Exchange Rate Volatility and Its Implications on Macroeconomic  Variables in East African Countries

The study examines the extent of exchange rate volatility and its impact on key macroeconomic variables such as exports, FDI inflows, interest rate and inflation in Tanzania, Kenya and Uganda. The GARCH model is used to compute the extent of exchange rate volatility while the Panel Autoregressive Distributed Lag (ARDL) technique or pooled mean group (PMG) estimator was used to estimate the effects of exchange rate volatility on selected macroeconomic variables. The results indicate that volatility in the exchange rate is a real issue in all the sampled countries and is fundamentally driven by exports and FDI dynamics for the period under consideration. The results indicate a positive impact of the exchange rate volatility to export performance and lending rates in the long run. Exchange rate volatility appears to be detrimental to both export performance and leads to a reduction in lending rates in the short run. Also, the response of FDI to exchange rate volatility seems to be negative in the long run while in the short run the response from the volatility of real exchange rate seems is insignificant. Though not significant, the volatility of the exchange rate appears to have a positive impact on inflation. The study recommends that policymakers need institute mitigation measures which could smooth out excessive exchange rate volatility to minimize its likely impact on the economy. The study also indicated a need for the EAC countries to consider adopting inflation targeting monetary policy framework in order to contain inflation at the appropriate level.

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THE EXCHANGE RATE VOLATILITY AND EXPORT PERFORMANCE: THE CASE OF INDONESIA'S EXPORTS TO JAPAN AND THE US

Buletin Ekonomi Moneter dan Perbankan ◽

10.21098/bemp.v20i1.724 ◽

2017 ◽

Vol 20 (1) ◽

pp. 49-70

Author(s):

Shinta Fitrianti

Keyword(s):

Exchange Rate ◽

Global Financial Crisis ◽

Export Performance ◽

Exchange Rate Volatility ◽

Commodity Price ◽

Long Run ◽

The Us ◽

Short Run ◽

The Exchange Rate ◽

The Impact

This paper investigates the long-run and short-run impacts of the exchange rate volatility onIndonesia’s real exports to its major trading partners; Japan and US. The study uses monthly data from January 1998 to October 2015 in order to capture the structural break period of the Global Financial Crisis 2008. In addition, commodity price is included as an explanatory variable. The index of exchange rate volatility is generated using moving sample standard deviation of the growth of the real exchange rate. This paper estimates the long-run cointegration using Autoregressive Distributed Lag (ARDL) bounds testing, while for the short-run dynamic this paper use error-correction-model (ECM). The findings suggest rupiah volatility against the Japanese yen reduces Indonesia’s export to Japan, both in the short and the long-run. Fluctuation of rupiah against the US dollar helps Indonesia’s export to the US in the short run, but the impact is not carried out to the long-run. On the other hand, the impact of commodity price shock is negligible, except for the long-run export to Japan.

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Exploring the relationship between macroeconomic indicators and sovereign credit default swap in Pakistan

The Journal of Risk Finance ◽

10.1108/jrf-03-2017-0049 ◽

2017 ◽

Vol 18 (4) ◽

pp. 368-380

Author(s):

Abdul Rashid ◽

Farooq Ahmad ◽

Ammara Yasmin

Keyword(s):

