scholarly journals Rezimi kursnog koridora u kontekstu valutnih kriza

2003 ◽  
Vol 44 (157) ◽  
pp. 105-122
Author(s):  
Marko Malovic
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Ad Hoc ◽  
Exchange Rate Regime ◽  
Standard Wiener Process ◽  
Rigid Fixation ◽  
Open Market ◽  
International Financial Crises ◽  
International Capital Movements ◽  
The Face

One of the pillars of open-economy macro is the well-known axiom of "inconsistent trinity", which claims it is impossible to simultaneously achieve significant liberalisation of international capital movements, monetary policy independence and fixed exchange rate. Ignorance or inability to accept this identity, have recently placed many developing countries with fixed (yet adjustable) exchange rate regimes in the centre of fierce international financial crises with both monetary and real repercussions. Precautionary or after being burnt by crisis, majority of small open economies adopted the so-called bipolar view, i.e. one of exchange rate modalities which stretch along the wide axis between rigid fixation and free floating. After having dealt with elementary dynamics of crawling/monitoring band intermediate regime, this paper analyses its behaviour in the face of speculative attacks against domestic currency. In doing so, first, we reminded that exchange rate trajectory, even inside ("honeymoon"-free) currency band, does not follow Brownian motion (standard Wiener process). We showed, thereafter, that imperfectly-credible target zones could also have an asymptotically stabilizing effect on intramarginal exchange rate dynamics. This mean-reverting trait enables monetary authorities to control speculative volatility of exchange rate even in cases when they lack sufficient amount of foreign reserves, inasmuch as fundamental or globally spread crises need not be defended by means of open-market intervention, but by unanticipated, temporally irregular inside-the-band realignment or simply by sustainable widening of the band. Nevertheless, in principle, currency band should be shielded against non-fundamental market pressures. Therefore, we felt it was worthwhile calibrating the imminent danger of initial and cumulative attacks cum total currency crash, by means of introducing formal mathematical relationships among key variables which reflect both structural and behavioural features of the economy at hand (and, primus inter pares, its exchange rate regime), on the one hand, and on the other hand, objective functions of both policymaker and speculators (individually). At first armed with ad hoc log-nonlinear stochastic model of currency band, and later on by intertemporal optimisation modeling, we reconstructed preattack exchange rate trajectory, "sufficient" amount of foreign exchange reserves, exchange rate behaviour during the currency crisis and sequence of crisis events. At last, we carried out rigorous analysis of variables which influence width and/or location of ranges of effective commitment. Finally, we suggested alleys which may prove fruitful for further research efforts.

Price-level instability and international monetary policy coordination

2015 ◽  
Vol 15 (1) ◽  
Author(s):  
Hong Thang Nguyen
Keyword(s):  
Growth Rate ◽  
Exchange Rate ◽  
Open Economy ◽  
Price Level ◽  
Exchange Rate Regime ◽  
Policy Coordination ◽  
Money Growth ◽  
Open Market ◽  
Fixed Rate ◽  
Fixed Exchange Rate

AbstractIn a two-country open economy model, Bencivenga, Huybens, and Smith [2002, What to Stabilize in the Open Economy, International Economic Review 43, 1289–1307] investigate three policy regimes and find that a fixed exchange rate regime, where the country with the lowest reserve-to-deposit ratio is charged with maintaining the fixed rate, and a price-level targeting regime are both more prone to price-level instability than a constant money growth rate regime. This paper, by replacing their “helicopter drops” assumption with an open market operations assumption, shows that the two rules of fixing the money growth rate and targeting the time path of the price level work equally well. Additionally, under a regime of fixed exchange rates, it does not matter which country is charged with keeping the fixed exchange rate.

Exchange Rate Volatility in Emerging Markets:The Chilean Case

2007 ◽  
pp. 87-100
Author(s):  
Juan R. Castro
Keyword(s):  
Exchange Rate ◽  
Exchange Rate Regime ◽  
External Debt ◽  
Exchange Rate Volatility ◽  
Arch Model ◽  
Macroeconomic Shocks ◽  
Domestic Debt ◽  
Domestic Credit ◽  
The Face ◽  
The Exchange Rate

The document conducts an empirical investigation on the volatility of the Chilean exchange rate regime, using a model of Objective Zones. Through the use of the ARCH model, the document tests the volatility of the exchange rate in the presence of different levels of international reserves and other macroeconomic shocks. The results show that domestic credit, domestic debt and external debt have the greatest impact on the volatility of the variables studied, especially when compared with other fundamental variables. The variance of the exchange rate is heterosedastic but it is not persistent, which implies that the exchange rate is stable, probably when it oscillates between two bands. The volatility of the exchange rate fluctuates to a greater extent in the face of changes in internal and external debt, than with the other variables used.

scholarly journals Exchange Rate Behaviour after Recent Float: The Experience of Pakistan

2004 ◽  
Vol 43 (4II) ◽  
pp. 829-852
Author(s):  
M. Ali Kemal ◽  
Rana Murad Haider
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Purchasing Power Parity ◽  
Exchange Rate Regime ◽  
Open Market ◽  
Market Exchange ◽  
Power Parity ◽  
Traded Goods ◽  
The Exchange Rate ◽  
The Interest Rate

Exchange rate is a price of traded goods in the world market. To maintain the commodities competitive in the market, exchange rate should be adjusted according to the change in prices. If it is adjusted accordingly, then we say that purchasing power parity (PPP) holds in that country. However, phenomenon of PPP is completely kicked out under floating exchange rate regime in the short run [see for example, Rogoff (1999); Mark and Choi (1997); MacDonald (1999); Obstfeld and Taylor (1997); Coleman (1995); O’Connel (1998) and Michael, et al. (1997)]. Recent statement by the President of the National Bank of Pakistan, that the exchange rate and the interest rate are two faces of the same coin [Bokhari (2004)], shows that the changes in the exchange rate is strongly associated with the changes in the interest rate differential.1 It is also argued that under free float the value of currency is determined by demand and supply of foreign exchange and to control the value of currency using open market operations interest rate is used as the key monetary policy tool. Moreover, deterioration of trade balance leads to deprecation in exchange to make the exports competitive in the market and vice versa.

