scholarly journals An inquiry into exchange rate misalignments as a cause of major global trade imbalances

2019 ◽  
Vol 46 (4) ◽  
pp. 902-924 ◽  
Author(s):  
Muhammad Ali Nasir ◽  
Karen Jackson
Keyword(s):  
Exchange Rate ◽  
Current Account ◽  
Trade Balance ◽  
Trade Deficit ◽  
Global Trade ◽  
Trade Surplus ◽  
Content Type ◽  
Trade Imbalances ◽  
Exchange Rate Misalignment ◽  
Practical Implications

Purpose In the context of debate on competitive devaluation and trade imbalances, the purpose of this paper is to investigate the role of exchange rate misalignment as a determinant of trade imbalances in selected major trade surplus (Germany, China, Japan, Russia and KSA) and major trade deficit countries (USA, UK, France, India and Turkey). Design/methodology/approach The authors used a structural vector auto-regressive model on data from ten countries with the highest trade deficit and surplus. The period of analysis is from 2000 Q1 to 2016 Q1. Findings The key findings suggest that although exchange rate misalignment from equilibrium may have some implications for the current account balance for surplus and deficit countries, the effects observed were rather very mild and transitory. There was a heterogeneity in the response of the current account position to exchange rate misalignment in each country, concomitantly; the exchange rate misalignment shall not be seen as the sole responsible factor in the debate on global trade imbalances. Research limitations/implications The research has profound implications in terms of exploring the notion of competitive devaluation and exchange rate misalignment as a cause of major global trade imbalances. Practical implications This study has important practical implications for the trade policy of major economies in the world. These are twofold. First, this study has analysed and reported on the degree of misalignment of exchange from its equilibrium values in the major trade surplus and deficit countries. Second, it has investigated the implications of any misalignment for the trade balance or respective economies. Social implications There are important social implications as the notion of competitive devaluation and exchange rate–trade balance nexus has been heavily politicised. This study provides an empirical insight and an answer to these claims which have social and political implications. Originality/value There is a significant element of originality and contribution to the existing body of knowledge on the subject. In the context of debate on competitive devaluation this is the first study which has investigated whether the exchange rate has been misaligned from its equilibrium values (competitive devaluation) and whether there is some nexus between the real exchange rate misalignment and trade imbalances in under-analysis economies.

scholarly journals Brexit associated sharp depreciation and implications for UK’s inflation and balance of payments

2018 ◽  
Vol 45 (2) ◽  
pp. 231-246 ◽  
Author(s):  
Muhammad Ali Nasir ◽  
Justine Simpson
Keyword(s):  
Exchange Rate ◽  
Trade Balance ◽  
Inflation Targeting ◽  
Social Implications ◽  
Content Type ◽  
External Balance ◽  
The Future ◽  
Trade Relationships ◽  
The Relationship ◽  
Practical Implications

Purpose The purpose of this paper is to analyse the implications of exchange rate depreciation for inflation targeting and trade balance of UK in the context of the Brexit epoch. Design/methodology/approach The study employed a time-varying structural vector auto-regression (TVSVAR) model framework in which the sources of time variation were both the coefficients and variance-covariance matrix of the innovations on the data from January 1989 to September 2016. Findings The findings suggest that the depreciation of the Stirling has significant effects on inflation and trade balance in UK in context of Brexit epoch. It also showed that such a depreciation can be helpful in the improvement of external balance as well as steering the inflation to its statutory target. Despite, the inflation targeting, there is strong evidence of a pass-through. Research limitations/implications Research has profound implications in terms of the sharp depreciation of GBP associated with the Brexit outcome. The study is very topical and could be very interesting to the readership of JES as well as wider audience. The study has limitations in a context that the significance of the results and association of the under analysis entities is contingent on the future trade relationships and Channel between UK and EU. Therefore, although there is a lot of uncertainty about the future of Britain trade relationships, this study provides guidance on the importance of exchange rate channel if the similar trade arrangements prevails in the post-Brexit era. Practical implications The research has profound practical implications, using a TVSVAR model in which the relationship among the entities varies over time; it has shown the importance of exchange rate in terms of external balance and inflation targeting. Hence, it has appeal for the practitioners as well as academics. Social implications The research has great social implications. The Brexit is the biggest political and economic event of this era for UK and EU. There are big questions about the relationship between UK and EU in the post-Brexit epoch as well as questions about the future of the European integration. In this context, this study has shown that how the exchange rate could play an important role for the UK economy when its contemporary trade channels prevail. Concomitantly, it has social implications particularly for the European society. Originality/value The research is an original piece of work. It has contributed to the debate on the exchange rate deprecation, external balance and inflation targeting in context of the Brexit associated sharp depreciation of Stirling. It has used a framework, i.e. TVSVAR, which also have unique features in terms of testing the associations among under analysis entities against time.

