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Article
Publication date: 10 October 2008

Magda Kandil and Nazire Nergiz Dincer

The paper aims to examine the effects of exchange rate fluctuations on real output, the price level, and the real value of components of aggregate demand in Egypt and Turkey.

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Abstract

Purpose

The paper aims to examine the effects of exchange rate fluctuations on real output, the price level, and the real value of components of aggregate demand in Egypt and Turkey.

Design/methodology/approach

Building on a theoretical model that decomposes movements in the exchange rate into anticipated and unanticipated components, the empirical investigation traces the effects through demand and supply channels.

Findings

In Turkey, anticipated exchange rate appreciation has significant adverse effects, contracting the growth of real output and the demand for investment and exports, while raising price inflation. Random fluctuations in Turkey have asymmetric effects that highlight the importance of unanticipated depreciation in shrinking output growth and the growth of private consumption and investment, despite an increase in export growth. In Egypt, anticipated exchange rate appreciation decreases export growth. Given asymmetry, the net effect of unanticipated exchange rate fluctuations, in Egypt, decreases real output and consumption growth and increases export growth, on average, over time.

Research limitations/implications

In light of the country‐specific evidence, future research should extend the investigation using panel estimation, incorporating various demand and supply shocks along with exchange rate fluctuations, to establish the relative importance of various shocks on macroeconomic performance across MENA countries.

Practical implications

While adhering to a flexible exchange rate policy to boost competitiveness, managing fundamentals to reduce excessive volatility impinging on the economic system over time should top the policy agenda.

Originality/value

Excessive volatility in the real effective exchange rate could be detrimental to real growth, over time, as the evidence for Turkey and Egypt illustrates.

Details

International Journal of Development Issues, vol. 7 no. 2
Type: Research Article
ISSN: 1446-8956

Keywords

Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

Book part
Publication date: 8 March 2011

Junko Shimizu and Eiji Ogawa

We investigate fluctuations in the nominal effective exchange rates (NEERs) of East Asian currencies and the Asian monetary unit (AMU), which is computed as a weighted…

Abstract

We investigate fluctuations in the nominal effective exchange rates (NEERs) of East Asian currencies and the Asian monetary unit (AMU), which is computed as a weighted average of East Asian currencies during the global financial crisis. We find that NEERs were more stable for countries that continued to follow a currency basket system during the global financial crisis.

Furthermore, we investigate the relationships among NEERs, AMU, and AMU deviation indicators, which indicate the extent of the deviation in the exchange rate of each East Asian currency from a benchmark rate given in terms of the AMU. By comparing NEERs with a combination of AMU and AMU deviation indicators, we find that there is a strong relationship between them, both before and after the global financial crisis. These results indicate that a coordinated exchange rate policy aimed at stabilizing the AMU deviation indicators will be effective in stabilizing the NEERs of East Asian currencies. In this respect, the AMU deviation indicators, which indicate intraregional exchange rates among East Asian currencies, play a crucial role.

Because NEER trade weights are widely similar among East Asian currencies, a policy aimed at stabilizing a home currency against its NEER may lead to a coordinated exchange rate policy without a common consensus among East Asian countries. In the future, however, coordinated monetary policies should be considered along with coordinated exchange rate policies.

Article
Publication date: 1 June 1997

Elaine M. Worzala, Richard D. Johnson and Colin M. Lizieri

Uses Monte Carlo simulation to demonstrate the benefits of employing a currency swap to hedge the exchange rate exposure in a single international real estate investment…

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Abstract

Uses Monte Carlo simulation to demonstrate the benefits of employing a currency swap to hedge the exchange rate exposure in a single international real estate investment. The only cashflow exposed to the currency fluctuations is the appreciation associated with the investment. Shows that this hedging technique has some potential for protecting the investor from adverse currency fluctuations if an international real estate investment is made. However, promises to explore unresolved issues in future research. Demonstrates that some elements of exchange rate risk may be hedged, resulting in improved risk‐adjusted returns. Thus extends earlier research in international property investment and suggests that international real estate strategies based on diversification (as opposed to currency plays) may be more effective than has been argued in previous research.