scholarly journals Dynamic Effects of Changes in the Exchange Rate System

2016 ◽  
Vol 33 (1) ◽  
pp. 111-161 ◽  
Author(s):  
Naoyuki Yoshino ◽  
Sahoko Kaji ◽  
Tamon Asonuma
Keyword(s):  
Exchange Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Transition Period ◽  
Exchange Rate Regime ◽  
Small Open Economy ◽  
Rate System ◽  
Transition Analysis ◽  
Dynamic Stochastic ◽  
The Exchange Rate

We propose a new dynamic transition analysis on the basis of a small open economy dynamic stochastic general equilibrium model. Our proposed analysis differs from existing static and conventional dynamic analyses in that shifts from a fixed exchange rate regime to a basket peg or a floating regime are explicitly explored. We apply quantitative analysis, using data from the People's Republic of China and Thailand, and find that both economies would be better off shifting from a dollar peg to a basket peg or a floating regime over the long run. Furthermore, the longer the transition period, the greater the benefits of shifting to a basket peg regime from a dollar peg regime owing to limited volatility in interest rates. Regarding sudden shifts to a desired regime, the welfare gains are larger under a shift to a basket peg if the exchange rate fluctuates significantly.

A COMPARATIVE STUDY OF EXCHANGE RATE REGIMES AND MACRO-INSTABILITIES IN THE TWIN ECONOMIES OF SINGAPORE AND HONG KONG

2007 ◽  
Vol 52 (01) ◽  
pp. 93-116 ◽  
Author(s):  
YUE MA ◽  
Y. Y. KUEH ◽  
RAYMOND C. W. NG
Keyword(s):  
Hong Kong ◽  
Exchange Rate ◽  
Open Economy ◽  
Exchange Rate Regime ◽  
Small Open Economy ◽  
Prototype Model ◽  
Internal Factors ◽  
Monetary Authorities ◽  
The Stability ◽  
The One

Based on a small, open-economy IS-LM prototype model, this paper examines the sources of macroeconomic instabilities in Hong Kong and Singapore operating under two different currency board arrangements. The empirical findings suggest that in general, both external and internal factors contribute to the macroeconomic volatilities observed in the two economies. There is evidence of a tradeoff between exchange rate and interest rate targeting for the stability of money supply in Singapore. Our findings have important implications for Mainland China's monetary authorities in the transition from a hard-peg exchange rate regime like Hong Kong to a basket-link system like the one in Singapore.

scholarly journals Downward Nominal Wage Rigidity and the Case for Temporary Inflation in the Eurozone

2013 ◽  
Vol 27 (3) ◽  
pp. 193-212 ◽  
Author(s):  
Stephanie Schmitt-Grohé ◽  
Martín Uribe
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Full Employment ◽  
Exchange Rate Regime ◽  
Small Open Economy ◽  
Wage Rigidity ◽  
Nominal Wage ◽  
Fixed Exchange Rate ◽  
Nominal Wage Rigidity ◽  
Unemployment Problem

Since the onset of the Great Recession in peripheral Europe, nominal hourly wages have not fallen from the high levels they had reached during the boom years—this in spite of widespread increases in unemployment. This observation evokes a well-known narrative in which nominal downward wage rigidity is at the center of the current unemployment problem. We embed downward nominal wage rigidity into a small open economy with tradable and nontradable goods and a fixed exchange-rate regime. In this model, negative external shocks cause involuntary unemployment. We analyze a number of national and supranational policy options for alleviating the unemployment problem caused by the combination of downward nominal wage rigidity and a fixed exchange-rate regime. We argue that, in spite of the existence of a battery of domestic policies that could be effective in solving the unemployment problem, it is unlikely that a solution will come from within national borders. This leaves supranational monetary stimulus as the most compelling avenue out of the crisis. Our model predicts that full employment in peripheral Europe could be restored by raising the euro area annual rate of inflation to about 4 percent for the next five years.

scholarly journals External Shocks and FX Intervention Policy in Emerging Economies

2021 ◽  
Author(s):  
Alex Carrasco ◽  
David Florián Hoyle
Keyword(s):  
Exchange Rate ◽  
Open Economy ◽  
Exchange Rate Regime ◽  
Emerging Market ◽  
Agency Problem ◽  
Small Open Economy ◽  
Balance Sheet ◽  
Policy Instrument ◽  
External Shocks ◽  
Intervention Policy

This paper discusses the role of sterilized foreign exchange (FX) interventions as a monetary policy instrument for emerging market economies in response to external shocks. We develop a model for a commodity-exporting small open economy in which FX intervention is considered as a balance sheet policy induced by a financial friction in the form of an agency problem between banks and their creditors. The severity of banks agency problem depends directly on a bank-level measure of currency mismatch. Endogenous deviations from the standard UIP condition arise at equilibrium. In this context, FX interventions moderate the response of financial and macroeconomic variables to external shocks by leaning against the wind with respect to real exchange rate pressures. Our quantitative results indicate that, conditional on external shocks, the FX intervention policy successfully reduces credit, investment, and output volatility, along with substantial welfare gains when compared to a free-floating exchange rate regime. Finally, we explore distinct generalizations of the model that eliminate the presence of endogenous UIP deviations. In those cases, FX intervention operations are considerably less effective for the aggregate equilibrium.

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