Nominal Exchange Rate Volatility Research Articles

Do export responses to exchange rate movements differ in micro export flows?

This paper empirically examines how exports respond to exchange rate movements (exchange rate and exchange rate volatility) at the micro and macro levels using Turkey’s bilateral export data with 65 partner countries. Panel data contaninig 65 cross-sectional dimensions and 60 monthly time series dimensions from 2018:01 to 2022:12 are used. The empirical results of the Poisson Pseudo Maximum Likelihood (PPML) technique show that the negative effect of exchange rate volatility on micro export flows is amplified. Moreover, the potential positive effect of the exchange rate on micro export flows is weaker. Our findings are robust against the alternative method of exchange rate volatility and nominal exchange rate volatility. Our results are also intact under alternative robustness tests. The paper provides notable policy implications. Policymakers should be aware of the potential structural differences between micro and macro exports. Therefore, policymakers should also consider other aspects such as cross-border e-commerce when formulating economic policies on microexports.

THE NEXUS BETWEEN FOREIGN DIRECT INVESTMENT AND NOMINAL EXCHANGE RATE, REAL GDP, AND CAPITAL STOCK IN TANZANIA

Aim: The paper aims to examine the relationship between FDI and the nominal exchange rate, real GDP, and capital stock in Tanzania using quantitative research methods and an econometric analysis. The analysis aims to provide insights into the factors that affect FDI and contribute to the existing literature on the relationship between FDI and economic growth. Methods: This study examines the relationship between FDI inflow, real GDP, capital stock, and the normal exchange rate in Tanzania using a robust research methodology. The study employs STATA 15 software and Akaike’s Information Criteria (AIC), Schwarz Information Criteria (SC), Final Prediction Error (FPE), and the Hannan Quinn (HQ) Information Criteria. In addition, the autoregressive model, the Johansen co-integration test, and the Toda-Yamamoto Granger causality (modified WALD) test were employed to determine the optimal lag. Results: The results indicate a bidirectional relationship between the nominal exchange rate and FDI in Tanzania, with FDI inflows influencing the nominal exchange rate volatility and vice versa. Furthermore, the results indicate that real GDP, capital stock, and the nominal exchange rate exert a unidirectional influence on FDI influx in Tanzania. Conclusions: The nominal exchange rate and capital stock have positive and negative correlations with foreign direct investment. Like many other African economies, Tanzania remains vulnerable to external forces despite making significant strides in stabilizing the exchange rate. It is recommended that the Central Bank of Tanzania – along with those of other African nations with similar economic structures – maintain a stable nominal exchange rate level as an incentive for foreign investors in order to increase the inflow of foreign direct investment.

환율변동성이 베트남의 무역수지에 미치는 실증적 영향: DYNARDL 모형 분석

This study investigate the effect of exchange rate volatility on trade balance for Vietnam during the period of 2010 from first quarter to the 2021 second quarter. The dynamic simulations of autoregressive distributed lag (DYNARDL) approach is applied to analyze positive and negative changes on trade balance of exchange rate volatibility, finalcial development, financial globalization and economic growth in Vietnam. The conditional variance of the generalized autoregressive conditional heteroskedasticity (GARCH) model is used to estimate the exchange rate volatility. The results indicated a significant positive effect of real exchange rate volatility on Viet Nam’s balance trade while there was no effect of nominal exchange rate volatility.

Current Account Imbalances, Real Exchange Rates, and Nominal Exchange Rate Variability

AbstractThis paper globally analyzes the bivariate relation between large current account imbalances and the real exchange rate over different degrees of nominal exchange rate variability. Employing both linear and nonlinear panel estimation procedures, we typically find an inverse long-run link between large imbalances and the real exchange rate at lower nominal exchange rate rigidity levels. This is in contrast to the often non-existent or positive comovement that materializes under lower nominal exchange rate variation. Our results thus suggest that greater nominal exchange rate adjustment can induce a stabilizing “current account”-“real exchange rate” relation. Meanwhile, current account adjustment speeds up with more flexible nominal exchange rates. Along the cross-section, the most salient findings are i) the striking positive relation between current account persistence and real exchange rate persistence based on country-specific estimates and ii) the inverse correlation between persistence in either the current account or real exchange rate and nominal exchange rate volatility.

