The impact of exchange rate volatility on trade: The evidence from Russia

This paper analyzes the effects of exchange rate volatility on exports and imports of a range of goods between Russia and its 70 trading partners from 2004 until 2018. The goods in question fall into eight product categories, as follows: (i) agricultural raw materials­; (ii) chemicals; (iii) food; (iv) fuels; (v) manufactured goods; (vi) ores and metals­; (vii) textiles; and (viii) machinery and transport equipment. Exchange rate volatility­ is measured using the standard deviation of the first difference in the logarithmic daily nominal exchange rate. The paper concludes that exchange rate volatility had a negative impact on exports of agricultural raw materials, manufactured goods, and machinery and transport equipment. In contrast, it was found to have a positive and significant impact on trade in fuels and imports of chemicals and textiles.

The effect of political risk on emerging and developed markets

<p>This thesis consists of three substantive chapters (3, 4, 5) on the impact of political risk on equity and exchange rate returns and their volatilities. Chapter 3 proposes a framework for predicting market returns and volatility using changes in the country’s political risk. We identify the appropriate lag to to calculate changes over, and how the changes should be included in mean and volatility equations. The level of aggregation of political risk variable is also examined. Analysing 47 emerging and 21 developed markets, we find predictive power primarily for volatility of emerging markets, and recommended use of three political risk components which suitably capture important dimensions of political environment. In the Chapter 4 we empirically examines the impact of political risk on returns and volatility of individual firms and industry portfolios from New Zealand and Pakistan. The data used in the study consist of 184 firms from New Zealand and 202 firms from Pakistan along with country-level political risk data from the ICRG. As in the , we find in Chapter 3 that the impact of political risk is more on volatility than the returns of firms in both markets. As we expect, the impact of political risk is more on Pakistani firms compared to those in New Zealand. Overall, results from the industry portfolios are according to the hypothesis that political risk impact is different across industries (volatility increase for some industries and decrease for few). Chapter 5 examine the relationship between political risk variables on the nominal exchange rate return and its volatility. We again investigate developed versus developed markets, and also consider three different exchange rate regimes i.e. floating, managed floating and fixed. This is important to examine the link between political risk and exchange rate because there are two sources of political risk one on either side of the exchange rate. In our analysis, we use the political risk spread between the country of interest and the USA. Overall results reveal that emerging markets are more exposed to political risk compared to developed. Further, the impact of political risk variables is more on the floating exchange rate compared to managed floating and fixed exchange rate as might be expected, since intervention in the market will generally reduce to eliminate the influence of alternative factors. We also find strong evidence that volatility increases more during a period of high political risk and poor economic conditions for emerging markets.</p>

The effect of political risk on emerging and developed markets

<p>This thesis consists of three substantive chapters (3, 4, 5) on the impact of political risk on equity and exchange rate returns and their volatilities. Chapter 3 proposes a framework for predicting market returns and volatility using changes in the country’s political risk. We identify the appropriate lag to to calculate changes over, and how the changes should be included in mean and volatility equations. The level of aggregation of political risk variable is also examined. Analysing 47 emerging and 21 developed markets, we find predictive power primarily for volatility of emerging markets, and recommended use of three political risk components which suitably capture important dimensions of political environment. In the Chapter 4 we empirically examines the impact of political risk on returns and volatility of individual firms and industry portfolios from New Zealand and Pakistan. The data used in the study consist of 184 firms from New Zealand and 202 firms from Pakistan along with country-level political risk data from the ICRG. As in the , we find in Chapter 3 that the impact of political risk is more on volatility than the returns of firms in both markets. As we expect, the impact of political risk is more on Pakistani firms compared to those in New Zealand. Overall, results from the industry portfolios are according to the hypothesis that political risk impact is different across industries (volatility increase for some industries and decrease for few). Chapter 5 examine the relationship between political risk variables on the nominal exchange rate return and its volatility. We again investigate developed versus developed markets, and also consider three different exchange rate regimes i.e. floating, managed floating and fixed. This is important to examine the link between political risk and exchange rate because there are two sources of political risk one on either side of the exchange rate. In our analysis, we use the political risk spread between the country of interest and the USA. Overall results reveal that emerging markets are more exposed to political risk compared to developed. Further, the impact of political risk variables is more on the floating exchange rate compared to managed floating and fixed exchange rate as might be expected, since intervention in the market will generally reduce to eliminate the influence of alternative factors. We also find strong evidence that volatility increases more during a period of high political risk and poor economic conditions for emerging markets.</p>

