trade balance between USA and China

Purpose This paper aims to investigate asymmetric long-run effects of bilateral exchange rate on US trade imbalances with China and to examine if the effects are the same under China’s fixed and managed floating exchange rate systems. Design/methodology/approach The authors estimate both linear autoregressive distributed lag (ARDL) model assuming symmetric effect and nonlinear ARDL model assuming asymmetric effect of exchange rate on US trade deficit with China. The authors use data from 1994Q1 to 2005Q2 (under Chinese fixed exchange rate system), from 2005Q3 to 2021Q3 (under Chinese managed floating exchange rate regime), and from 1994Q1 to 2021Q3 (overall data). Findings The Chow test indicates 2005Q3 is a structure break point. Further, the results suggest the effects of bilateral exchange rate on US trade deficit with China are not the same under different exchange rate systems. The asymmetric long-run effect of bilateral exchange rate does exist. The results also demonstrate the depreciation of Chinese currency will not significantly affect US trade imbalances with China. Research limitations/implications Based on the results, the Chinese Government should embrace a more transparent and flexible exchange rate system. It will not significantly hurt Chinese trade balance, but it will help to reduce the tension between the USA and China. Originality/value All previous literature (except two papers) related to the effect of Chinese exchange rate on US trade deficit with China assume the effect is symmetric, and all (except one) use data under different Chinese exchange rate systems. To the best of the authors’ knowledge, this is the first paper that studies the possible asymmetric long-run effect of bilateral exchange rate under different Chinese exchange rate regimes.

Long-run relationship between interest rate spread and unemployment in the cemac region: a panel data analysis

This paper examines the long-run relationship between interest rate spread and unemployment in the CEMAC region. The data used to carry out this study goes from 1960 to 2013 and are secondary data from the world development indicator database. We use the panel data analysis to carry out this study, our variables of interest turn out to be I (1) and after successfully performing the Johansen cointegration test, we applied the Error Correction Model (ECM) to estimate our parameters. We reached two major conclusions. First, there is cointegration between interest rate spread and unemployment in the CEMAC Region. Second, when considering countries individually, there is such a cointegration relationship for all member countries but Cameroon. Our results also portray that variations of the interest rate spread in the CEMAC region could account for 35 % of variations in total unemployment. An increase in the interest rate spread in the short and long run drives positively and significantly the level of total unemployment in the CEMAC region. Therefore, we proposed some policies measures such as reducing the interest rate spread to encourage investors to take more risks, create more jobs and drive down total unemployment. We also proposed to the government authorities of the CEMAC region to quit the CFA currency zone and join a flexible exchange rate system, so they could have more leverage to control monetary policies.

Interest rate setting in Egypt: a NARDL approach for estimating backward-looking monetary policy reaction function

ABSTRACT The role of inflation versus output and exchange rate in designing monetary policy in Egypt has been subject to considerable debate in literature, even after the proclamation of price stability as the monetary policy objective in 2004 and the adoption of flexible exchange rate system in 2016. This study aims to investigate the main drivers of interest rate setting in Egypt throughout the period from 2005 to 2019. In this context, both an ARDL and NARDL econometric techniques are employed to estimate the backward-looking augmented Taylor monetary policy reaction function. The estimated equation estimates policy rate as a function in lagged inflation, lagged output gap, lagged policy rate, change in real effective exchange rate, in addition to other variables. The importance of this study arises from the lack of recent studies assessing interest rate setting in Egypt. The study concludes that monetary policy in Egypt has been accommodative to inflation and that Central Bank of Egypt responds asymmetrically to shocks in inflation, output and exchange rate.

الجامعة المستنصرية / كلية الادارة والاقتصاد

This study deals with the relationship between the flexible exchange rate system and the return on the monetary issue, in other words, it tries to clarify the extent of the impact of adopting the flexible exchange rate system on the monetary return that the government can get. Therefore, this study came divided into three sections, the first topic dealt with the concept of the flexible exchange rate, while the second topic dealt with the concept of the return on the cash issue and methods of measuring it, and the third section reviews the size of the return on the cash issue achieved by the government if it follows the flexible exchange rate system. Keywords: yield on the cash issue, flexible exchange rate system, inflation tax, opportunity cost.