Analiza uticaja promene nominalnog deviznog kursa na stopu inflacije na primeru odabranih zemalja

Inflation rate is one of the essential macroeconomics variables and it represents the main goal of monetary policy. It is determined by a great number of factors, so it is necessary to analyse the impact their changes have on inflation rate. The purpose of this research is the analysis of the nominal exchange rate pass-through effect on inflation rate in selected emerging and developed countries in the period 2014-2020, which share the same characteristics of inflation targeting, as main monetary policy regime, and managed floating exchange rate, as exchange rate type. Inverse proportion between volatility of nominal exchange rate and inflation rate is proven (depreciation of nominal exchange rate of national currency leads towards the growth of inflation rate), as well as higher pass-through effect in emerging countries compared to developed countries.

The Modelling of Exchange Rate Volatility Using Arch-Garch Models: The Case of Turkey

This study investigates the most appropriate method for modelling the volatility for nominal exchange rate by using the ARCH type models. The research covers the period of 2002-2017 of nominal exchange rate using daily data. It is observed that the volatility of nominal exchange rate has the ARCH effect and the most appropriate model for forecasting the volatility of nominal exchange rate is GARCH(1,2) because it has the lowest Akaike Information Criterion. Furthermore, during the crises and uncertain periods, the volatility of nominal exchange rate series increases and volatility clustering is observed, meaning high volatility tends to follow high volatility and it is true for vice versa.

Real exchange rate persistence and country characteristics: A global analysis

This paper examines the persistence of real exchange rates across 151 countries. We employ univariate time series techniques on a country-by-country basis allowing for deterministic structural breaks and nonlinearities in the adjustment process. Our findings suggest that bilateral exchange rates display higher rates of persistence than multilateral exchange rates, with the latter (former) exhibiting half-lives of less than 1 (2) year(s). Assessing country results by stage of economic development, we find that industrial countries display higher levels of exchange rate inertia than developing countries. We retrieve evidence indicating that higher inflation, nominal exchange rate volatility, trade openness and proximity to reference country are associated with faster rates of real exchange rate convergence. Conversely, international financial integration is found to only play a role at the country group level, with differential effects across cohorts.

Does Exchange Rate Volatility Dampen Imports? Commodity-Level Evidence From India

ABSTRACTThis paper studies the effect of exchange rates’ volatility on India’s imports on a balanced panel of 73 commodities spanned from April 2013 to October 2016. Rather than using cross-country bilateral import flows, we test the relationship at the commodity level using disaggregated trade data with monthly frequency. Generalized autoregressive conditional heteroscedasticity model is used for estimating exchange rate. We employ pooled mean group estimator for simultaneously assessing long- and short-run association between nominal exchange rate volatility and import volume. In the long-run, for all commodities, a 100% increase in volatility results in a 12% drop in India’s imports. A significant dampening impact of volatility of exchange rate on imports is evidenced also in short-run. However, at the disaggregate level, imports in the agricultural and allied sector are found to be relatively more sensitive to exchange rate volatility as compared to the manufacturing sector. We also conducted a time series analysis for the aggregate data covering both pre- and post-crisis period. The results validate the findings of commodities-level panel data analysis. This paper concludes with policy implications of our findings.

