EMPIRICAL PSYCHOLOGY BETWEEN WHOLESALE PRICE AND CONSUMER PRICE INDICES: THE CASE OF PAKISTAN

2010 ◽  
Vol 55 (03) ◽  
pp. 537-551 ◽  
Author(s):  
MUHAMMAD SHAHBAZ ◽  
ABU N. M. WAHID ◽  
ADNAN HAIDER
Keyword(s):  
Interest Rates ◽  
Open Economy ◽  
Price Index ◽  
Wholesale Price ◽  
Small Open Economy ◽  
Nominal Exchange Rate ◽  
Retail Sector ◽  
Inference Procedure ◽  
Long Run ◽  
Consumer Prices

In a small open economy, the retail sector adds value with a lag to existing production and uses existing domestic production as an input. Therefore, demand side dynamics depend on the wholesale prices of the domestic goods, the prices of the imported goods, the nominal exchange rate, the level of indirect taxes, the marginal cost of retail production and interest rates. Hence, this mechanism provides a theoretical basis for causality from wholesale prices to consumer prices. Being motivated by this causal transmission mechanism, this paper tries to examine the causal relationship between wholesale prices and consumer prices in a small developing economy like Pakistan. Empirical methodology uses recently developed tests for the existence of a long-run relationship between wholesale prices and consumer prices. Typically, in applied analysis, testing for the existence of cointegration and causality can only be carried out once the time series properties of the data have been established. For example, tests for cointegration require the variables to be integrated to the same order, typically I(1), prior to estimation. By eliminating the need for unit root pre-testing, the tests applied here considerably simplify the inference procedure. They also reduce the potential for distortions in the inference due to the unknown properties of the testing sequence. Our findings include robust evidence that, for Pakistan, there is a bidirectional causality between wholesale prices and consumer prices. Feedback impact shows that influences from the wholesale price index (WPI) to the consumers' price index (CPI) is stronger or dominating as compared to feedback from CPI to WPI supporting the Cushing-McGarvey (1990) hypothesis.

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.

HABIT FORMATION AND GOVERNMENT SPENDING IN A SMALL OPEN ECONOMY

2003 ◽  
Vol 7 (3) ◽  
pp. 407-423 ◽  
Author(s):  
Cem Karayalçin
Keyword(s):  
Fiscal Policy ◽  
General Equilibrium ◽  
Current Account ◽  
Open Economy ◽  
Equilibrium Model ◽  
Government Spending ◽  
Time Preference ◽  
Small Open Economy ◽  
Long Run ◽  
Fiscal Shocks

The paper studies the effects of an expansionary fiscal policy in a general equilibrium model of a small open economy. Households are assumed to possess habit-forming, endogenous rates of time preference. In response to fiscal shocks, the model generates cyclical endogenous persistence and procyclical time paths for consumption, employment, and investment, as well as a countercyclical path for the current account. Furthermore, fiscal shocks are shown to have positive long-run effects on output and negative long-run effects on consumption.

Trade Tax Reform in a Small Open Economy with Distributional Objectives and Distortionary Taxation

2002 ◽  
Vol 1 (1) ◽  
Author(s):  
Jeremy Edwards
Keyword(s):  
Open Economy ◽  
Small Open Economy ◽  
Small Open Economies ◽  
Tax Reforms ◽  
Distortionary Taxation ◽  
Nontraded Goods ◽  
Traded Goods ◽  
Consumer Prices ◽  
Distortionary Taxes ◽  
The One

Abstract The paper shows that, if two conditions are satisfied, both radial contraction and concertina trade tax reforms continue to be desirable in a small open economy that differs from the one usually considered by having distributional objectives and using distortionary taxes to raise revenue. The first condition is that some optimisation in the choice of commodity taxes takes place - at a minimum, taxes on nontraded goods must be optimally chosen while taxes on traded goods keep the consumer prices of such goods constant. The second is that pure profits are absent from every household's budget constraint. These conditions mean that some care is required in arguing the case for simple trade tax reforms in small open economies.