Details

Journal of Property Finance, vol. 8 no. 2
Type: Research Article
ISSN: 0958-868X

Keywords

Book part
Publication date: 13 May 2019

Rosaria Rita Canale and Rajmund Mirdala

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II…

Abstract

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

Details

Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence
Type: Book
ISBN: 978-1-78743-793-7

Keywords

Article
Publication date: 5 June 2017

Abolaji Daniel Anifowose, Izlin Ismail and Mohd Edil Abd Sukor

The purpose of this paper is to present the essential role that currency order flow plays in the foreign exchange markets of emerging economies in the determination of…

Abstract

Purpose

The purpose of this paper is to present the essential role that currency order flow plays in the foreign exchange markets of emerging economies in the determination of their currencies in the short and the long-run against major currencies of the world, which cannot be over emphasized, most especially against the US dollar. Insomuch that, if some of these emerging economies can be successfully transmitted into full development, it would be a good model for other emerging economies and the world at large.

Design/methodology/approach

A hybrid model (portfolio shift model) proposed by Evans and Lyons (2002a, 2002b) is extended to analyze a data set of every quarter of an hour currency order flow and currency exchange rate fluctuations of Thai Baht (THB) against the US$ for the period of six years (January 2010 to December 2015). To reflect the pressure of currency excess demand, the authors construct a measure of currency order flow in the Thailand currency exchange market. Vector autoregression model is applied to estimate the effectual role of currency order flow in the determination of exchange rate for the THB against the US$.

Findings

Currency order flow indeed accounted for a sizeable and significant portion of the fluctuations in the THB and the US$ exchange rate.

Originality/value

Insomuch that, the results show that currency order flow has significant explanatory power in the emerging markets economy to capture the THB exchange rate variability, and it then brings to the attention of the Thailand Monetary Authority the importance that should be attached to the market microstructure.

Details

Journal of Chinese Economic and Foreign Trade Studies, vol. 10 no. 2
Type: Research Article
ISSN: 1754-4408

Keywords

Book part
Publication date: 12 November 2016

Falin Zhang

Propose a more comprehensive explanation on the determinants and fluctuations of China’s exchange rate policy in the past decade (2005–2015).

Abstract

Purpose

Propose a more comprehensive explanation on the determinants and fluctuations of China’s exchange rate policy in the past decade (2005–2015).

Approach

Case study on China’s exchange rate policies in three respective stages since 2005 and then a comparative study on these three stages.

Findings

Put forward a two-pronged explanation on the determinants and fluctuations of China’s exchange rate policy in the past decade and arrive at three specific conclusions. First, external pressure is only one factor among many influencing the formation of China’s national interests (Guojia Liyi in Chinese) and the decision-making process on exchange rate policy. Second, national interest is the fundamental driving force and substratum for making China’s exchange rate policy. Third, in the short term, the specific exchange rate policies in different periods were not always in accordance to the national interests (or Guojia Liyi), due to the influences of some factors on the decision-making environment.

Value

The comprehensive view is conducive to better explaining the formation and fluctuations of China’s exchange rate policy and consequently contributes to understanding and even predicting future policies.

Details

The Political Economy of Chinese Finance
Type: Book
ISBN: 978-1-78560-957-2

Keywords

Article
Publication date: 3 December 2019

Sahar Charfi, Salah BenHamad and Afif Masmoudi

The purpose of this paper is to analyze how monetary fundamentals affect exchange rate movements.

Abstract

Purpose

The purpose of this paper is to analyze how monetary fundamentals affect exchange rate movements.

Design/methodology/approach

To develop this paper, a Bayesian Network modeling is applied to explore the causal interactions between monetary fundamentals and exchange rate fluctuations. Subsequently, a sensitivity analysis is performed to asses and estimate exchange rate behavior with uncertain monetary fundamentals. Furthermore, a Granger Causality test is used as suggested in the Econometric literature to determine the causality direction among factors.