Exchange rate volatility and exports from India: a commodity-level panel data analysis

PurposeThis study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case.Design/methodology/approachThe monthly panel data used for analysis are at a disaggregated level, which cover around 100 products, encompassing all merchandize sectors for the period spanning from 2012:12 to 2017:11. To measure the exchange rate volatility, the authors use real as well as nominal exchange rate concepts and predict the volatility of exchange rate using the autoregressive conditional heteroscedastic-based model. They use pooled mean group, mean group and common correlated effects mean group estimator that is suitable for the objectives and data frequency.FindingsThe empirical analysis indicates both short- and long-term negative effects of exchange rate variations on exporting. Specifically, in the long run, real exchange rate as well as nominal exchange rate volatility has significant effects on export performance, yet, the effects of uncertainty of nominal exchange rate is much severe and intense. In the short run, it is the nominal exchange rate uncertainty that hurts exports from India. Nevertheless, the short-run effect is much lesser than the long-run, supporting the argument that the short-term exchange rate risk can be hedged, at least partially, through financial instruments; however, uncertainty of the long-term horizon cannot be hedged easily and cost-effectively.Practical implicationsReducing uncertainty and attaining stability in exchange rate and price level should be an important policy objective in developing countries such as India to achieve higher export growth, both in the short and long run.Originality/valueUnlike previous studies, this paper tests the relationship using micro-level data and uses advanced econometric techniques that are likely to provide more precise information regarding the association between exchange rate volatility and trade flows.

FINANCIAL INTEGRATION AND MACROECONOMIC VOLATILITY: NEW EVIDENCE FROM DSGE MODELING

This paper provides a brief overview of theoretical and empirical literature on financial integration and macroeconomic volatility nexus highlighting how the degree of financial integration affects the volatility of macroeconomic fundamentals. Using a dynamic stochastic general equilibrium (DSGE) model, our findings show that: (i) higher degree of financial integration tends to decrease short-run volatility; (ii) following monetary policy shocks, financial integration increases nominal exchange rate and output volatility and reduces both nominal and real interest rates and consumption volatility; and (iii) in response to fiscal shocks, financial integration stabilizes all variables under the assumption of perfect capital mobility.

Asymmetric effects of financial dollarization on nominal exchange rate volatility in Nigeria

The paper investigates the relationship between financial dollarization and nominal exchange rate volatility in Nigeria. To achieve this objective, a Threshold Autoregressive Conditional Heteroscedasticity (TARCH) model using monthly data for the period December 2009 to September 2018. From the estimation results, it is evident that nominal exchange rate volatility in Nigeria is driven by the degree of financial dollarization, all things equal. It is also evidence from the study that exchange rate volatility exhibit high degree of persistence and ratchet effect. In other words, bad news of depreciation in the nominal exchange rate trigger foreign currency holding which further depreciates the domestic currency exchange rate more than the good news of appreciation lead to further appreciation of the nominal exchange rate of the domestic currency.

Time‐Varying Dynamics of the Norwegian Economy

AbstractWe use time‐varying parameter vector autoregressive models to investigate possible changes in the time‐series properties of key Norwegian macroeconomic variables since the 1980s. Notably, we find that inflation persistence falls during the inflation targeting period, while the volatility of inflation and nominal exchange rates increases. The observed time‐variation in the correlations between the interest rates and the macro variables largely reflects the prevailing monetary policy regimes. An increase in the correlations between oil prices and other macro variables over time is also documented. Using a counterfactual analysis, we discuss the observed time‐varying dynamics of the Norwegian economy in the light of monetary policy and oil price shocks.

Empirical Analysis of Crude Oil Price Effects on Exchange Rate Volatility

This study examined the effects of crude oil price on nominal exchange rate volatility for oil and non-oil exporting countries. Immediately after the global financial crisis, the swings in the movement of crude oil price revealed how vulnerable the currencies of oil exporting countries and other commodity exporting countries. Using the Structural VAR method and the sample data from 2011 to 2016, the study estimated the effects of crude oil price on exchange rate stability and its impulse responses. Empirical results show that exchange rates for oil exporting countries are highly vulnerable to crude oil price shocks. As crude oil price declines, exchange rate volatility increases, similarly large crude oil price increases are associated with low exchange rate volatility. Currencies such as Angolan Kwanza, Russian Ruble, and Mexican Peso are very sensitive to crude oil price shocks. SVAR results show that oil price shocks significantly reduce exchange rate volatility of oil exporting countries. Meanwhile, the exchange rate volatility for non-oil exporting countries was driven by other factors than the price of crude oil.

