Economic policy in an open economy under alternative exchange rate systems: Effectiveness and stability in the short and long run

The paper analyses the long-run (steady-state) output and price stability of a small, open economy which adopts a “crawling-peg” type of exchange-rate regime in the presence of various kinds of random shocks. Analytical and simulation results suggest that with the exception of money demand shocks, an exchange rate policy which involves a relatively higher rate of indexation of the exchange rate to price level is likely to lead to the worsening of price stability for all types of shocks. On the other hand, the impact of adopting such a policy on output stability depends on the type of the shock; for policy shocks to the exchange rate and shocks to output demand, output stability is worsened whereas for the shocks to risk premium of domestic assets, supply price of domestic output and the wage rate, better output stability is achieved in the long run.

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Dynamic Relationship Between Real Export, Real Import, Real Exchange Rate, Labor Force and Real Gross Domestic Product in Malaysia

Research in World Economy ◽

10.5430/rwe.v10n5p20 ◽

2019 ◽

Vol 10 (5) ◽

pp. 20

Author(s):

Emilda Hashim ◽

Norimah Rambeli ◽

Asmawi Hashim ◽

Norasibah Abdul Jalil ◽

Shahrun Nizam Abdul Aziz ◽

...

Keyword(s):

Exchange Rate ◽

Labor Force ◽

Open Economy ◽

Unit Root ◽

Correction Term ◽

Unit Root Test ◽

Real Effective Exchange Rate ◽

Global Changes ◽

Real Gdp ◽

Long Run

This study examined short run and long run relationship between endogenous and exogenous variables. Specifically, it studied the relationship between real export, real import, labor force participation and real effective exchange rate (REER) and real GDP in Malaysia from 1988 to 2017. These variables were tested in various tests, namely, unit root test, granger causality test, vector autoregressive (VAR), Johansen Juselius test and Error Correction Term (ECT). The result revealed that all variables were non-stationary at the level form and stationary at first difference in ADF unit root test. The findings also exhibited the existence of bilateral relationships between real export and real GDP, real import and real GDP, as well as labor and real GDP. Nonetheless, there were no relationship found between REER and real GDP. On the other hand, in VAR, the lag optimum was lag 10 because it indicated the smallest value of AIC. Moreover, for Johansen Juselius cointegration test, it showed two cointegrated vector at both, 5% and 1%, level in trace test. In addition, Max-Eigen value test indicated two cointegrated vector at 0.05 and one cointegrated vector at 0.01. As for the Wald test, there were long run cointegration relationship between real GDP and its determinants, namely real export, real import, labor and REER. Apparently, Malaysia, as a small open economy, has relied heavily on foreign trade. Consequently, our domestic economic performance is susceptible to the changes in international markets and exchange rate. Therefore, suitable international policy implementation is vital to ensure Malaysian economy will be able to adjust to current global changes.

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Testing the Harrod Balassa Sameulson Hypothesis: The Case of Pakistan.

The Pakistan Development Review ◽

10.30541/v50i4iipp.379-399 ◽

2011 ◽

Vol 50 (4II) ◽

pp. 379-399 ◽

Cited By ~ 1

Author(s):

Sunila Jabeen ◽

Waseem Shahid Malik ◽

Azad Haider

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Open Economy ◽

Purchasing Power Parity ◽

Control Variable ◽

Policy Implications ◽

Purchasing Power ◽

Power Parity ◽

Long Run ◽

Tradable Sector

For a small open economy of Pakistan, exchange rate is determined through the two alternative theories; the nominal theory of exchange rate named by Purchasing Power Parity (PPP) and the real theory known as Harrod Balassa Sameulson (HBS). According to the requirements of theories, two kinds of real exchange rate have been employed for the yearly data of 1972-2008. As, both of the theories are disputed at the ground of their long run relationship with real exchange rate, therefore, the VAR based Johenson Co-integration approach has been utilised to see the long run relationships. PPP has shown less satisfactory results either in its form of absolute version or relative version. Because, real exchange rate in Pakistan is a non-stationary process by Augmented Dickey Fuller unit-root test, predicting some pushing force behind the non-tradable sector. While favouring the PPP in tradable sector, the ADF and KPSS are indicating the presence of the HBS in Pakistan. On the other hand, the analysis of the HBS through co-integration is showing that relative productivity difference has an opposite relationship with relative non-tradable sector prices and with RER. However, the relationship between relative non-tradable sector prices and RER is much stronger and according to the theory. So, there have been incorporated some demand side and external factors to reduce the mis-specification of the simple HBS model. Therefore, in the extended HBS model, productivity difference, government consumption expenditure, terms of trade and world oil prices are appreciating the RER and money supply (a control variable) is pursuing depreciation in RER. So, these results yield some policy implications for Pakistan which can be useful for developing countries as well. JEL classification: E0, E31, E44 Keywords: Harrod-Balassa-Samuelson, Exchange Rate, Purchasing Power Parity, Pakistan

