Showing papers on "Exchange rate published in 2019"

Exchange Arrangements Entering the Twenty-First Century: Which Anchor will Hold?

Abstract: This article provides a comprehensive history of anchor or reference currencies, exchange rate arrangements, and a new measure of foreign exchange restrictions for 194 countries and territories over 1946-2016. We find that the often cited post-Bretton Woods transition from fixed to flexible arrangements is overstated; regimes with limited flexibility remain in the majority. Even if central bankers' communications jargon has evolved considerably in recent decades, it is apparent that many still place a large implicit weight on the exchange rate. The U.S. dollar scores as the world's dominant anchor currency by a very large margin. By some metrics, its use is far wider today than 70 years ago. In contrast, the global role of the euro appears to have stalled. We argue that in addition to the usual safe assets story, the record accumulation of reserves since 2002 may also have to do with many countries' desire to stabilize exchange rates in an environment of markedly reduced exchange rate restrictions or, more broadly, capital controls: an important amendment to the conventional portrayal of the macroeconomic trilemma.

The Dollar Exchange Rate as a Global Risk Factor: Evidence from Investment

Abstract: Exchange rate fluctuations could influence economic activity not only via the standard trade channel, but also through a financial channel, which operates through the impact of exchange rate fluctuations on borrowers’ balance sheets and lenders’ risk-taking capacity. This paper explores the “triangular” relationship between (1) the strength of the US dollar, (2) cross-border bank flows and (3) real investment. We conduct two sets of empirical exercises—a macro (country-level) study and a micro (firm-level) study. We find that a stronger dollar is associated with lower growth in dollar-denominated cross-border bank flows and lower real investment in emerging market economies. An important policy implication of our findings is that a stronger US dollar has real macroeconomic effects that go in the opposite direction to the standard trade channel.

International Shocks, Variable Markups, and Domestic Prices

Abstract: How strong are strategic complementarities in price setting across firms? In this article, we provide a direct empirical estimate of firms’ price responses to changes in competitor prices. We develop a general theoretical framework and an empirical identification strategy, taking advantage of a new micro-level dataset for the Belgian manufacturing sector. We find strong evidence of strategic complementarities, with a typical firm adjusting its price with an elasticity of 0.4 in response to its competitors’ price changes and with an elasticity of 0.6 in response to its own cost shocks. Furthermore, we find evidence of substantial heterogeneity in these elasticities across firms. Small firms exhibit no strategic complementarities in price setting and complete cost pass-through. In contrast, large firms exhibit strong strategic complementarities, responding to both competitor price changes and their own cost shocks with roughly equal elasticities of around 0.5. We show that this pattern of heterogeneity in markup variability across firms is important for explaining the aggregate markup response to international shocks and the observed low exchange rate pass-through into domestic prices.

A Tie That Binds: Revisiting the Trilemma in Emerging Market Economies

Abstract: This paper examines the claim that exchange rate regimes are of little salience in the transmission of global financial conditions to domestic financial and macroeconomic conditions by focusing on ...

Nonlinear causality between crude oil price and exchange rate: A comparative study of China and India - A Reassessment

Abstract: De Vita and Trachanas's (hereafter DV-T, 2016) paper published in (Energy Economics, Volume 56, May 2016, pages, 150-160) criticizes Bal and Rath's paper (Energy Economics, Volume 51, September 2015, pages, 149-156) (hereafter, BR, 2015) by undertaking a ‘pure replication' and a ‘reanalysis' using (BR, 2015) data set. The aim of this paper is to reassess (BR, 2015) by providing comments and additional evidence. We revisit (BR, 2015) with the aim of applying additional unit root, cointegration and nonlinear causality tests. The results derived from these supplementary tests clearly reveal that the oil price series is non-stationary at level. The bivariate noisy Mackey-Glass model proposed by Kyrtsou and Terraza (2003) reveals bi-directional non-linear causality exists between real oil price and exchange rate in case of China, whereas for India, only unidirectional nonlinear causality running from oil price to exchange rate.

The determinants of profitability of Indian commercial banks: A panel data approach