Exchange rate volatility and India's cross-border trade: A pooled mean group and nonlinear cointegration approach

This paper offers first-hand commodity-level evidence regarding the effects of exchange rate volatility on India's cross-border trade with the U.S., Germany, Japan, and China. We used autoregressive conditional heteroscedasticity based models to estimate the volatility of the nominal exchange rate. To determine the short and long run relationships, we used pooled mean group estimators. The results show that, in the long run, nominal exchange rate volatility has a significant dampening impact on India's export rates to the U.S., Germany, and China along with imports from the U.S. and China. However, in the short run, the effects of the nominal exchange rate volatility on India's exports and imports were rather mixed. The study also tested the asymmetric effects of exchange rate volatility on India's trade using aggregated data. Although the results do not show much of an asymmetric effect, they do indicate that positive and negative effects differ in terms of their impact on trade volume. Policy recommendations are therefore suggested on the basis of these results.

Влияние бюджетных правил на волатильность обменного курса

Decrease of dependency level between oil prices and ruble exchange rate is among the key goals of a new version of Russia’s fiscal rule. This study analyzes motivation to adopt this goal by reviewing the estimates for impact of exchange rate volatility on economic growth. It proceeds to assessment of commodity-exporting countries experience and considers the effects of fiscal rule implementation on real and nominal exchange rate volatility. Moreover, the author conducts the long-term scenario analysis of ruble exchange rate volatility for different versions of the fiscal rule. The main results are as follows. First, reduction of the exchange rate volatility leads to a modest increase in investment and export growth. Second, in general, adoption of fiscal rules does not result in reduction of the exchange rate fluctuations, though in the case of Russia since 2017 ruble exchange rate has been significantly de-linked from oil prices. Finally, according to scenario analysis compared with other versions of the fiscal rule (2013 Russian version; Norwegian version; targeting non-oil deficit; tying expenditure growth to GDP growth; no fiscal rule) the current Russian version yields a substantial decrease in exchange rate volatility, though its performance could be further improved by introduction of a mechanism for the base oil price modification in case of a long-term fall in actual oil prices below 40$/barrel in constant 2017 dollars (which is the base price in the current version of the rule).

The determinants of corporate profitability: an investigation of Indian manufacturing firms

PurposeThe purpose of this paper is to examine the firm-specific and macroeconomic determinants of profitability of Indian manufacturing firms. It assesses the main determinants of firm’s profitability in the pre-crisis and post-crisis period from 2000 to 2015.Design/methodology/approachThis methodology splits the factors that influence firm profitability in two groups: firm-specific (internal) factors and macroeconomic indicators. It further aims to look at the consistency of the factors in the pre-crisis and post-crisis period. The return on assets and the net profit margin are considered as proxy for corporate profits. The panel generalized least square and panel vector auto-regression model have been employed, and it is observed that the exchange rate seems to have played a major role in the crisis period by explaining the earning quotient for Indian firms.FindingsThis paper concludes that the firm-specific variables and exchange rate channels are quite relevant in explaining the profitability of Indian manufacturing firms. It accepts the hypotheses that size and liquidity enhances whereas leverage discourages the profitability. Few exceptions have been observed during the crisis period. The study also concludes that in the short run, the changes in exchange rate are not increasing profitability, but in the long run, it increases profitability as the volatility of nominal exchange rate is positively impacting profitability. Moreover, the study finds that the nominal exchange rate index is more informative and explains that profitability is better than real exchange rate index in the case of Indian manufacturing firms over the study period.Research limitations/implicationsThe managers and the policy makers should give utmost importance to the firm-specific determinants, especially after the crisis period, and consider the appropriate exchange rate to evaluate firm performance for making any change in the policy to make any business profitable.Originality/valueThis study has been conducted over a longer time by using advanced panel data analysis techniques on the recent data. The study period properly captures the crisis time and the research includes different selection of profitability that highlights corporate earnings pattern. Moreover, validation of the exchange rate sensitivity of profitability over nominal and real exchange rate increases the robustness of the study. Moreover, on Indian manufacturing firms, the study is very significant and unique.