Exchange Rate ◽

Credit Default Swap ◽

Content Type ◽

Macroeconomic Variables ◽

Long Run ◽

Credit Default ◽

Macroeconomic Indicators ◽

Short Run ◽

The Exchange Rate ◽

The Interest Rate

Purpose This paper aims to empirically examine the long- and short-run relationship between macroeconomic indicators (exchange rates, interest rates, exports, imports, foreign reserves and the rate of inflation) and sovereign credit default swap (SCDS) spreads for Pakistan. Design/methodology/approach The authors apply the autoregressive distributed lag (ARDL) model to explore the level relationship between the macroeconomic variables and SCDS spreads. The error correction model is estimated to examine the short-run effects of the underlying macroeconomic variables on SCDS spreads. Finally, the long-run estimates are obtained in the ARDL framework. The study uses monthly data covering the period January 2001-February 2015. Findings The results indicate that there is a significant long-run relationship between the macroeconomic indicators and SCDS spreads. The estimated long-run coefficients reveal that both the interest rate and foreign exchange reserves are significantly and negatively, whereas imports and the rate of inflation are positively related to SCDS spreads. Yet, the results suggest that the exchange rate and exports do not have any significant long-run impact on SCDS spreads. The findings regarding the short-run relationship indicate that the exchange rate, imports and the rate of inflation are positively, whereas the interest rate and exports are negatively related to SCDS spreads. Practical implications The results suggest that State Bank of Pakistan should design monetary and foreign exchange rate polices to minimize unwanted variations in the exchange rate to reduce SCDS spreads. The results also suggest that it is incumbent to Pakistan Government to improve the balance of payments to reduce SCDS spreads. The findings also suggest that the inflation targeting policy can also help in reducing SCDS spreads. Originality/value This is the first study to examine the empirical determinants of SCDS spreads for Pakistan. Second, it estimates the short- and long-run effects in the ARDL framework. Third, it considers both internal and external empirical determinants of SCDS spreads.

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Determinants of Islamic Rural Bank Financing in Indonesia

JEJAK ◽

10.15294/jejak.v10i2.11293 ◽

2017 ◽

Vol 10 (2) ◽

pp. 273-288

Author(s):

Arif Widodo ◽

Istianah Asas

Keyword(s):

Exchange Rate ◽

Global Financial Crisis ◽

Positive Impact ◽

Impulse Response Function ◽

Third Party ◽

Correction Model ◽

Macroeconomic Variables ◽

Bank Financing ◽

Long Run ◽

Short Run

This research is designed to empirically investigate the determinants of Islamic rural banking financing in Indonesia after 2008 global financial crisis covering period 2009.1-2014.12. The methods applied in this research are Error Correction Model (ECM) and VAR/VECM. The results of ECM model demonstrate that the variable third party funds (DPK) and non-performing financing can significantly affect Islamic rural banking financing both in the short run and long run, while Return on Asset (ROA) and Profit-and-loss sharing does not have a significant influence. Islamic rural bank financing, however, was influenced by inflation and exchange rate as the proxy of macroeconomic variables in the short and long run. Furthermore, Impulse Response Function (IRF) and variance decomposition results show that Profit-and-loss sharing (PLS) has the largest positive impact to financing (39.08%), followed by third party fund (19.6%) and inflation (8.9%). While, the variables that contribute to reduce financing are non-performing financing (9.02%), followed by ROA (7.76%) and exchange rate (2.48%).

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Exchange Rate Volatility and Trade Flows: Evidence from China, Pakistan and India

International Journal of Economics and Finance ◽

10.5539/ijef.v7n11p121 ◽

2015 ◽

Vol 7 (11) ◽

pp. 121 ◽

Cited By ~ 2

Author(s):

Sarfaraz Ahmed Shaikh ◽

Ouyang Hongbing

Keyword(s):

Exchange Rate ◽

Exchange Rate Volatility ◽

Trade Flows ◽

Series Data ◽

General Level ◽

Negatively Associated ◽

Long Run ◽

Short Run ◽

The Exchange Rate ◽

The Impact

This study examines the impact of exchange rate fluctuations on trade flows in case of China, Pakistan and India by using the time series data from 1980 to 2013. Most of the researchers have advocated that exchange rate volatility is negatively associated with general level of trade. In this study we have used the standard deviation of the moving average of the logarithm of the exchange rate as a proxy for volatility. And to investigate this relationship, we have applied the Autoregressive Distributive Lag (ARDL) approach for co-integration which estimates the short and long run relationship among the variables for the said period. The results of this empirical work have suggested that exchange rate volatility is negatively associated with Chinese exports in short run while positively associated in long run. However, in the case of Pakistan and India both in the short run and long run, the exchange rate volatility is negatively associated with total volume of trade.

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LONG RUN RELATIONSHIP BETWEEN OIL PRICE SHOCKS, EXCHANGE RATE VOLATILITY AND ECONOMIC GROWTH IN NIGERIA

10.26772/cijds-2021-04-02-02 ◽

2021 ◽

Vol 4 (2) ◽

pp. 27-51

Author(s):

Abubakar Mikailu Aminu ◽

◽

Alexander Abraham Anfofum ◽

Zakaree Saheed ◽

◽

...

