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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.

The establishment of a currency union is a topical issue in the West African Monetary Zone (WAMZ). The subject of currency union formation needs to be reassessed in light of the recent efforts towards the economic integration of west African countries. This study employs the Markov Switching Model (MSM) to determine whether a currency union in WAMZ is feasible. The study analyzes the regime switching behavior in WAMZ countries’ foreign exchange markets before and after the formation of the union. The contribution of this study is two-fold. First, the study accounts for the success or otherwise of the latest efforts to integrate the fiscal and monetary strategies in the zone. Secondly, the study contributes to the literature on the currency union literature in WAMZ by using Markov Switching Model (MSM) to generate novel results. The results of the study revealed that prior to the WAMZ formation, the real exchange rates of member states were more divergent. In contrast, a growing but marginal, convergence was observed after the formation of the zone amongst four (Nigeria, Sierra Leone, Gambia, and Liberia) of the six countries. The authors conclude that while WAMZ is on course for establishing a currency union, their monetary authorities must work together, particularly with Ghana and Liberia, to synchronize their policy efforts, and policy makers must implement policies to strengthen harmonious trade interactions.

There has been significant interest in the classification of exchange rate regimes in order to investigate a wide range of hypotheses. Studies of the effects of exchange rate regimes on crises and other aspects of economic performance can have important implications for policy choices. The paper provides a guide to the major new large data sets that classify exchange rate regimes and to critically analyze important methodological issues.

The study surveys and critiques the literature and provides theoretical analysis of major issues involved in classifying exchange rate regimes.

The study finds that all of the new data sets have problems but some have more problems than others and several of them are substantial improvements on what was previously available. It is also shown that the best ways to classify depend on the issue being addressed and that for detailed studies variants of measures using the concept of exchange market pressure are the most promising. Directions for future research are also discussed.

The paper makes researchers aware of the new data sets that are available and discusses their strengths and weaknesses. It also presents original analysis of several of the major conceptual issues involved in classifying exchange rate regimes.

This chapter investigates the determinants of the volatility of spread in the over-the-counter foreign exchange market and examines whether the relationships differ in the crisis periods. We compute the measures for the volatility of liquidity by using bid-ask spread data sampled at a high frequency of five minutes. By examining 11 currencies over a 13-year sample period, we utilize a balanced dynamic panel regression to investigate whether the risk associated with the currencies quoted or trading activity affects the variability of liquidity provision in the FX market and examine whether the crisis periods have any effect. We find that both the level of spread and volatility of spread increases during the crisis periods for the currencies of emerging countries. In addition, we find increases in risks associated with the currencies proxied by realized volatility during the crisis periods. We also show risks associated with the currency are the major determinants of the variability of liquidity and that these relationships strengthen during periods of uncertainty. First, we develop measures to capture the variability of liquidity. Our measures to capture the variability of liquidity are non-parametric and model-free variable. Second, we contribute to the debate of whether variability of liquidity is adverse to market participants by examining what drives the variability of liquidity. Finally, we analyze seven crisis periods, allowing us to document the effect of the crises on determinants of variability of liquidity over time.

Although China has claimed since 2005 that it will move towards a more market-oriented system of managing its foreign exchange, it has remained, in part, a managed economic system. This chapter examines the relative importance of fundamentalist, chartist and currency arrangements in determining the RMB exchange regime using both traditional linear and non-linear artificial intelligence models. We find that the emphasis on the US dollar as a reference currency has declined. Fundamentalist forces are becoming strong determinants of the currency exchange. The genetic programming approach is among the best performing in minimizing forecasting error.

To study the determinants and effects of “Operational” exchange rate exposure resulting from the mismatch between cost and revenues of the firms by using data on 500 Indian firms.

We conduct detailed empirical analysis of the determinants of firm level exposure and their impact using panel regression techniques and conduct several robustness tests to confirm the validity of these results.

Among other factors, exchange rate volatility appears as a significant determinant of average firm level exposure with the direction of relationship supporting the presence of “Moral Hazard” in firm’s risk-taking behavior. Further large “operational” exposure is associated with significantly lower output growth, profitability, and capital expenditure during episodes of large currency depreciation at the firm level.

This paper leaves several questions to be answered. Further research is called for to explore the nature of distortions in the production process encouraged by exchange rate volatility and their impact on firm level productivity. Looking at the relationship between the use of financial and operational hedges is another fruitful area of future research.