Can Price-Level Targeting Reduce Exchange Rate Volatility?

Previous studies have shown that, under certain conditions, a central bank can achieve a better trade-off between inflation and output volatility by replacing its inflation target with a price-level target. This article studies whether a Taylor rule that targets the price level instead of the inflation rate can reduce nominal and real exchange rate volatility without compromising the goals of inflation and output stability. The results indicate that supply shocks cause less nominal and real exchange rate volatility under price-level targeting. However, in the case of demand shocks the results depend on the persistence of the shocks.

Impact of dollarisation on exchange rate volatility and rational choice of currency regime: Evidence from two EU candidate countries

Objective of this paper is to empirically examine whether widespread unofficial dollarisation plays significant role in determination of exchange rate dynamic in Turkey and Serbia, as one big and one small of the EU candidate countries under managed floating currency regime and synthesize consequent policy recommendations. Our time-series approach utilised monthly data from 2006-2016 to research the aforementioned relationship. After resolving non-stationarity issues, we deployed GARCH analysis to pinpoint the sources of volatility. Our research shows that in Serbia dollarisation has significant and robustly positive influence on exchange rate levels, but not so in Turkey, whose national currency is pretty robust in levels yet its volatility is more sensitive than Serbian dinar to volatility of dollarisation. In addition, Serbian foreign exchange reserves share in the money supply positively influences dinar-euro nominal exchange rate volatility, while Turkish reserves' share in money supply has negative impact on exchange rate volatility. Even though uncovered interest parity doesn't hold in either of countries, Serbian dinar is somewhat susceptible to interest rate manipulation, unlike Turkish lira. In the end, one could conclude that flexible exchange rate has more sense and better results in Turkey than in Serbia, but rational choice between earlier-agreed upon or unilateral-official dollarisation on the one hand and continuing with managed (systematic) floating on the other in these two EU candidate countries, requires additional, more precise cost-benefit analysis, as formalised in the discussion and suggested for future research.

Inflation targeting and exchange rate volatility smoothing: A two-target, two-instrument approach

This paper introduces a strategy to model a small open economy, whose central bank has established two simultaneous policy objectives: an inflation target, and a maximum limit for nominal exchange rate volatility. In line with the Tinbergen–Aoki condition, the monetary authority establishes two policy instruments, one for accomplishing each target: the monetary policy rate, and the stock of foreign exchange reserves. Monetary policy analysis is built around a non-microfounded augmented New Keynesian DSGE model estimated through Bayesian techniques for the Guatemalan economy. It is found that each instrument is efficient in accomplishing its own target. Nevertheless, a coordinated effort is required for central bank policymakers before employing both instruments simultaneously, in order to avoid sending mixed signals to economic agents about its monetary policy stance, and endanger the achievement of its inflation target.

The effect of exchange rate volatility upon foreign trade of Hungarian agricultural products

This paper takes a new empirical look at the long-standing question of the effect of exchange rate volatility on international trade flows of transition economies in Central Europe by studying the case of Hungarian agricultural exports to their export destination countries between 1999 and 2008. Based on a gravity model that controls for other factors likely to determine bilateral trade, the results show that nominal exchange rate volatility has had a significant positive effect on agricultural trade over this period. This positive effect of exchange rate volatility on agricultural exports suggests that agri-food entrepreneurs are not interested in speeding up the process of joining Hungary to the euro zone.