scholarly journals Trade Balance Response to Shocks in Monetary Policy and Exchange Rate: Evidence from Pakistan using SVECM Approach

2017 ◽  
Vol 18 (3) ◽  
pp. 579-594
Author(s):  
Abdul Rahman Nizamani ◽  
Zulkefly Abdul Karim ◽  
Mohd Azlan Shah Zaidi ◽  
Norlin Khalid
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Trade Balance ◽  
Trade Deficit ◽  
Monetary Policy Shocks ◽  
Trade Surplus ◽  
Vector Error Correction ◽  
Policy Shocks ◽  
Short Run ◽  
Exchange Rate Shocks

This paper examines the effects of monetary policy and exchange rate shocks on the trade balance of Pakistan. Theseeffects are further investigated on the two broad categories of trade surplus and trade deficit sectors.Thisstudy has employed the Structural Vector Error Correction Model (SVECM) withalongrun and short run restrictions to identify the monetary policy shocks. The results from the SVECM are consistent with the standard theoretical expectationsi.e. free from empirical puzzles.The findings have revealed that the tradebalance deteriorates to the contractionary monetary policy shocks, providing support to the expenditure switching effects of monetary policy in Pakistan. Furthermore, the effectiveness of monetarypolicyis only limited to trade surplus sectors.On the other hand, the exchange rateshocks do not support the J-Curve effects on both the aggregate as well as disaggregate level trade balance.

scholarly journals Different Approaches to Merchandise Trade Balance in Pakistan

2020 ◽  
Vol 12 (Number 2) ◽  
pp. 19-30
Author(s):  
Yousuf Aboya ◽  
Arsalan Hussain ◽  
Rohail Hassan ◽  
Hassan Mujtaba Nawaz Saleem ◽  
Aamir Hussain Siddiqui
Keyword(s):  
Exchange Rate ◽  
Trade Balance ◽  
Trade Deficit ◽  
Real Effective Exchange Rate ◽  
Series Data ◽  
Long Run ◽  
Effective Exchange ◽  
Short Run ◽  
Merchandise Trade ◽  
Effective Exchange Rate

The current study empirically examines the three major approaches to trade balance for Pakistan by utilizing the yearly data from 1972 to 2016. Monetary, elasticity, and absorption approaches were tested by developing a model that incorporates all three approaches. The significant contribution of the study is that it uses only the merchandise trade deficit account, which includes trade of only physical goods. The study used time-series data; therefore, variables have been tested for the stationarity, and it is found that there is a combination of I (0) and I (1) variables, so ARDL bounds testing approach to co-integration has been employed to find the short run and long run associations among the variables. The bound test results discovered that there is a presence of stable long-term association among the merchandise trade deficit account, real broad money supply, real effective exchange rate, and real domestic absorption. The results further revealed that merchandise trade discrepancy is determined purely by the real effective exchange rate, which specifies that the exchange rate's devaluation increases the deficit in the long run whereas in the short-run increase in domestic absorption decreases the merchandise trade deficit.

Re-examining the twin deficit hypothesis for major South Asian economies

2019 ◽  
Vol 12 (3) ◽  
pp. 265-287
Author(s):  
Shruti Shastri
Keyword(s):  
Time Series ◽  
Exchange Rate ◽  
Interest Rate ◽  
Sri Lanka ◽  
South Asian ◽  
Current Account ◽  
Transmission Mechanism ◽  
Asian Countries ◽  
Content Type ◽  
Long Run