Findings

The empirical findings show that money supply and interest rate have a significant positive effect on exchange rate, whereas inflation rate has a considerable negative effect on exchange rate. In addition, the authors deduce that real income has an indirect impact on exchange rate and a direct impact on inflation rate, interest rate and money supply. Furthermore, the sensitivity analysis shows that monetary uncertainty has a considerable effect on exchange rate fluctuations. Moreover, the Granger Causality test reveals that there is a unique unidirectional causality running from money supply to exchange rate.

Practical implications

The model can be considered as a vital management tool for international investors and financial analysts to explore the effect of monetary fundamentals on exchange rate behavior. It allows estimating exchange rate fluctuations with uncertain monetary factors.

Originality/value

This study is the first one which applied a Bayesian Network modeling to examine the exchange rate determination problem. Results of this research are presented under a clear graphical representation that can be easily useful by monetary policymakers and international traders to determine the influential monetary factors on exchange rate behavior. Also, the model will help them in estimating the effect of monetary uncertainty on exchange rate fluctuations.

Details

Journal of Modelling in Management, vol. 15 no. 1
Type: Research Article
ISSN: 1746-5664

Keywords

Article
Publication date: 2 August 2013

Young‐Ryeol Park, Sangcheol Song and Eun‐kyoung Rhee

The purpose of this paper is to examine whether Korean multinational corporations (MNCs) in the electronics and steel industries do shift their production across their…

Abstract

Purpose

The purpose of this paper is to examine whether Korean multinational corporations (MNCs) in the electronics and steel industries do shift their production across their foreign subsidiaries, located in different countries, as exchange rates fluctuate in foreign countries.

Design/methodology/approach

A case study was taken as a qualitative methodology to examine whether MNCs actually shift their production as multinational operational flexibility perspective predicts.

Findings

From a case study of two Korean MNCs (LG Electronics and POSCO), it was found that even facing heightened production costs associated with host country currency appreciation, Korean MNCs do not shift their production to less costly locations due to industrial characteristics, limited capacity, and high tariff barriers. It was also found that they reduce the production costs internally and they also negotiate the costs with employees and suppliers to adjust the production costs associated with appreciated currency.

Practical implications

Our findings imply that certain industrial and environmental constraints make it difficult for MNCs to take flexible actions as multinational operational flexibility perspective predicts. The findings also shed additional light on the less‐explored argument over operational flexibility and vertical integration associated with cross‐country shifts of value chain activities, including production or sales.

Originality/value

Almost all literature taking the multinational operation flexibility view argues that MNCs are able to shift their productions for their own benefits. However, the authors of this paper find from their case studies that firms take advantage of other methods than production shifts in their responses to exchange rate fluctuations in their host countries. Thus this study gives an insight into when and how firms behave as the theory predicts.

Article
Publication date: 9 May 2016

Carolina Troncoso Baltar, Celio Hiratuka and Gilberto Tadeu Lima

– The purpose of this paper is to study the impact of the real exchange rate on investment in the Brazilian manufacturing industry.

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Abstract

Purpose

The purpose of this paper is to study the impact of the real exchange rate on investment in the Brazilian manufacturing industry.

Design/methodology/approach

The authors develop an investment model that considers the effect of changes in the real exchange rate, taking into account that the effect of the real exchange rate on the Brazilian manufacturing investment operates through demand and cost channels. The composition of these effects varies across manufacturing sectors, with different repercussions on investment decisions, depending on sectoral characteristics. A panel data analysis is applied to estimate the model for the Brazilian manufacturing sectors from 1996 to 2010.

Findings

One main result is that the responsiveness of the Brazilian manufacturing investment to real exchange rate varies considerably across manufacturing sectors. Overall, the results contribute to a better understanding of the relationship between exchange rate dynamics, manufacturing investment and industrial development, thus unveiling important empirical elements for the debate on industrial policies to stimulate manufacturing investment and production.

Originality/value

As the (scant) empirical literature on real exchange rate and investment in Brazil has invariably been using aggregate data, this paper contributes to the literature by obtaining sectoral estimates of the responsiveness of manufacturing investment to exchange rate fluctuations that further the understanding of the complex relationship between these economic variables.

Details

Journal of Economic Studies, vol. 43 no. 2
Type: Research Article
ISSN: 0144-3585

Keywords

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