Exchange rate changes and endogenous terms of trade effects in a small open economy

2004 ◽  
Vol 26 (4) ◽  
pp. 737-745 ◽  
Author(s):  
Robyn Swift
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Small Open Economy ◽  
Terms Of Trade ◽  
Trade Effects ◽  
Exchange Rate Changes

scholarly journals Does Exchange Rate Impact Commodity Prices: Evidence From a Small Open Economy 

2021 ◽  
Author(s):  
Kore Marc Antoine Guei ◽  
IREEN CHOGA
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Small Open Economy ◽  
Commodity Prices ◽  
Jel Classification ◽  
Terms Of Trade ◽  
Vector Autoregressive ◽  
Threshold Autoregressive ◽  
Svar Model ◽  
The Impact

Abstract The paper assesses the dynamics of exchange rate and the terms of trade on industrial commodity prices. We investigate the linear and asymmetric effects of exchange rate on commodity prices using an error correction model (ECM) and a threshold autoregressive (TAR) model that allows to estimate the dynamics of different regimes. Further we employ a structural vector autoregressive (SVAR) model to examine the impact of an external shock on the terms of trade using quarterly data over the period 1992q1 to 2019q4.The results suggest that an exchange rate above or equal 4.6 has a positive and significant impact on commodity prices. Specifically, if real exchange rate is above the threshold 4.6, the price of gold, copper, and nickel increases by 0.9 %, 1.1%, and 2.7%, respectively. We also find that a 1% increase in real interest rate is associated with a 0.003% fall in the terms of trade. JEL classification: E31, E43, F3

scholarly journals A Neutral Real Interest Rate in the Case of a Small Open Economy: Application to Ukraine

2018 ◽  
pp. 4-20 ◽  
Author(s):  
Anton Grui ◽  
Volodymyr Lepushynskyi ◽  
Sergiy Nikolaychuk
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Risk Premium ◽  
Real Interest Rate ◽  
Small Open Economy ◽  
National Bank ◽  
Exchange Rate Changes

This paper measures a neutral interest rate in Ukraine by means of applying a Kalman filter to a semistructural model with unobserved components. We rely on a medium-term concept of a neutral interest rate, where it is defined as a real interest rate consistent with output at its potential level and inflation at its target level after the effects of all cyclical shocks have disappeared. Under this concept, and accounting for the small open nature of Ukrainian economy, the neutral interest rate is determined by the global economy’s cost of capital and domestic long-term factors that influence risk-premium and changes in the real exchange rate. Conditional on long-term forecasts for output, demographic trends, real exchange rate changes, and risk premium, the neutral rate is projected to decrease gradually from its 2.5% level as of the beginning of 2018 to 2% in real terms, or to 7% in nominal terms under a 5% inflation target. However, in the following years, the gap between the National Bank of Ukraine’s policy rate and the neutral rate should remain positive – reflecting the tight monetary stance needed to ensure stable disinflation.

The long-run stability of a small, open economy under crawling peg regime

2002 ◽  
Vol 52 (1) ◽  
pp. 57-78
Author(s):  
S. Çiftçioğlu
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Risk Premium ◽  
Small Open Economy ◽  
Exchange Rate Policy ◽  
Price Stability ◽  
Output Stability ◽  
Long Run ◽  
The Exchange Rate ◽  
The Impact

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.

scholarly journals A Theory of Foreign Exchange Interventions

2021 ◽  
Author(s):  
Sebastián Fanelli ◽  
Ludwig Straub
Keyword(s):  
Exchange Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Open Economy ◽  
Small Open Economy ◽  
Bond Markets ◽  
Pecuniary Externality ◽  
Optimal Intervention ◽  
The Exchange Rate ◽  
Intervention Policy

Abstract We study a real small open economy with two key ingredients (1) partial segmentation of home and foreign bond markets and (2) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (1) the optimal policy leans against the wind, stabilizing the exchange rate; (2) it involves smooth spreads but allows exchange rates to jump; (3) it partly relies on “forward guidance,” with non-zero interventions even after the shock has subsided; (4) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

A structural model of price and exchange rate dynamics in a small open economy

1980 ◽  
Vol 40 (3-4) ◽  
pp. 321-342 ◽  
Author(s):  
Manfred Gärtner ◽  
Heinrich W. Ursprung
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Structural Model ◽  
Small Open Economy ◽  
Exchange Rate Dynamics
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