Purpose The purpose of this study is to revisit the twin deficit hypothesis (TDH) and provide insights into the transmission mechanism connecting budget deficits and current account deficits for five major South Asian countries, namely, India, Bangladesh, Pakistan Sri Lanka and Nepal for the period 1985-2016. Design/methodology/approach This study uses a multivariate framework including real interest rate, real exchange rate and real gross domestic product to avoid the possibility of incorrect inferences caused by omission of relevant mediating variables. The long-run relationship and causality are investigated through the autoregressive distributed lag bounds testing approach and Toda Yamamoto approach, respectively, for each individual country. The robustness of the results is assessed with the help of Westerlund’s cointegration test and group mean fully modified ordinary least squares (GM-FMOLS), group mean dynamic ordinary least square (GM-DOLS) and common correlated effect mean group (CCEMG) estimators in the panel framework. Findings Both time series and panel evidences indicate long-run relationship between budget balance (BB) and current account balance (CAB) together with the mediating variables. The results indicate bi-directional causation between the two balances for India and Bangladesh, TDH for Pakistan and Sri Lanka and the reverse causation from CAB to BB for Nepal. Regarding the transmission mechanism, the results indicate the absence of the causal chain postulated by Mundell–Fleming, which predicts that BB causes CAB via interest rate and exchange rate. A CCEMG estimate of the import demand function reveals a positive government spending elasticity of imports suggesting that BB affects CAB by direct impact through demand. Originality/value This study augments the twin deficit literature on South Asian countries by providing insights into the transmission mechanism connecting the BB and CAB. Moreover, the study provides robust evidences on the TDH by using both time series and panel data techniques.

Policy shocks, current account and the macroeconomy in a developing country

2019 ◽  
Vol 46 (3) ◽  
pp. 710-726
Author(s):  
Moumita Basu ◽  
Ranjanendra Narayan Nag
Keyword(s):  
Exchange Rate ◽  
Developing Country ◽  
Foreign Exchange ◽  
Current Account ◽  
Current Account Balance ◽  
Foreign Exchange Reserves ◽  
Effective Demand ◽  
Content Type ◽  
Traded Goods ◽  
The Current Account

Purpose This is a theoretical paper in the field of international macroeconomics. The purpose of this paper is to focus on a dynamic interaction between current account imbalance and unemployment in response to some policy-induced shocks for a small open economy under a flexible exchange rate. Design/methodology/approach The paper uses a two-sector framework: one sector is traded and another is the non-traded sector that is subject to an effective demand constraint. The current account imbalance arises due to the discrepancy between production of traded goods, household consumption of traded goods and government purchases of importables. The authors keep the asset structure simple by considering only domestic currency and foreign bonds that are imperfect substitutes. The paper considers a standard methodology of dynamic adjustment process involving change in foreign exchange reserves and exchange rate under perfect foresight. The saddle path properties of the equilibrium are also examined. Findings The results of comparative static exercises depend on a set of structural features of a developing country, which include asset substitutability, wage price rigidity and sectoral asymmetries. The paper shows that expansionary monetary policy, balanced budget fiscal expansion and financial liberalization have an ambiguous effect on the current account balance, foreign exchange reserves, non-traded sector and the level of employment. Originality/value The existence of Keynesian unemployment with fixed prices is the key ingredient of this paper. The paper introduces the problem of effective demand to analyze the dynamics of current account balance and exchange rate, which, in turn, determine the sectoral composition of output and level of employment.

Argentine foreign finance fears will rise this year

2019 ◽  
Keyword(s):  
Current Account ◽  
Trade Balance ◽  
Current Account Deficit ◽  
Foreign Debt ◽  
Economic Downturn ◽  
Content Type ◽  
Agricultural Exports ◽  
Debt Burden ◽  
External Adjustment ◽  
Interest Payments

Significance In 2018 the economic slump and devaluation helped to improve the trade balance by cutting imports. However, the current account deficit reached 5.4% of GDP, up from 4.9% in 2017, due to the growing burden of interest payments on foreign debt, which already represents more than 50% of GDP. Impacts External adjustment will be mostly driven by falling imports; competitiveness woes will prevent a rise in non-agricultural exports. The government's inability to reverse the economic downturn and a growing debt burden will keep default fears high. Access to foreign finance will remain key to guarantee debt servicing.

scholarly journals Effect of Exchange Rate Misalignment on Bilateral Trade Between Kenya and European Union: 2000-2016

2021 ◽  
Vol 17 (41) ◽  
pp. 58
Author(s):  
Charles Munene Gachoki ◽  
Susan Okeri ◽  
Julius Korir
Keyword(s):  
European Union ◽  
Exchange Rate ◽  
Bilateral Trade ◽  
Market Access ◽  
Trade Deficit ◽  
Important Variable ◽  
The European Union ◽  
Economic Fundamentals ◽  
Exchange Rate Misalignment ◽  
The Exchange Rate