Keyword(s):

Economic Growth ◽

Exchange Rate ◽

Positive Impact ◽

Exchange Rate Volatility ◽

Oil Price ◽

Causality Test ◽

Long Run ◽

Oil Price Shock ◽

Price Shock ◽

Short Run

The paper examined the long run relationship between oil price shock, exchange rate volatility and economic growth in Nigeria over the period 1980-2019. The study employed the Johansen Vector Autoregression (VAR)-based cointegration technique model to examine the sensitivity of real economic growth to changes in oil prices and real exchange rate volatility in the long-run while the short run dynamics was checked using a vector error correction model. The result from the Granger causality test suggests that there is causality between oil price, exchange rate and GDP. The results from Johansen cointegration test indicate there exist a long-run equilibrium relationship among the variables. Findings further show that oil price shock and appreciation in the level of exchange rate exert positive impact on real economic growth in Nigeria. The paper therefore recommends greater diversification of the economy through investment in key productive sectors of the economy using income from the crude oil export to guard against the vicissitude of oil price shock and exchange rate volatility.

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Pengujian Resiko Redenominasi terhadap Nilai Tukar Rupiah

Owner ◽

10.33395/owner.v5i2.495 ◽

2021 ◽

Vol 5 (2) ◽

pp. 620-630

Author(s):

Abdul Holik

Keyword(s):

Exchange Rate ◽

Inflation Rate ◽

Positive Impact ◽

Credit Default Swap ◽

Economic Agents ◽

Long Run ◽

Short Run ◽

The Exchange Rate ◽

The Government ◽

The Impact

The redenomination is a breakthrough policy to induce stabilization because making transactions easier among the economic agents. This quantitative research aims to find the properness of the redenomination policy in Indonesia. The focus of this research is to analyze the impact of redenomination risk on rupiah exchange rate performance. It is conducted from April 1st, 2015 until May 9th, 2016. The method of analysis used here is VECM (Vector Error Correction Model) to find relation reciprocally among the three variables: CDS (Credit Default Swap) as a proxy for redenomination risk, exchange rate, and sovereign yields. Based on the result, we find that there are negative impacts in the long-run and short-run from redenomination risk on the rupiah exchange rate. Meanwhile, the sovereign yield has a positive impact on the rupiah exchange rate in the long run. In the short run, the exchange rate has a positive impact on redenomination, as well as on sovereign yield. The sovereign yield also has a positive effect on the exchange rate, as well as on the redenomination risk. But there is no impact of redenomination risk on the sovereign yield. From this finding, we should suggest that redenomination is a not proper decision yet. It is because the weakness of rupiah after its implementation due to sentiment of over-confidence among the economic agents sometimes triggers uncontrollable and high inflation rate. For the successful policy, previously the government should take action to reduce the inflation rate.

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Investigating the Impact of Exchange Rate Volatility, Inflation and Economic Output on International Trade of India

The Indian Economic Journal ◽

10.1177/0019466220966701 ◽

2020 ◽

Vol 68 (2) ◽

pp. 207-226

Author(s):

Aastha Arora ◽

Sarika Rakhyani

Keyword(s):

Exchange Rate ◽

Positive Impact ◽

Exchange Rate Volatility ◽

Goods And Services ◽

Economic Output ◽

Distributed Lag ◽

Long Run ◽

Short Run ◽

Trade Of Services ◽

The Impact

Four models have been constructed separately for exports of goods, imports of goods, exports of services and imports of services to explore the impact of exchange rate volatility, inflation and economic output on India’s foreign trade. AutoRegressive Distributed Lag (ARDL) bounds test run on monthly data over the period of 2011–2020 reports that in the long run, growth in production positively impacts the trade in goods and services. Rise in level of prices negatively impacts the exports of goods. In the short run, a rise in volatility brings a decline in the imports of goods but in the long run, it has a positive impact on the exports of goods. Volatile exchange rate has no impact on trade in services. An increase in inflation in the short run leads to a rise in the imports of goods but brings a decline in the trade of services.