Abstract: The current study examines the determinants of profitability of Indian commercial banks. The analysis is conducted over a period of 10 years in which the Indian banking sector has gone under different changes such as demonetization and issues related to banking sector sustainability and banking sector frauds. The analysis is based on balanced panel data over a period ranging from 2008 to 2017 for 69 commercial Indian banks. Profitability of Indian banks is measured by two proxies, namely, return on assets (ROA) and return on equity (ROE), whereas bank size, assets quality, capital adequacy, liquidity, operating efficiency, deposits, leverage, assets management, and the number of branches are used as bank‐specific factors. Further, a set of macroeconomic determinants such as gross domestic product, inflation rate, interest rate, exchange rate, financial crisis, and demonetization are used as independent variables. Stationary test along with pooled, fixed, random effect models and panel correction standard error are used in this study. The results revealed that bank size, the number of branches, assets management ratio, operational efficiency, and leverage ratio are the most important bank‐specific determinants that affect the profitability of Indian commercial banks as measured by ROA. Furthermore, among the bank‐specific determinants, the results revealed that bank size, assets management ratio, assets quality ratio, and liquidity ratio are found to have a significant positive impact on ROE. With regard to the macroeconomic determinants, the results revealed that the inflation rate, exchange rate, the interest rate, and demonization are found to have a significant impact on ROA. However, in the case of ROE, the results show that all macroeconomic determinants except demonization have a significant impact on the bank's profitability as measured by ROE.

Inflation in Emerging and Developing Economies : Evolution, Drivers, and Policies

Abstract: Emerging market and developing economies, like advanced economies, have experienced a remarkable decline in inflation over the past half-century. Yet, research into this development has focused almost exclusively on advanced economies. This book fills that gap, providing the first comprehensive and systematic analysis of inflation in emerging market and developing economies. It examines how inflation has evolved and become synchronized among economies; what drives inflation globally and domestically; where inflation expectations have become better-anchored; and how exchange rate fluctuations can pass through to inflation. To reach its conclusions, the book employs cutting edge empirical approaches. It also offers a rich data set of multiple measures of inflation for a virtually global sample of countries over a half-century to spur further research into this important topic.

Exploring the dynamics of Bitcoin’s price: a Bayesian structural time series approach

Abstract: Currently, there is no consensus on the real properties of Bitcoin. The discussion comprises its use as a speculative or safe haven asset, while other authors argue that the augmented attractiveness could end up accomplishing money’s properties that economic theory demands. This paper explores the association between Bitcoin’s market price and a set of internal and external factors by employing the Bayesian structural time series approach (BSTS). The idea behind BSTS is to create a superposition of layers such as cycles, trend, and explanatory variables that are allowed to vary stochastically over time, additionally, it is possible to perform a variable selection through the application of the Spike and Slab method. This study aims to contribute to the discussion of Bitcoin price determinants by differentiating among several attractiveness sources and employing a method that provides a more flexible analytic framework that decomposes each of the components of the time series, applies variable selection, includes information on previous studies, and dynamically examines the behavior of the explanatory variables, all in a transparent and tractable setting. The results show that the Bitcoin’s price is negatively associated with the price of gold as well as the exchange rate between Yuan and US Dollar, while positively correlated to stock market index, USD to Euro exchange rate and diverse signs among the different countries’ search trends.

8. Why Do Countries Borrow the Way They Borrow

Abstract: This paper analyzes the interplay between individual borrowers’ choices for liability denomination and the optimal monetary policy. If the monetary authority cares about preventing bankruptcy and most liabilities are denominated in dollars, it will stabilize the exchange rate at the expense of higher volatility in the interest rate and vice-versa if most liabilities are denominated in local currency. That can generate multiplicity of equilibria in the liability composition. If an individual borrower expects the others to borrow in dollars (pesos) he or she will expect the monetary policy to be tailored for that liability denomination and as a result would find it optimal to borrow in dollars (pesos) as well. If the monetary authority has a strong enough preference for exchange rate (interest rate) stability the equilibrium becomes unique with the liabilities denominated in dollars (pesos).

Analysis of the determinants of foreign direct investment in Ghana

Abstract: Purpose The factors that determine foreign direct investment (FDI) are important to policy-makers, investors, the banking industry and the public at large. FDI in Ghana has received increased attention in recent times because its relevance in the Ghanaian economy is too critical to gloss over. The purpose of this paper is to examine the determinants of FDI in Ghana between the period of 1990 and 2015. Design/methodology/approach The study employed a causal research design. The study used the Johansen’s approach to cointegration within the framework of vector autoregressive for the data analysis. Findings The study found a cointegrating relationship between FDI and its determinants. The study found that both the long-run and short-run results found statistically significant negative effects of inflation rate, exchange rate and interest rate on FDI in Ghana while gross domestic product, electricity production and telephone usage (TU) had a positive effect on FDI. Research limitations/implications The study found a cointegrating relationship between FDI and its determinants. The study found that both the long-run and short-run results found statistically significant negative effects of inflation rate, exchange rate and interest rate on FDI in Ghana whiles gross domestic product, electricity production and TU had a positive effect on FDI. Practical implications This study has potential implication for boosting the economies of developing countries through its policy recommendations which if implemented can guarantee more capital inflows for the economies. Social implications This study has given more effective ways of attracting more FDI into countries which in effect achieve higher GDP and also higher standard of living through mechanisms and in the end creating more social protection programs for the people. Originality/value Although studies have been conducted to explore the determinants of FDI, some of the core macroeconomic variables such as inflation, interest rate, telephone subscriptions, electricity production, etc., which are unstable and have longstanding effects on FDI have not been much explored to a give a clear picture of the relationships. Therefore, a study that will explore these and other macroeconomic variables to give clear picture of their relationships and suggest some of the possible ways of dealing with these variables in order to attract more FDI for the country to achieve its goal is what this paper seeks to do.