The exchange rate is an important variable in international trade because a country's competitiveness is determined by the expectations on how trade reacts to its movements. To orient the economy outwards, Kenya has pursued various measures from the 1990s to the 2000s. Kenya also signed up for nonreciprocal trade with the European Union under the Cotonou agreement. Despite the export-oriented efforts, Kenya's trade has remained skewed towards imports and a widening trade deficit which seems to follow the weakening of the Kenya shilling. The main policy dilemma therefore, is how imports accelerated in an environment of unhindered European Union market access, hence the motivation of this study. The study adopted a dynamic modeling approach since previous and present values affect exchange rate and trade. The results show that the economic fundamentals drive the real exchange rate. In terms of misalignment, the exchange rate is overvalued to a maximum of 5.9 percent and undervalued up to 5.2 percent. The estimated misalignment hurts imports but has a positive, statistically insignificant effect on exports. The results of this study suggest that the monetary authority should ensure the exchange rate remains stable and within the 6 percent range while monitoring all the underlying determinants. Additionally, hedging instruments should be made available and affordable to traders.

Brazil's trade surplus rises amid economic crisis

2015 ◽  
Keyword(s):  
Economic Crisis ◽  
Emerging Economies ◽  
Trade Balance ◽  
Foreign Currency ◽  
Domestic Demand ◽  
Trade Surplus ◽  
Content Type ◽  
Relative Gains ◽  
Positive Effect ◽  
Better Than

Subject The improving trade balance. Significance At the close of September, Brazil recorded a better-than-expected trade surplus of some 2.9 billion dollars. This result is the best for the month since 2011, and reflects exports of 16.1 billion and imports of 13.2 billion. Brazil's trade surplus from January-September topped 10.2 billion dollars, the highest for the period since 2012 and a sharp contrast with the 742 million dollar deficit recorded in the year-earlier period. Impacts Exports may help boost the economy at a time when domestic demand is contracting due to the recession and falling income. The sharp fall in the real favours exporters, but also increases the burden of those with substantial foreign currency debts. The positive effect of depreciation may be insignificant if its impact on inflation undercuts competitiveness gains. Other major emerging economies, too, have seen significant depreciations, undermining relative gains in Brazil's competitiveness.

Renminbi reform will not allay suspicions

2015 ◽  
Keyword(s):  
Exchange Rate ◽  
Exchange Rate Regime ◽  
Market Forces ◽  
Foreign Exchange Reserves ◽  
Trade Surplus ◽  
Content Type ◽  
Limited Impact ◽  
Access To Credit ◽  
Economy Growth ◽  
The Cost

Significance Beijing's abrupt reform of its exchange rate regime on August 11 led to an immediate sharp devaluation, but is also broadly consistent with giving market forces a greater role in determining the value of the currency. Impacts The devaluation will have limited impact on the competitiveness of China's exports. Efforts to manage the exchange rate will prove increasingly costly and will be viewed negatively on market-based criteria. An increase in China's trade surplus will result in further accumulation of foreign exchange reserves. The cost of funding for firms and greater access to credit will be pressing policy concerns as the economy growth slows.

Causes of U.S.-China trade imbalances: a review

2020 ◽  
Vol 13 (1) ◽  
pp. 37-44
Author(s):  
Yongqing Wang
Keyword(s):  
Bilateral Trade ◽  
Trade Deficit ◽  
Previous Literature ◽  
Common View ◽  
Content Type ◽  
Trade Imbalances ◽  
China Trade ◽  
The Us ◽  
The Usa ◽  
Trump Administration

Purpose It is a common view to Trump administration and public that devaluation of Chinese currency is the origin of the US trade deficit. However, the previous literature does not support this common view. To better understand the causes of the US trade imbalances with China, this study aims to review the previous literature focusing on the causes of bilateral trade imbalances between the USA and China. Design/methodology/approach Review previous literature according to the different reasons that each paper studies. Findings Based on the previous literature, the Chinese exchange rate is not the main reason for the US trade imbalances. The official US trade figures overestimate the amount of deficit. The actual causes for the US trade deficit with China perhaps should be the relocation of production to China, low saving in the USA and high saving in China, and the US dollar as the international currency and reserve. Originality/value By reviewing previous literature, the authors could better understand the puzzle of the US trade deficit with China.

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