Our results have important implications for policy makers worried about mitigating the impact of exogenous shocks. Implicit and explicit guarantees with regards to the value of exchange rate tend to raise the vulnerability of the economy to exchange rate shocks at same time that they encourage capital expenditures and possibly output growth during “normal” times. Our findings indicate that the policy makers must take into account the incentive effects of their intervention in foreign exchange markets.

Unlike the existing papers in the literature, we use a measure of “operational” currency exposure based on foreign currency revenues and costs of firms. In most of the existing papers the focus is on the mismatch between the currency denomination of assets and liabilities. Little attention has been paid to the currency mismatch between costs and revenues of the firms. Such “operational” mismatches are potentially equally important and deserve attention of policy makers and academics alike.

The paper aims to examine the asymmetric response of three major altcoins to shocks in six African fiat currencies in a time-frequency space.

Data are for the period 10th August 2015 to 2nd February 2019 at a daily frequency. The authors capture the time and frequency information in the return series of the currencies using the ensemble empirical mode decomposition. The authors implemented quantile regression and quantile-in-quantile regression on the decomposed series to test the response of altcoins to both positive and negative shocks in the fiat currencies across time to see if the altcoins are viable alternatives to African fiat currencies.

The outcome of the study suggests that altcoins behave differently from African fiat currencies and are viable alternative digital currencies and good hedges for African fiat currencies from the medium-term.

Policymakers in Africa and across the globe can follow this paper to mitigate currency crises by adopting altcoins as alternatives to fiat currencies. Forex traders can also mitigate trade risk by using altcoins to hedge dollar/African fiat currency exchange rate risk.

The research was conducted by the authors and has not been published in any journal.

This paper analyses the possibility of Latin America's (LA) major economies adopting dollarization, considering that in the last decade macroeconomic instability has once again challenged the ability of certain economies to properly manage their own currency.

To determine the feasibility of adopting the US dollar as official currency, the author uses the framework of optimum currency area (OCA) theory, since, in fact, dollarization is an incomplete monetary union. The author uses a structural vector autoregressive (SVAR) model to identify what type of structural shock — country-specific, regional or global — prevails in LA economies. For this purpose, the US output is used to represent the global output and determine how the shocks of the US influence the output trajectory of each LA nation. The higher the influence of the US product, the lower the costs of adopting the US dollar.

The results of the variance decomposition show that the influence of the US shocks in the gross domestic product (GDP) trajectory of LA countries has significantly decreased over the last two decades, even in the currently dollarized economies. The estimates for Venezuela and Argentina show that the importance of US shocks in the trajectory of their GDP is low. Therefore, the cost of adopting the US dollar as the official currency would be high.

In view of hyperinflation and macroeconomic imbalances in certain LA nations, the dollarization debate has resurfaced in recent years. However, the literature that empirically evaluates the feasibility of adopting dollarization as a monetary system under current economic conditions is limited.

This paper explores the sensitivity of Chinese stock returns to changes in trade-weighted indexes of the renminbi (RMB) and the currencies of China's trading partners from 1999 to 2003. It analyses this exposure elasticity cross-sectionally using accounting variables to proxy for size and costs of financial distress. It finds that internationally oriented Chinese companies have experienced exchange exposure particularly against the yen. It also finds that, against a trade-weighted index, there is no empirical evidence that Chinese firms are engaged in hedging activities. However, when exposures are measured in yen terms, it finds that Chinese firms, particularly exporters, engage in active currency hedging.

The purpose of this paper is to analyse the role that the nation‐state plays in influencing the behaviour of the transnational companies (TNCs) and how it affects one's view of TNCs as efficiency‐ versus strategy‐driven institutions.

The paper starts with a brief historical analysis of the main theories of international production and the TNCs, to which it then relates the role of the nation‐state and of strategic approaches.

The characteristics of the nation‐states that affect the behaviour of TNCs are linked to their regulatory regimes regarding fiscal, currency and social security regulations. These create opportunities for advantages of operating across frontiers and thus for specific strategic behaviour towards labour and governments.

The theoretical approach presented will need to be supported by empirical findings.

There are policy implications specifically related to the fact that multinationality per se gives advantages and that actors other than the TNCs may have to move towards achieving a multinational organization.

The paper questions the international character of most current theories of the TNC, arguing about the necessity to put the nation‐states with their different characteristics at the heart of the explanations of TNCs' activities and suggests a strategic rather than efficiency approach to theories of the TNC.