Openness-inflation Nexus in alternative monetary regimes

Abstract By applying an endogenous switching regression model to a sample of 64 countries, this article explores whether the effect of trade openness on inflation is influenced by the adoption of inflation targeting (IT). The outcome indicates that, while there exists a significant and negative impact of trade openness on inflation in the non-IT countries with flexible exchange rate system, the effect is negligible in the IT economies. In addition, the above differential inflation effect of trade openness across IT and non-IT regimes is only present in the developing subsample with flexible exchange rate system, but not the developed counterpart. Moreover, apart from trade openness, financial openness reinforces inflation in those developing countries not adopting IT, whereas no such significant effect is found in developing countries adopting IT. Instead of inflation, further results show that trade openness lowers inflation volatility both in developing and developed countries not adopting IT, yet the impact is smaller in developed country group. However, no such statistically significant link is found in developing and developed countries that adopt IT.

US MONETARY POLICY SHOCKS AND MACROECONOMIC FLUCTUATIONS IN MALAYSIA

ABSTRACT This research intends to investigate the US monetary shocks and its impact on selected macroeconomic variables on Malaysia, a small and open economy. This research estimates a structural VAR model using monthly data from January 2000 to February 2016. The result suggests that the Malaysian ringgit and industrial production were mostly affected by the US financial market variables. In comparison, Malaysia's inflation rate was relatively less affected by this external shock as compared to oil price shocks. This shows that the Malaysian ringgit serves as the primary absorber of the external shocks. Given that Malaysia works under a flexible exchange rate system, when the economy experiences external shocks, the nominal exchange rate serves as a natural automatic shock absorber Keywords US UMP, external shocks, macroeconomic fluctuations

Brazil: Economic Policies and Institutions in the Twenty-first Century

Abstract This article discusses the major shifts in macroeconomic policies in Brazil in the last two decades. The early part of this period was marked by a combination of prudent fiscal policies, an inflation targeting framework, and a flexible exchange rate system. The great financial crisis led to the adoption of policies that took some distance from elements of this triad, with increased state intervention in the economy. This policy shift contributed to the gestation of a home-grown economic crisis starting in 2014, with the eventual rollback of this policy experiment under a new administration. We also examine three structural factors that stand out among those hampering productivity and growth in Brazil: a relatively closed economy, inadequate infrastructure, and an inefficient state.

Examining the Threshold Effect of Exchange Rate Changes on Monetary Policy Reaction Function of ASEAN-5: A Panel Threshold Approach

In small open economies, the connection between exchange rate and monetary policy function is well-recognised either in the form of theoretical concept or empirical literature. Unlike others, this paper revisits the study by utilising the panel threshold approach of Hansen (1999) to investigate how the monetary policy function of ASEAN-5 responding to exchange rate changes in two different policy regimes, pre-crisis (1980Q1-1996Q4) and post-crisis (1999Q1-2015Q4). The results exhibit asymmetric effect of exchange rate changes on monetary policy function in both sub-periods. The double threshold effect in the pre-crisis, showing exchange rate changes influencing the policy function in a limited threshold value. Conversely, in the post-crisis, the single threshold effect illustrating exchange rate changes having stronger effect on the policy function in various magnitudes at all threshold values. Although claiming the execution of flexible exchange rate system aftermath crisis, there exist policymakers’ intervention in stabilising the exchange rate changes with respect to ‘fear of floating’ behaviour in ASEAN-5. Lastly, in each sub-period, the threshold effect of exchange rate changes relative to inflation variation is highly significant while trivial to output gap in triggering the policy function. This witnessing, by and large, the ultimate goal of ASEAN-5 is to achieve price stability.

Comment on “Changing International Financial Architecture: Growing Chinese Influence?”

Comment on “Changing International Financial Architecture: Growing Chinese Influence?”