Ciclos económicos y variables monetarias y financieras en México, 1980-2019: un enfoque de cambio estructural

El objetivo de este documento es analizar la relación entre el ciclo económico y diversas variables monetarias y financieras con el fin de determinar si han sido estables en el tiempo, teniendo en cuenta los efectos de las modificaciones en las condiciones económicas generales, la estrategia específica adoptada de política monetaria en diferentes subperiodos y las condiciones institucionales en que esta se maneja. Para probar la estabilidad de estas relaciones, una vez que se obtienen los indicadores del ciclo mediante los filtros convencionales, se emplea la metodología de cambio estructural de Bai y Perron (1998). Los resultados destacan dos cambios estructurales en la relación entre el indicador del ciclo y las variables de inflación, tasa de interés, tipo de cambio nominal y agregados monetarios nominales, uno a mediados de los años ochenta y el otro a mediados de los noventa. Abstract This paper aims to analyze the relationship between the business cycle and various monetary and financial variables. In particular, the paper seeks to determine whether this relationship has been stable over time, considering the effects of the changes in the general economic conditions, the specific monetary policy strategy adopted in different subperiods, and the institutional framework in which this is managed. To test the stability of these relationships, once the cycle indicators are obtained using conventional filters, the structural change methodology of Bai and Perron (1998) is used. The results highlight two structural changes in the relationship between the cycle indicator and inflation, interest rate, nominal exchange rate, and nominal monetary aggregates, one in the mid-eighties and the other in the middle of the nineties.

Relationship between Budget Deficit and Economic Growth: Evidence from Ethiopia

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.

An Investigation into the Sources of Depreciations in Mongolian Tugrik Exchange Rate: A Structural VAR Approach

This paper empirically investigates the sources of fluctuations in real and nominal Mongolian Tugrik (MNT) exchange rates by estimating the structural vector autoregressive (SVAR) model over the period January 1994–May 2021 and decomposing the exchange rate series into stochastic components induced by real and nominal shocks under the assumption of the long-run neutrality of nominal shocks on the real exchange rate level. The empirical results show that the real MNT exchange rate movements are primarily due to the real shocks, while the nominal shocks have a major role in explaining nominal exchange rate movements in the short and long run. The nominal exchange rate shows a delayed over-shooting occurring between one and three years after a nominal shock hits the economy. The long-run effect of a monthly one standard deviation nominal shock on nominal MNT exchange rate is 2.5%, which results in a permanent divergence between real and nominal MNT exchange rate and causes non-cointegrated relation between real and nominal MNT exchange rates. The historical decomposition of forecast error indicates that the nominal shock plays a significant role in explaining the depreciation in nominal MNT exchange rate over the last three decades. Our recommendation is to stop “cash handling” policy, minimize monetary shock, and coordinate fiscal and monetary policies to avoid large nominal depreciation.