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SOURCES OF MACROECONOMIC FLUCTUATIONS IN BRUNEI DARUSSALAM

The Singapore Economic Review ◽

10.1142/s0217590816500065 ◽

2018 ◽

Vol 63 (05) ◽

pp. 1285-1306

Author(s):

WEE CHIAN KOH

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Open Economy ◽

Capital Investment ◽

Exchange Rate Volatility ◽

Macroeconomic Fluctuations ◽

Monetary Shocks ◽

Brunei Darussalam ◽

Long Run ◽

The Impact

This paper investigates the sources of macroeconomic fluctuations in Brunei Darussalam from 2003Q1 to 2014Q3 using a structural vector autoregression (SVAR) model. Shocks are identified by imposing block exogeneity and long-run restrictions motivated by an open economy model that includes oil prices. The results show that oil price shocks account for only a small proportion of output fluctuations while productivity shocks have the largest share. Real exchange rate movements are largely driven by demand shocks while monetary shocks explain most of the variability in prices. Economic policies should focus on productivity improvement and capital investment to increase output in the long run, and the conduct of fiscal policy should take into account the impact on real exchange rate volatility.

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The impact of Economic Policy Uncertainty on the real exchange rate: Evidence from the UK

10.15847/dinamiacet-iul.wp.2021.06 ◽

2021 ◽

Author(s):

Paula Moldovan ◽

Sérgio Lagoa ◽

Diana Mendes

Keyword(s):

Economic Policy ◽

Exchange Rate ◽

Real Exchange Rate ◽

Debt Crisis ◽

Subprime Crisis ◽

Policy Uncertainty ◽

Economic Policy Uncertainty ◽

Long Run ◽

The Uk ◽

The Impact

The world economy has been punctuated by uncertainty as a result of the 2008 subprime crisis, the European sovereign debt crisis, Brexit, and the 2016 US presidential elections, to mention but a few of the reasons. This study explores how the UK real exchange rate reacts to economic policy uncertainty (EPU) shocks using monthly data for the period 1998 to 2020. We contribute to the literature by identifying the long-run and short-run impacts of EPU using a cointegrated ARDL model, and by studying a country that has been through periods of both relatively low and high uncertainty. Results confirm that EPU has an important effect in the long run by depreciating the exchange rate. In addition to urging policymakers and regulators to concentrate on the sometimes difficult task of keeping policy uncertainty to a minimum as a way of sustaining exchange rate stability and thus promoting long-term economic growth, further evidence is provided on exchange rate fundamentals.

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The impact of the Chinese exchange policy on foreign trade with the European Union

Brazilian Journal of Political Economy ◽

10.1590/0101-31572017v37n04a12 ◽

2017 ◽

Vol 37 (4) ◽

pp. 870-893

Author(s):

ANA CARDOSO ◽

ANTÓNIO PORTUGAL DUARTE

Keyword(s):

European Union ◽

Exchange Rate ◽

Foreign Trade ◽

Open Economy ◽

The European Union ◽

Vector Error Correction ◽

Vec Model ◽

Long Run ◽

Exchange Policy ◽

The Impact

ABSTRACT The aim of this paper is to analyze the impact of the Chinese foreign exchange policy on foreign trade with the European Union. After describing the importance of the exchange rate in an open economy and some of the methodologies employed to calculate its equilibrium value, we examine whether the Chinese competitiveness is due to the existence of misalignment (undervaluation) of its exchange rate, or rather, to other sources of competitiveness. For this purpose, we use a Vector Error Correction (VEC) model to estimate a long-run exports equation. The empirical results indicate that over the past few years, Chinese exports have benefited from an “unfair” competitive advantage resulting from the manipulation of its currency value.

