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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: 25 January 2008

Germana Corrado

The paper aims at developing a theoretical model for de facto dollarized small open economies focusing on currency substitution and nominal wages indexation to the exchange rate.

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Abstract

Purpose

The paper aims at developing a theoretical model for de facto dollarized small open economies focusing on currency substitution and nominal wages indexation to the exchange rate.

Design/methodology/approach

The analysis is performed in a general equilibrium “New Open Economy Macroeconomics” framework with nominal rigidities and imperfect competition in the nontraded good sector.

Findings

The paper finds that a dollar‐indexed economy with low degrees of payments/financial dollarization could experience higher costs in terms of exchange rate and output fluctuations when nominal shocks dominate real shocks, making stabilization programs more difficult to achieve in a rapid and less costly way.

Practical implications

The speed of adjustment of macro variables is faster in the highly dollarized economy as a response to a higher and more volatile inflation rate. A higher level of financial dollarization increases the frequency of domestic prices and wages revisions to nominal exchange rate shocks. This might explain, in turn, why nominal disturbances are shorter lived in the higher dollarized economies, and the asymmetry between financial and real dollarization

Originality/value

Contrary to the “conventional wisdom” that predicts a positive relationship between the degrees of dollarization and the exchange rate pass‐through, our model shows that the degree of dollarization and the degree of dollar indexation are not necessarily the same or even correlated.

Details

Journal of Economic Studies, vol. 35 no. 1
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 5 September 2016

Magda Kandil

Using data for a sample of advanced and developing countries, this paper aims to study the responses of monetary growth and the growth of government spending to external…

Abstract

Purpose

Using data for a sample of advanced and developing countries, this paper aims to study the responses of monetary growth and the growth of government spending to external spillovers, namely, the growth of exports and imports, movement in the real effective exchange rate and the change in the oil price. The objective is to study movements in domestic policy variables in open economies that are vulnerable to trade and commodity price shocks.

Design/methodology/approach

The analysis evaluates correlations between the responses of the policy variables to external spillovers. Further, the analysis studies the effects of indicators of economic performance on domestic policy responses to various shifts across countries.

Findings

Higher variability of real and nominal growth increases the fiscal policy response to external spillovers with an aim to stem further variability. Monetary policies appear to be more responsive to trend price inflation with an aim to stem further inflationary pressures. Fiscal policy’s reaction to trend price inflation aims at striking a balance between countering potential inflationary pressures, as well as recessionary conditions attributed to the various spillovers.

Originality/value

Overall, the evidence points to the importance of trade and commodity price shifts to the design of domestic policies. Further indicators of economic performance differentiate the degree of policy responses to trade and commodity price developments with a goal to stem inflationary pressures and reduce aggregate uncertainty.

Details

International Journal of Development Issues, vol. 15 no. 3
Type: Research Article
ISSN: 1446-8956

Keywords

Book part
Publication date: 1 July 2015

Mohamed Kadria and Mohamed Safouane Ben Aissa

This chapter attempts to analyze mainly the interactions between the implementation of inflation targeting (IT) policy and performance in the conduct of economic policies…

Abstract

This chapter attempts to analyze mainly the interactions between the implementation of inflation targeting (IT) policy and performance in the conduct of economic policies (fiscal and exchange rate) in emerging countries. More precisely, empirical studies conducted in this chapter aim to apprehend the feedback effect of this strategy of monetary policy on the budget deficit and volatility of exchange rate performance. This said, we consider the institutional framework as endogenous to IT and analyze the response of authorities to the adoption of this monetary regime. To do this, the retained methodological path in this chapter is an empirical way, based on the econometrics of panel data. First, our contribution to the existing literature is to evaluate the time-varying treatment effect of IT’s adoption on the budget deficit of emerging inflation targeters, using the propensity score matching approach. Our empirical analysis, conducted on a sample of 34 economies (13 IT and 21 non-IT economies) for the period from 1990 to 2010, show a significant impact of IT on the reduction of budget deficit in emerging countries having adopted this monetary policy framework. Therefore, we can say that the emerging government can benefit ex post and gradually from a decline in their public deficits. Retaining the same econometric approach and sample, we tried secondly to empirically examine whether the adoption of IT in emerging inflation targeters has been effectively translated by an increase in the nominal effective exchange rate volatility compared to non-IT countries. Our results show that this effect is decreasing and that this volatility is becoming less important after the shift to this monetary regime. We might suggest that this indirect and occasional intervention in the foreign exchange market can be made by fear of inflation rather than by fear of floating hence in most emerging countries that have adopted the IT strategy. Finally, we can say that our conclusions corroborate the literature of disciplining effects of IT regime on fiscal policy performance as well as the two controversial effects of IT on the nominal effective exchange rate volatility.

Details

Monetary Policy in the Context of the Financial Crisis: New Challenges and Lessons
Type: Book
ISBN: 978-1-78441-779-6

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Article
Publication date: 12 June 2019

Chandan Sharma

This study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case.

Abstract

Purpose

This study aims to examine the relationship between exchange rate risk and export at commodity level for the Indian case.

Design/methodology/approach

The 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.

Findings

The 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 implications

Reducing 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/value

Unlike 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.

Details

Journal of Financial Economic Policy, vol. 12 no. 1
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 20 September 2011

Eria Hisali

This paper aims to examine regime switching behaviour of the nominal exchange rate in Uganda to shed light on the necessity (as well as efficacy) of the participation of…

Abstract

Purpose

This paper aims to examine regime switching behaviour of the nominal exchange rate in Uganda to shed light on the necessity (as well as efficacy) of the participation of the central bank market.

Design/methodology/approach

The homogenous two‐state Markov chain methodology was employed to investigate the possibility of regime changes in the nominal exchange rate. The maximum likelihood parameter estimates were obtained using the Broyden‐Fletcher‐Goldfarb‐Shanno iteration algorithm.

