Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks

This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.

Effectiveness of capital controls in dampening international shocks

This study is a contribution to the ongoing debate on whether capital controls are effective in buffering international shocks and reducing capital flows volatility. The author demonstrates that capital controls can considerably mitigate the effects of monetary and exchange rate shocks and reduce the volatility of capital inflows to emerging markets. This study analyses quarterly data of 28 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital controls actions. Using panel analysis, autoregressive distributed lag, and local projections approaches, this study finds that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond anti-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. The author also finds that capital controls on inflows are more effective for reducing the volatility of capital flows compared to capital controls on outflows.

Crude oil futures to manage the price risk of natural rubber: Empirical evidence from India

The trading of natural rubber derivatives in the Indian commodity exchanges was banned several times in the past. Hence, in India, the derivatives on natural rubber are not traded actively and regularly. We have examined the possibility of a forecast model and a cross hedge tool for the natural rubber price by using crude oil futures in India. Results of the Johansen cointegration test proved that there is no cointegration equation in the model; hence, there is no scope to develop long-run models or error correction models. We have developed a vector autoregressive [VAR(2)] model to forecast the rubber price, and we examined the possibility of a cross hedge for natural rubber further by using the Pearson correlation coefficient and Granger causality test. We have extended our research to a structural VAR analysis to examine the effect of crude futures and exchange rate shocks on the natural rubber price. Our results showed that there is a short-term relationship between the crude oil futures price, the exchange rates of the US dollar to the Indian rupee, the Malaysian ringgit to the Indian rupee and the Thai baht to the Indian rupee; and the natural rubber price in India. The effort of policymakers to cause the Indian rupee to appreciate against the Thai baht and Malaysian ringgit may increase the natural rubber price in India. Natural rubber traders, growers and consumers can use crude futures to hedge the price risk. The Indian Rubber Board can suggest the VAR(2) model to predict the short-run price for natural rubber.

VOLATILITY SPILLOVER OF INTRADAY EXCHANGE RATES ON SOME SELECTED ASEAN COUNTRIES

In this paper, we use hourly exchange rate data for selected ASEAN countries (Singapore, Indonesia, Malaysia, Thailand and the Philippines) to test the hypothesis that exchange rate own shocks dominate exchange rate volatility. We find strong evidence that own exchange rate volatility explains between 64% to 86% of their own exchange rate volatility movements. These results do not change when we include the Chinese CNY currency in the analysis. Moreover, we find that exchange rate shocks of ASEAN countries explain 36%, 24% and 23% of exchange rate volatility movements of Indonesia, Thailand, and Singapore, suggesting that for these countries are more synchronized.

Acceleration of Islamic Bank Financing in Indonesian Agriculture Sector

Economic instability is a challenge for Islamic banks in channeling financing to various sectors including agriculture. This study aims to shed some light on the influence of economic indicators and the financing response to agriculture sector using monthly data from 2006 to 2020, including data from agriculture sector financing, interest rates, inflation, exchange rates, Islamic stock index, and composite stock index. This study employed Vector Error Correction Model (VECM) method. The results revealed that only interest rates and inflation affected Islamic bank financing in the short and long term period. Islamic bank financing in the agriculture sector reached the fastest stability when responding to exchange rate shocks. The results further showed that interest rates mostly influenced the level of diversity in Islamic bank financing in the agriculture sector. The results suggest that stakeholders need to play a crucial role in stabilizing economic turmoil to accelerate Islamic bank financing particularly in agriculture sector.

Attenuating international financial shocks: the role of capital controls

PurposeBy reinforcing monetary policy independence, reducing international financing pressures and avoiding high-risk takings, capital controls strengthen the stability of the financial system and then reduce the volatility of capital inflows. The objective of this study was to conduct an empirical examination of this hypothesis. This topic has received strong support in the theoretical literature; however, empirical work has been quite limited, with few empirical studies that provide direct empirical support to this hypothesis.Design/methodology/approachThis study analyzed quarterly data of 32 emerging economies over the period between 2000 and 2015 and proposes two methods to identify capital control actions. Using panel analysis, Autoregressive Distributed Lag and local projections approaches.FindingsThis study found that tighter capital controls may diminish monetary and exchange rate shocks and reduce capital inflows volatility. Furthermore, capital controls respond counter-cyclically to monetary shocks. Under capital controls, countries with floating exchange rate regimes have more potential to buffer monetary shocks. We also found that capital controls on inflows are more effective for reducing the volatility of capital inflows compared to capital controls on outflows.Originality/valueThis study contributes to the question of the effectiveness of capital controls in attenuating the effects of international shocks and reducing the volatility of capital flows. Previous studies have mostly focused on the role of macroprudential regulation; however, there is a lack of systematic effects of capital controls on monetary and exchange rate policies. To our knowledge, this is the first preliminary study to suggest that capital controls may buffer monetary and exchange rate shocks and reduce the volatility of capital inflows. This study investigates the novel notion that capital controls allow for a notable counter-cyclical response of monetary and exchange rate policies to international financial shocks.

Restrictive Policy to Curb Capital Flows Volatility

We examine the role of the restrictive policy, through capital controls, in reducing the capital flows volatility. The study highlights the effects of these controls to dampen international financial shocks. Using quarterly data of 28 emerging economies over the period between 1999 and 2019, three empirical approaches are applied, dynamic panel data, ARDL, and local projections models. Four indexes of capital controls have contributed to the finding that a tighter level of capital controls reduces the sensitivity of capital flows to monetary and exchange rate shocks. These findings on the benefits of capital controls are particularly asymmetric according to the differences between controls on inflows and outflows, and the differences between floating and pegged exchange rate regimes.