Distortions in Macroeconomics

Distortions in Macroeconomics

Bilateral Export Demand Function of India: An Empirical Analysis

In this paper, we examine the determinants of bilateral export demand function of India during 1993:Q1-2015:Q1. The starting point of our study is 1993:Q1 by keeping into consideration that RBI implemented market determined managed floating flexible exchange rate system during that period. We have employed Auto Regressive Distributed Lag (ARDL) model by using the macroeconomic variables such as real exports, foreign income, nominal exchange rate (Rupee-Dollar) and relative price. We found there exists a long run equilibrium relationship between real exports, foreign income, exchange rate and relative price. In our empirical analysis, we found that in the long run and short run, real exports are influenced more by foreign income followed by relative price. Foreign income carries a positive sign and is statistically significant, which implies that 1% increase in foreign income will increase real export by 1.63% in the long run. Likewise, relative price carries a negative sign and is statistically significant which implies 1% decrease in relative prices that will increase real exports by 0.22% in the long run. The nominal exchange rate carries a negative sign and is statistically significant (in both short run and long run), which suggests that depreciation of nominal exchange rate would not stimulate the volume of export during our study period. Hence, for policy point of view if any policy makers want to promote exports by depreciating, the rupee will not give fruitful results.

Inflation targeting and exchange rate management in less developed countries

We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that tight management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank fixes the path of the nominal exchange rate or leans heavily against the wind in a managed float.

Is There Any Meaningful Ratchet Effect in the Process of Currency Substitution? Evidence from Turkey

Currency substitution is an important phenomenon that has emerged with the liberalization of economies. In the Turkish economy, the studies about the currency substitution have gained momentum as a result of the extreme depreciation of the domestic currency in early 2000s. Switching to the flexible exchange rate system practice after the 2000-2001 crisis and putting into implement the inflation targeting strategy since 2005 have significantly reduced the currency substitution rate. Since 2014, the depreciation of domestic currency has made the currency substitution phenomenon a current issue again. This study analyses the main determinants of currency substitution phenomenon by considering the demand for money in the context of Turkey. Developed empirical model is estimated by using ARDL methodology for 2003-2016 periods by using monthly data obtained from Turkish economy. Estimation results indicate that interest rate differential is an important variable in the process of currency substitution in Turkey. Besides, estimation results also support the existence of a strong ratchet effect in the allocation of deposits between local and foreign currencies. These results together show that strong policies with higher credibility should be pursued with a longer period of time to make reverse currency substitution in effect and to assure economic units to turn back local currency denominated deposits.

Co-movement between Exchange Rate Fluctuations and Economic Factors in Pakistan’s Economy (1990-2013)

Prior to 1976, business community of the world followed gold as a stable standard exchange rate for international business. After flexible exchange rate system implemented in the world in 1976, different solutions for stabilizing the exchange rate system were introduced to reduce the effects of exchange rate fluctuations on business. Pakistan and US Economy relies on trade for improving its GDP, lowering inflation rate and enhancing the economy of the Country. However if the trade balance is sufficient but the exchange rate fluctuation is significant then GDP would decrease instead of increasing and the economy might be negatively affected. It is understandable that imports of Pakistan are more than its exports and if exchange rate also fluctuates between Pakistan and the imported country then the country economy would disturb. Due to this imbalance in import/export, Pakistan relies on different institutions like IMF, World Bank, etc. These loans many help in balance of payment, partial stability but on the same time depreciate the economy if Pakistan. These loans are in the form of US dollars and Pakistani rupees are mostly associated with US dollars. Pakistan economy suffers a setback when these loans are returned. This paper looks as to how exchange rate fluctuations between Pakistan and USA and affects Pakistan’s economy and what are the factors which are disturbed due to exchange rate fluctuations between the two countries.

Exchange rate volatility and non-oil exports in Nigeria: An empirical investigation

The adoption of a flexible exchange rate system since 1986 in Nigeria has made the country witnessed varying rate of the naira vis-à-vis the U.S dollar. This paper examines exchange rate volatility with ARCH model and its various extensions (GARCH, TGARCH, and EGARCH) using quarterly exchange rate series from 1986-Q1 to 2014-Q4.The impact of exchange rate volatility on non-oil exports was also examined using Error Correction Model (ECM) with two different measures of volatility. The results obtained confirm the existence of exchange rate volatility and also found a significant negative effect on non-oil export performance in Nigeria. Therefore, the Nigerian government should ensure an appropriate policy mix that not only ensures a stable and realistic exchange rate but also conducive atmosphere for production and exportation.