The global financial cycle and us monetary policy in an interconnected world

Abstract: We assess the international spillovers of US monetary policy with a large-scale global VAR which models the world economy as a network of interdependent countries. An expansionary US monetary policy shock contributes to the emergence of a Global Financial Cycle, which boosts macroeconomic activity worldwide. We also find that economies with floating exchange rate regimes are not fully insulated from US monetary policy shocks and, even though they appear to be relatively less affected by the shocks, the differences in responses across exchange rate regimes are not statistically significant. The role of US monetary policy in driving these macrofinancial spillovers gets even reinforced by the complex network of interactions across countries, to the extent that network effects roughly double the direct impacts of US monetary policy surprises on international equity prices, capital flows, and global growth. This amplification increases as countries get more globally integrated over time, suggesting that the evolving network is an important driver for the increasing role of US monetary policy in shaping the Global Financial Cycle.

The Quanto Theory of Exchange Rates

Abstract: We present a new identity that relates expected exchange rate appreciation to a risk-neutral covariance term, and use it to motivate a currency forecasting variable based on the prices of quanto index contracts. We show via panel regressions that the quanto forecast variable is an economically and statistically significant predictor of currency appreciation and of excess returns on currency trades. Out of sample, the quanto variable outperforms predictions based on uncovered interest parity, on purchasing power parity, and on a random walk as a forecaster of differential (dollar-neutral) currency appreciation.

Signatures of the Crypto-Currency Market Decoupling from the Forex

Abstract: Based on the high-frequency recordings from Kraken, a cryptocurrency exchange and professional trading platform that aims to bring Bitcoin and other cryptocurrencies into the mainstream, the multiscale cross-correlations involving the Bitcoin (BTC), Ethereum (ETH), Euro (EUR) and US dollar (USD) are studied over the period between 1 July 2016 and 31 December 2018. It is shown that the multiscaling characteristics of the exchange rate fluctuations related to the cryptocurrency market approach those of the Forex. This, in particular, applies to the BTC/ETH exchange rate, whose Hurst exponent by the end of 2018 started approaching the value of 0.5, which is characteristic of the mature world markets. Furthermore, the BTC/ETH direct exchange rate has already developed multifractality, which manifests itself via broad singularity spectra. A particularly significant result is that the measures applied for detecting cross-correlations between the dynamics of the BTC/ETH and EUR/USD exchange rates do not show any noticeable relationships. This could be taken as an indication that the cryptocurrency market has begun decoupling itself from the Forex.

Global Value Chains and Effective Exchange Rates at the Country‐Sector Level

Abstract: The real eective exchange rate (REER) is one of the most cited statistical constructs in open-economy macroeconomics. The conventional measures of the REER assume a world in which every country exports only final goods. With rising importance of oshoring and cross-border trade in intermediate goods, such measures are increasingly flawed. Taking into account international value chains, we develop a theoretical framework to compute REER at the both sector and country levels. The framework nests all existing measures in the literature and addresses their shortcomings. We exploit detailed trade data from the recently available World Input-Output Database(WIOD) spanning the period 1995-2011 to compute the REER for gross output as well as value added for 40 countries and 1435 country-sectors.

Exchange Rate Shocks and Inflation Comovement in the Euro Area

Abstract: This paper decomposes the time-varying effect of exogenous exchange rate shocks on euro area countries inflation into country-specific (idiosyncratic) and region-wide (common) components. To do so, we propose a flexible empirical framework that is based on dynamic factor models subject to drifting parameters and exogenous information. We show that exogenous shocks to the euro/USD account for over 50% of the nominal euro/USD exchange rate fluctuations in more than 1/3 of the quarters over the past six years – especially in turning points periods. Our main results indicate that headline inflation in euro area countries, and in particular its energy-related component, has significantly become more affected by these exogenous exchange rate shocks since the early 2010s, in particular, for the largest economies of the region. While such increasing sensitivity relies solely on a sustained surge in the degree of comovement for headline inflation, it is also based on a higher region-wide effect of the shocks for the case of energy inflation. Instead, purely exogenous exchange rate shocks do not seem to have a significant effect on the core component of headline inflation, which also displays a lower degree of comovement across euro area countries.