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 PERANAN KEBIJAKAN MONETER DALAM MENJAGA STABILITAS PEREKONOMIAN INDONESIA SEBAGAI RESPON TERHADAP FLUKTUASI PEREKONOMIAN DUNIA

2007 ◽  
Vol 9 (2) ◽  
pp. 145-177
Author(s):  
M. Maulana Al Arif ◽  
Achmad Tohari
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Interest Rate ◽  
Open Economy ◽  
Small Open Economy ◽  
Monthly Data ◽  
Vector Autoregressive ◽  
The World ◽  
The Exchange Rate ◽  
The Impact

This paper analyzes the impact of the inflation and the world interest rate on the Indonesian economy and the effectiveness of the Indonesian central bank policy to adopt the domestic macroeconomic fluctuation.Assuming Indonesia as a small-open economy, the Stuctural Vector Autoregressive Model is utilized on the monthly data during the periode of 1999: 1 – 2004: 12 covering the main domestic macroeconomic indicator (output, price, money supply, interest rate and the exchange rate) and the world oil price and world interest rate as the disturbance source.The analysis provides 2 main results, first, the international variables do have impacts on the domestic variables fluctuation, implying the fragility of the domestic economy due to the external shock, second, the monetary policy is effective on supporting the economic growth and stabilizing the price level. However, the Bank Indonesia policy to stabilize the international shock via the exchange rate channel, contributes to a higher impact of the international shock on domestic interest rate.Keywords: monetary policy, business cycle, SVARJEL Classification: E52, E32, C32, F41

scholarly journals The 2000s commodity boom and the exchange rate in Argentina

2019 ◽  
Vol 27 (79) ◽  
pp. 46-61
Author(s):  
Luciano Campos
Keyword(s):  
Exchange Rate ◽  
Latin American ◽  
Open Economy ◽  
Small Open Economy ◽  
Exchange Rate Policy ◽  
Dutch Disease ◽  
Nominal Exchange Rate ◽  
Content Type ◽  
Selection Of Variables ◽  
The Impact

Purpose This paper aims to estimate the impact of the 2000s commodity boom in the major Latin American economies. Design/methodology/approach The author used a structural vector autorregresive analysis where the selection of variables is conditional on a New Keynesian Model for a small open economy. Findings The evidence indicates that the Argentinean nominal exchange rate appreciated less while its output and inflation grew more than those of the other nations when subjected to commodity shocks. These results are interpreted as a more aggressive leaning-against-the-wind intervention by Argentina, probably to avoid the Dutch disease. Although the effects with regard to output were indeed stronger in Argentina, this was only at the expense of higher inflation and volatility suffered during the boom. Originality/value At the time of the writing of this paper, no work had evaluated Argentinean underperformace to the manner in which its exchange rate policy was handled in comparison with the rest of the region during the boom. This paper intends to fill this gap.

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

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.

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.

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.

scholarly journals Imperative of Exchange Rates Policy and Industrial Growth in Nigeria: A Time Series Analysis

2017 ◽  
Vol 10 (2) ◽  
pp. 187-198 ◽  
Author(s):  
Olatunji A. Shobande
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Money Supply ◽  
Exchange Rate Policy ◽  
Industrial Growth ◽  
Vector Error Correction ◽  
Tax Incentive ◽  
Long Run ◽  
Speed Up ◽  
The Impact

Abstract This paper looks at the impact of foreign exchange rate policies on industrial growth in Nigeria between 1981 and 2016. The study employed the Vector Error Correction Model (VECM) techniques, following the results of Johansen Cointegration techniques that shows the existence of long run relationship among the variables considered. While, VECM estimates showed that money supply (monetary policy) impacted positively effects, evidence on, TAX (fiscal policy) impacted negative on industrial growth. Besides, the Exchange rate and Inflation impacted negatively on industrial growth., suggesting that the issue of stability remained a challenge unresolved by the Apex bank. The emanating policy antidotes are that there is urgent need to use proactive monetary policy through money supply to speed up the rate of industrial growth on one hand, while providing tax incentive to various industrial good that can further have enhanced the contribution of the sector to industrial growth on the other. In all, the need to align the objective of exchange rate policy with broader macroeconomic goals is necessary for effective policy transmission mechanism to speed up the rate of industrial progress in the country.

scholarly journals Investigating Exchange Rate Pass-through to Consumer Prices in Nigeria

2021 ◽  
Vol 21 (1) ◽  
pp. 105-121
Author(s):  
Ephraim Ugwu ◽  
Ditimi Amassoma ◽  
Christopher Ehinomen
Keyword(s):  
Exchange Rate ◽  
Research Work ◽  
Exchange Rate Policy ◽  
Long Run ◽  
Consumer Prices ◽  
Short Run ◽  
Pass Through ◽  
Exchange Rate Pass Through ◽  
The Impact ◽  
Negative Shock

Abstract Research background: There have been several studies on the degree of exchange rate pass-through (ERPT) to consumer prices, as well as macroeconomic environment with yet no clear direction. Purpose: This research work investigates exchange rate pass-through effects into consumer prices in Nigeria from 1960 to 2018. Research methodology: The methodology employed by the study for estimation is the Johansen cointegration and Vector Error Correction Model (VECM) procedures. Results: The empirical results indicate an incomplete pass-through of exchange rate into consumer prices in Nigeria. The pass-through is found to be 1.6 for the model under consideration. The impulse response function results indicate that the response of the consumer prices to the exchange rate shock decreases immediately to a negative shock in the short run, and continues along the horizon to a positive shock in the long run. Also, the response of consumer prices to interest rate shock decreases immediately and continues to fluctuate to a negative shock in both the short run long run horizon. Novelty: The results support the view that exchange rate policy should be complimented with coordinated macroeconomic policy approaches in order to control inflationary level in the economy. The study therefore recommends that the Federal Government should adopt a tightening of the monetary policy as it will help reduce the impact of exchange rate depreciation on consumer prices.

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