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Determinants of Nominal Effective Exchange Rate in Uganda (2000-2017): A Vecm Approach

Applied Economics and Finance ◽

10.11114/aef.v5i5.3543 ◽

2018 ◽

Vol 5 (5) ◽

pp. 45

Author(s):

Sawuya Nakijoba

Keyword(s):

Exchange Rate ◽

Interest Rate ◽

Open Economy ◽

Time Series Data ◽

Reduced Form ◽

Series Data ◽

Impulse Response Functions ◽

Long Run ◽

Effective Exchange ◽

Effective Exchange Rate

This study analyses the main determinants of the nominal effective exchange rate using quarterly time series data covering the period 2000 to 2017. The Augmented Dickey Fuller test confirms that all the with the exception of interest rate were non stationary in levels. This study employs the reduced form Vector Auto-regression (VAR) and Johansen and Juselius cointegration to estimate the long run relationship between exchange rate and other key variables. The VAR is used following the Mundell-Fleming model which argues that, in an open economy with external trade and financial transactions the key macro variables interact and influence each other with lags. The impulse response functions are used to investigate the monetary policy transmission mechanism (MPTM). The study indicates that money supply, terms of trade and inflation were negative while gross domestic product and interest rate were positively related to exchange rate . The variables were found to have a long run relationship. The estimate of the speed of adjustment indicates that when nominal effective exchange rate deviates from the equilibrium, it returns to the equilibrium quickly because of its coefficient of adjustment which is 0.25.

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Does Monetary Policy Boost Economic Growth? The Case of Small Open Economy

Research in World Economy ◽

10.5430/rwe.v11n3p216 ◽

2020 ◽

Vol 11 (3) ◽

pp. 216

Author(s):

Javid Aliyev ◽

Shahriyar Mukhtarov ◽

Khanlar Haydarov ◽

Murad Isgandarov

Keyword(s):

Economic Growth ◽

Monetary Policy ◽

Exchange Rate ◽

Open Economy ◽

Small Open Economy ◽

Policy Tools ◽

Integration Methods ◽

Monetary Base ◽

Long Run ◽

The Impact

The main aim of this paper is to investigate the impact of monetary policy tools on economic growth in Azerbaijan during 2005-2018 using the Vector Error Correction Model (VECM). Also, different co-integration methods, namely, Johansen, DOLS, FMOLS and CCR were utilized for the robustness test. The outcomes of the different co-integration methods are consistent with one another and confirm the existence of long-run relationships among variables. Furthermore, the estimation results of VECM show that the monetary base and exchange rate have a positive and statistically significant impact on economic growth in the long-run, while the discount rate is insignificant. The paper concludes that the monetary base and exchange rate should be promoted by policymakers over other monetary policy tools during monetary policy implementation toward stimulating economic growth.

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The response of macroeconomic aggregates to monetary policy shocks in Pakistan

Journal of Financial Economic Policy ◽

10.1108/jfep-04-2013-0016 ◽

2014 ◽

Vol 6 (4) ◽

pp. 314-330 ◽

Cited By ~ 4

Author(s):

Abdul Rashid ◽

Zainab Jehan

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Interest Rate ◽

Error Correction ◽

Money Supply ◽

Open Economy ◽

Output Growth ◽

Content Type ◽

Long Run ◽

Macroeconomic Aggregates

Purpose – This paper aims to empirically examine how shocks to monetary policy measures (the short-term nominal interest rate and broad money supply) affect macroeconomic aggregates, namely, output growth of the economy, national price levels and the nominal exchange rate. Design/methodology/approach – Johansen’s (1995) cointegration technique and error correction models are used to explore the long-run relationship among variables. To investigate how macroeconomic aggregates respond to a one-standard deviation shock to the underlying monetary measures, the authors estimate impulse response functions based on error correction models. The study uses quarterly data covering the period 1980-2009. Findings – The results provide evidence that there is a long-run stable relationship between the authors' monetary measures and the underlying macroeconomic aggregates. They also find that the industrial production adjusts at a faster speed relative to commodity prices and the exchange rate over the examined period. Further, they show that the short-term interest rate has relatively stronger effects on output as compared to broad money supply, whereas prices and exchange rates adjust more quickly to their long-run equilibrium when money supply is used as a measure of monetary policy. Finally, the authors find significant evidence of a price puzzle regardless of whether they consider a closed or an open economy case. However, an initial appreciation of exchange rate is observed in response to a one-standard deviation shock to money supply, indicating the overshooting hypothesis phenomenon. Practical implications – The findings of the analysis suggest that the interest rate-oriented monetary policy is more effective when the monetary authorities’ objective is to enhance the output growth of the economy. However, in case of inflation targeting, the broad money supply seems a more appropriate instrument. Our findings also suggest that the monetary policy has a significant role in stabilizing both real and nominal sectors of the economy. Originality/value – The main value of this paper is to examine the significance of monetary policy for a developing and relatively small open economy, namely, Pakistan. The authors use the error correction model, which improves the estimation by accounting for the long-run association. They also take into account the world oil prices by including the world commodity price index as a control variable in their empirical investigation. Finally, they utilize quarterly data rather than annual, and they cover a relatively recent sample period.

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