Findings

The results validate the expectation of the two distinct state spaces characterized as sharp and disruptive but short‐lived depreciations as well as small appreciations occurring through a long period. The central bank intervention actions are shown to be largely successful in mitigating the disruptive effects of the sharp depreciations.

Practical implications

The paper lends empirical support to the intervention actions of the Bank of Uganda. In face of the numerous disruptions to the short‐term exchange rate process, failure to intervene may cause rational panic and given the nature of investor behavior, this may quickly spread and even cause further disruptions. It is important for the central bank to send signals that these disruptions are temporary.

Originality/value

The homogenous Markov chain specification employed in this study makes it possible to avoid the pitfalls that may arise by attempting to specify a structural model for the exchange rate. In addition, inference about the different possible state spaces is made on the basis of all available information.

Details

African Journal of Economic and Management Studies, vol. 2 no. 2
Type: Research Article
ISSN: 2040-0705

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Article
Publication date: 19 May 2014

Kim Abildgren

– The purpose of this paper is to explore the extent of the so-called “small-sample problem” within quantitative exchange-rate risk management.

Abstract

Purpose

The purpose of this paper is to explore the extent of the so-called “small-sample problem” within quantitative exchange-rate risk management.

Design/methodology/approach

The authors take a closer look at the frequency distribution of nominal price changes in the European foreign exchange markets.

Findings

The analysis clearly illustrates the risk of seriously underestimating the probability and magnitude of tail events when frequency distributions are derived from fairly short data samples.

Practical implications

The authors suggest that financial institutions and regulators should have an eye for the long-term historical perspective when designing sensitivity tests or “worst case” scenarios in relation to risk assessments and stress tests.

Originality/value

The authors add to the literature by analysing the distribution of nominal exchange-rate fluctuations on the basis of a unique quarterly data set for ten European exchange-rate pairs covering a time span of 273 years constructed by the authors. To the best of the authors' knowledge this is the first study on nominal exchange-rate changes for a large number of exchange-rate pairs based on quarterly data spanning almost three centuries.

Details

The Journal of Risk Finance, vol. 15 no. 3
Type: Research Article
ISSN: 1526-5943

Keywords

Book part
Publication date: 22 November 2012

Eiji Okano, Masataka Eguchi, Hiroshi Gunji and Tomomi Miyazaki

We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency…

Abstract

We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.

Details

DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments
Type: Book
ISBN: 978-1-78190-305-6

Keywords

Book part
Publication date: 26 April 2014

Panayiotis F. Diamandis, Anastassios A. Drakos and Georgios P. Kouretas

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing…

Abstract

Purpose

The purpose of this paper is to provide an extensive review of the monetary model of exchange rate determination which is the main theoretical framework on analyzing exchange rate behavior over the last 40 years. Furthermore, we test the flexible price monetarist variant and the sticky price Keynesian variant of the monetary model. We conduct our analysis employing a sample of 14 advanced economies using annual data spanning the period 1880–2012.

Design/methodology/approach

The theoretical background of the paper relies on the monetary model to the exchange rate determination. We provide a thorough econometric analysis using a battery of unit root and cointegration testing techniques. We test the price-flexible monetarist version and the sticky-price version of the model using annual data from 1880 to 2012 for a group of industrialized countries.

Findings

We provide strong evidence of the existence of a nonlinear relationship between exchange rates and fundamentals. Therefore, we model the time-varying nature of this relationship by allowing for Markov regime switches for the exchange rate regimes. Modeling exchange rates within this context can be motivated by the fact that the change in regime should be considered as a random event and not predictable. These results show that linearity is rejected in favor of an MS-VECM specification which forms statistically an adequate representation of the data. Two regimes are implied by the model; the one of the estimated regimes describes the monetary model whereas the other matches in most cases the constant coefficient model with wrong signs. Furthermore it is shown that depending on the nominal exchange rate regime in operation, the adjustment to the long run implied by the monetary model of the exchange rate determination came either from the exchange rate or from the monetary fundamentals. Moreover, based on a Regime Classification Measure, we showed that our chosen Markov-switching specification performed well in distinguishing between the two regimes for all cases. Finally, it is shown that fundamentals are not only significant within each regime but are also significant for the switches between the two regimes.

Practical implications

The results are of interest to practitioners and policy makers since understanding the evolution and determination of exchange rates is of crucial importance. Furthermore, our results are linked to forecasting performance of exchange rate models.

Originality/value

The present analysis extends previous analyses on exchange rate determination and it provides further support in favor of the monetary model as a long-run framework to understand the evolution of exchange rates.

Details

Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

Keywords

Article
Publication date: 1 December 2004

Jocelyn Horne

This paper examines and dissects eight popular conjectures about exchange rates. The conjectures are: there exists a systematic linkage between economic fundamentals and…

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Abstract

This paper examines and dissects eight popular conjectures about exchange rates. The conjectures are: there exists a systematic linkage between economic fundamentals and exchange rates; flexible exchange rates are unstable due to destabilising speculation; flexible exchange rates are excessively volatile; the foreign exchange market is efficient; purchasing power parity holds; volatile exchange rates are harmful to trade; depreciating exchange rates trigger a “vicious” inflationary circle; and countries with current account deficits have depreciating exchange rates. The main message is that there is weak theoretical and empirical support for the majority of the conjectures. Only one proposition, relative PPP has strong empirical support but its policy relevance is weakened by the difficulty of interpreting departures from PPP. The remaining group for which there is inconclusive support presents the greatest challenge to research and policy as it includes the first conjecture.

Details

Journal of Economic Studies, vol. 31 no. 6
Type: Research Article
ISSN: 0144-3585

Keywords

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