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Exchange Rate Volatility and Monetary Policy Shocks

10.5772/intechopen.99606 ◽

2022 ◽

Author(s):

Gbalam Peter Eze ◽

Tonprebofa Waikumo Okotori

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Forecast Error ◽

Exchange Rate Volatility ◽

Error Variance ◽

Variance Decomposition ◽

Long Run ◽

Forecast Error Variance ◽

Short Run ◽

The Exchange Rate

The study investigated the influence of innovations in monetary policy on the rate of exchange volatility in Nigeria. The research adopted vector error correction model as well as impulse response function and forecast error variance decomposition function in the estimation using two models derived in the study. Monthly data between the periods 2009 and 2019 were adopted for the research. Our findings show that in the long run; all the monetary policy variables have a significant long run correlation with volatility in the exchange rate; but that money supply and the rate of exchange seem to have significant short run impact on volatility in the exchange rate, the other variables such as liquidity ratio or monetary policy rate did not show a significant short run relationship with the volatility in the exchange rate. Further findings on the volatility impulse response and the forecast error variance decomposition suggest a significant link between volatility in the exchange rate and money supply though the link was much more pronounced. The use of monthly data shows that the managed exchange rate regime by the CBN seems to have the desired effect in exchange rate volatility and thus having a critical impact on inflationary spikes.

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Effect of exchange rate volatility on Rwandan coffee price and export volumes

Agro-Science ◽

10.4314/as.v21i1.1 ◽

2021 ◽

Vol 21 (1) ◽

pp. 1-6

Author(s):

A. Kabayiza ◽

R. Muhire ◽

S. Nsabimana ◽

M. Kabarungi ◽

Y.B. Ningabire ◽

...

Keyword(s):

Exchange Rate ◽

Time Series Data ◽

Export Price ◽

Exchange Rate Volatility ◽

Real Income ◽

Series Data ◽

Long Run ◽

Short Run ◽

The Exchange Rate ◽

Coffee Price

The main strategy of Rwanda for having a steady growth in coffee export value and revenues was increased sales of speciality coffee. However, global coffee prices are often volatile and Rwanda has little control over the fluctuating global prices. This paper analysed the effect of exchange rate volatility on the price and exports of Rwanda coffee. In order to respond to this question, the monthly time series data on bilateral Rwanda coffee exports and real effective exchange rates from January 2001 to December 2016 were analysed. The cointegration methods and error correction model using the autoregressive distributed lag procedure andGlosten, Jagannathan, and Runkle-Generalized Autoregressive Conditional Heteroskedasticity (GJR-GARCH) model were used to analyse the data. The findings showed that the exchange rate volatility resulted in an increase in Rwandan coffee export price in the long run by 1.5% and a decrease in the short run by 0.2%. The findings also showed that the exchange rate volatility affected coffee export volumes in the long run and the short run by 44.4% and 3.8%, respectively. The real income in importing countries increased coffee prices in the long run by 3.0% and coffee export volumes in the long run and the short run by 26.9% and 38.5%, respectively. A review of monetary policy to address the issue of volatility and hedging system adoption in the Rwanda coffee sector should be done in order to stabilize the exchange rate and to consequently avoid its bad effects on coffee price and export volumes.

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Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?

The American Economic Review ◽

10.1257/aer.96.3.552 ◽

2006 ◽

Vol 96 (3) ◽

pp. 552-576 ◽

Cited By ~ 234

Author(s):

Philippe Bacchetta ◽

Eric van Wincoop

Keyword(s):

Exchange Rate ◽

Empirical Evidence ◽

Rational Expectations ◽

Exchange Rate Volatility ◽

Order Flow ◽

Macroeconomic Variables ◽

Symmetric Information ◽

Macroeconomic Fundamentals ◽

The Exchange Rate ◽

Exchange Rate Changes

Empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables. We introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts. Consistent with the evidence, the model implies that (a) observed fundamentals account for little of exchange rate volatility in the short to medium run, (b) over long horizons, the exchange rate is closely related to observed fundamentals, (c) exchange rate changes are a weak predictor of future fundamentals, and (d) the exchange rate is closely related to order flow.

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