EXOGENOUS INTEREST RATE AND EXCHANGE RATE DYNAMICS UNDER ELASTIC EXPECTATIONS

<div class="WordSection1"><h1 align="center"><strong style="font-size: 10px;">ABSTRACT</strong></h1></div><p>A theory analyzing the short run dynamics of nominal exchange rates under exogenous interest rates and free imperfect international capital markets is presented. Introducing elastic exchange rate expectations leads to cumulative changes in the spot and forward exchange rates in the same direction. We find that free floating exchange rate regimes are intrinsically unstable, as the nominal exchange rate is an institutional or policy variable that has no ‘fundamental equilibrium’ level. Implications for monetary policy and exchange market interventions of this potential instability are derived. Our results help to explain both the empirical prevalence of dirty floating exchange rate regimes and some aspects of the uncovered interest parity ‘failure’.</p><p> </p><p align="center">TASA DE INTERÉS EXÓGENA Y DINÁMICA DEL TIPO DE CAMBIO CON EXPECTATIVAS ELÁSTICAS</p><p align="center"><strong>RESUMEN </strong></p><p>Presentamos un análisis teórico de la dinámica de corto plazo de los tipos de cambio nominales con tasas de interés exógenas y libres e imperfecta movilidad internacional de capitales. La introducción de expectativas de tipo de cambio elásticas conduce a variaciones acumulativas en los tipos de cambio <em>spot</em> y <em>forward</em> en la misma dirección. Los regímenes de tipo de cambio de flotación libre son intrínsicamente inestables, dado que el tipo de cambio nominal es una variable institucional o de política que no tiene un nivel de “equilibrio fundamental”. Derivamos implicaciones de esta inestabilidad potencial para la política monetaria y las intervenciones en los mercados cambiarios. Los resultados ayudan a explicar la prevalencia de tipos de cambio de flotación sucia y aspectos de la “falla” de la paridad de tasas de interés descubierta.</p>

ADAPTATION TO EXTERNAL SHOCKS WITHIN THE CURRENCY BOARD SYSTEM ON THE EXAMPLE OF THE BALTIC COUNTRIES AND BOSNIA AND HERZEGOVINA

One of the most important economic policy issues, especially in the post-transition countries, is exchange rate regime (ERR), i.e. the question of optimal exchange rate regime that would stimulate economic growth and propagate macroeconomic stability. For small and EU-oriented countries like Bosnia and Herzegovina (B&H), the EU accession processes and character of countries' economic cycle phase are usually highlighted among many factors. The choice of the appropriate exchange rate system is determinated by the specific characteristics of individual countries, time moment and the characteristics of the external shock occurrence. It is generally accepted that monetary instabilities are treated by fixation and real economic shocks by exchange rate fluctuations. An important criterion for assessing the adequacy of the current exchange rate regime is its response to external shocks, such as the Great Recession in 2008. While flexible exchange rate regime is used as an automatic stabilizer, fixed exchange rates place certain restrictions. The process of macroeconomic adjustment in the Baltic States is an example of how large macroeconomic imbalances can be reduced without adjusting the nominal exchange rate and how the currency board can be successfully used as a stage in the euro introduction process. The aim of this paper is to give a comparative overview of the currency board introduction in Bosnia and Herzegovina and the Baltic countries, results achieved and reactions to external shocks (Great Recession in 2008) within this exchange rate arrangement, so conclusions that could be valuable in post-COVID 19 recovery can be drawn. Key words: exchange rates, currency board, external shocks

Does the Incomplete Exchange Rate Pass-through Exist in Sudan?

The purpose of this paper is to examine the nominal exchange rate pass-through to domestic prices in Sudan from 1978–2017. An autoregressive distributed lag (ARDL) approach to cointegration is employed. The analysis is based on impulse response functions (IRFs) and forecast error variance decompositions (FEVDs). The dynamics of the cointegrated system can be investigated via the variance decompositions and IRFs. The findings confirm that the degree of exchange rate pass-through in Sudan is incomplete, and the empirical results also show that the domestic price index is predominantly caused by foreign price in both the short and long runs, in addition to the import price index and the nominal exchange rate; the exchange rate shock has a negative effect on the domestic price. Furthermore, FEVDs analysis illustrates that the variation in domestic price is primarily determined by the import prices, while changes in the exchange rate are primarily determined by the exchange rate itself.