Relationship between Budget Deficit and Economic Growth: Evidence from Ethiopia

2021 ◽  
Vol 2 (2) ◽  
pp. 10-15
Author(s):  
Desalegn Emana
Keyword(s):  
Economic Growth ◽  
Interest Rates ◽  
Budget Deficit ◽  
Time Series Data ◽  
Negative Impact ◽  
Positive Impact ◽  
Negative Relationship ◽  
Nominal Exchange Rate ◽  
Series Data ◽  
Long Run

This study examined the relationship between budget deficit and economic growth in Ethiopia using time series data for the period 1991 to 2019 by applying the ARDL bounds testing approach. The empirical results indicate that budget deficit and economic growth in Ethiopia have a negative relationship in the long run, and have a weak positive association in the short run. In line with this, in the long run, a one percent increase in the budget deficit causes a 1.43 percent decline in the economic growth of the country. This result is consistent with the neoclassical view which says budget deficits are bad for economic growth during stimulating periods. Moreover, in the long run, the variables trade openness and inflation have a positive impact on Ethiopian economic growth, and on the other hand, the economic growth of Ethiopia is negatively affected by the nominal exchange rate in the long run. Apart from this, in the long run, gross capital formation and lending interest rates have no significant impact on the economic growth of the country. Therefore, the study recommends the government should manage its expenditure and mobilize the resources to generate more revenue to address the negative impact of the budget deficit on economic growth.

Risk Aversion and Unemployment in an Open Economy

2000 ◽  
Vol 49 (2) ◽  
Author(s):  
Pia Weiß
Keyword(s):  
Risk Aversion ◽  
Open Economy ◽  
Small Open Economy ◽  
Risk Behaviour ◽  
Terms Of Trade ◽  
Individual Risk ◽  
Risk Averse ◽  
Search Frictions ◽  
Long Run ◽  
The Impact

AbstractThe paper analyses the impact which risk aversion has on a small open economy characterised by search frictions on the labour market. It is shown that the long-run qualitative effects caused by a terms-of-trade shock are independent of individual risk behaviour. As far as quantitative aspects are concerned risk aversion always leads to higher equilibrium employment; however the increase in unemployment due to a price shock is the higher the more risk-averse individuals are.

ONE APPROACH TO RESOLVE THE EXCHANGE RATE PUZZLE: RESULTS USING DATA FROM THE UNITED KINGDOM AND THE UNITED STATES

2018 ◽  
Vol 63 (05) ◽  
pp. 1367-1384
Author(s):  
MOHAMED ARIFF ◽  
ALIREZA ZAREI
Keyword(s):  
Exchange Rate ◽  
Interest Rates ◽  
The United States ◽  
Cash Flows ◽  
Nominal Exchange Rate ◽  
Data Series ◽  
Test Procedures ◽  
Bretton Woods ◽  
Long Run ◽  
Using Data

We approach a significant research topic in international economics by restating the test procedures in a novel manner consistent with monetary theorems with controls using monetary variables and applying an appropriate econometric methodology to re-examine three aspects of exchange rate behavior. (i) Does the inflation (price) factor affect Nominal Exchange Rate (NER)? (ii) Do relative interest rates between countries affect a country’s exchange rate? (iii) Do the price and interest rate effects hold if controls for non-parity factors are embedded in tests? The data series for this study are taken over 55 years covering pre-and-post-Bretton Woods era: a second test was done over the post-Bretton Woods period only using 30 years of data. Also, the traditional factors of parity conditions are extended in this research to take into account recently theorized and tested non-parity factors related to cash flows. The resulting evidence affirms clearly that both the parity factors (prices and interest rates) and the non-parity factors affect exchange rates significantly over the long run, also over the 30-year period. In our view, these findings extend our knowledge of how currency behavior is consistent with parity and non-parity theorems.

The Term Structure of Interest Rates In a Small Open Economy

1981 ◽  
Vol 13 (1) ◽  
pp. 44 ◽  
Author(s):  
Michael Beenstock ◽  
J. Andrew Longbottom
Keyword(s):  
Interest Rates ◽  
Term Structure ◽  
Open Economy ◽  
Small Open Economy
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