HOW THE EXCHANGE RATE REGIME AFFECTS ADJUSTMENT TO LARGE OIL PRICE SWINGS IN OIL EXPORTING COUNTRIES

The aim of this study is to analyze how oil price shocks affect the economic growth of floating exchange rate regimes and fixed exchange rate regimes in oil-exporting countries with a ratio of oil exports to total exports exceeding 70%. Also, this study seeks to determine what monetary and fiscal policies both regimes apply in order to curb business cycles and reduce inflationary and recessionary gaps. The analytical study uses panel data for the period from 1991 to 2019, covering 24 oil-exporting countries, from the World Economic Outlook (WEO) database and World Bank. The econometric model is estimated by applying a panel VECM to examine the short- and long-term interdependencies in the macroeconomic variables. The results demonstrate that when there is a negative shock to the oil price, the exchange rate of the floating exchange rate regimes depreciates, money supply increases, and government spending decreases. In contrast, the exchange rate of the fixed exchange rate regimes fluctuates slightly; the money supply slightly decreases in the near, medium, and long term; and government spending decreases.

Does the Mundell-Fleming Model Apply to Malaysia's Output?

Based on an extended Mundell-Fleming model, this paper finds that both fiscal expansion and monetary expansion raise output in Malaysia and that a lower real interest rate, a higher stock value, a lower real oil price and a lower expected inflation rate increase output. Hence, a managed floating system with no predetermined path of the exchange rate adopted by Malaysia may lead to better outcomes than the predictions of the Mundell- Fleming model that fiscal expansion does not raise output under a floating exchange rate but increases output under a fixed exchange rate whereas monetary expansion increases output under a floating exchange rate but does not affect output under a fixed exchange rate (Mankiw, 2019).

International Monetary Frameworks

In this chapter we turn to representing flows of funds in alternative international monetary frameworks, and what global liquidity these different frameworks provide. We first recall some arguments in favour of and against fixed exchange rate systems. We then introduce two international monetary arrangements of the past which imply fixed exchange rates, namely the gold standard and the Bretton Woods system, and recall why both eventually failed. We then turn to three international monetary frameworks in the context of the current paper standard, i.e. fixed exchange rate systems, flexible exchange rate systems, and the European monetary union. We explain the role of an international lender of last resort and related solutions, and how these allow for more leeway in running fixed exchange rate systems. We also show how banks and central bank balance sheets are affected by international flows of funds and the balance of payments. Finally, we briefly review recent developments of foreign currency reserves, being the key central bank balance sheet position in this context.

The Theoretical Possibility of the Mundellian-Trilemma in Practice

Mundellian-Trilemma depicts that the impossibility of three policy goals, monetary policy independence, open capital market and fixed exchange rate. The depiction of the Mundellian-Trilemma appears true under an assumption of zero arbitrage costs across international markets. In practice, however, the transaction costs can be enormous to hinder the capital across international markets. Hence, by relaxing the assumption of zero arbitrage costs, this paper demonstrates a theoretical possibility of the trilemma in practice.

In Search of an Anchor

This chapter details how, in 1993, Norges Bank argued in favour of supplementing the fixed exchange rate target, and in 1997 in favour of replacing it with an inflation target, with a view to maintaining inflation at a low and stable level. The introduction of an inflation target provided Norges Bank with greater scope for the exercise of independent judgement. Controversial increases in the policy rate in 2000 and 2002 demonstrated that Norges Bank was willing to use its increased independence. Moreover, amendments to the Norges Bank Act in 2003 weakened the scope of action available to the government and parliament to influence the bank’s decisions, and the Executive Board largely became a council of economic experts. In addition, Norway’s slightly inefficient central bank organization underwent major changes, with extensive outsourcing of non-core tasks, as defined by the new guidelines.

Domestic Macroeconomic Adjustment to Oil Price Shocks Under Different Exchange Rate Regimes in Malaysia

This study examined the insulation properties of flexible exchange rate regime and fixed exchange rate regime in response to the oil price shocks in Malaysia. A monthly time series data for the period 1980- 2005 was used to examine whether the response of output, exchange rate and price levels to the oil price shocks were different across the exchange rate regimes. For this purpose, this study employed the structural vector autoregressive model. Empirical results indicated that the short-run output responses to the oil price shocks are smoother under the flexible exchange rate regime compared to the situation under the fixed exchange rate regime.