Exchange Rate Changes and Inflation in Post‐Crisis Asian Economies: Vector Autoregression Analysis of the Exchange Rate Pass‐Through

Macro‐economic consequences of large currency depreciations among the crisis‐hit Asian economies varied from one country to another. Inflation did not soar after the Asian currency crisis of 1997–98 in most crisis‐hit countries except Indonesia where high inflation followed a very large nominal depreciation of the rupiah. The high inflation meant a loss of price competitive advantage, a key for economic recovery from a crisis. This paper examines the pass‐through effects of exchange rate changes on the domestic prices in the East Asian economies using a vector autoregression analysis. The main results are as follows: (i) the degree of exchange rate pass‐through to import prices was quite high in the crisis‐hit economies; (ii) the pass‐through to Consumer Price Index (CPI) was generally low, with a notable exception of Indonesia; and (iii) in Indonesia, both the impulse response of monetary policy variables to exchange rate shocks and that of CPI to monetary policy shocks were positive, large, and statistically significant. Thus, Indonesia's accommodative monetary policy, coupled with the high degree of CPI responsiveness to exchange rate changes was an important factor in the inflation‐depreciation spiral in the wake of the currency crisis.     

Official FX interventions through derivatives

We use high-frequency data to study the effects of currency swap auctions carried out by the Brazilian Central Bank on the USDBRL exchange rate. We find that official currency swap auctions impact the exchange rate in a significant way, even though they do not directly alter the supply of foreign currency in the market. We show that during our sample period auctions of contracts in which the Central Bank took a short position in USD had larger effects than those in which the Central Bank took a long position. The supply of currency swaps to the market provides an alternative for traders that demand foreign currency for financial (speculative or hedging) rather than transactional reasons, and thus affects the demand for foreign currency and its price. This mechanism is likely to be particularly relevant when forecasters extrapolate exchange rate trends at short-term horizons.     

The High‐Frequency Response of the EUR‐USD Exchange Rate to ECB Communication

We investigate the impact of the European Central Bank's monetary policy communication during the press conference held after the monthly Governing Council meeting on the EUR‐USD exchange rate in high frequency. Based on the method of Content Analysis, we construct communication indicators for the introductory statement and find that communication with respect to future price developments is most relevant. In response to statements about increasing risks to price stability the EUR appreciates on impact. To the contrary, communication about economic activity and monetary aggregates does not generate significant exchange rate reactions.     

Central bank digital currency: A systematic literature review using text mining approach

Central bank digital currency (CBDC) is seen as a possible next step in the evolution of money, offering a more stable unit of account, a more efficient medium of exchange, and a safer way to store value. However, since it began to get significant attention from academics and practitioners a few years ago, many concerns about how a central bank may build an efficient CBDC and how it would impact a country's current financial system still remain unanswered satisfactorily. Based on the combination of text mining and systematic review methods, this work presents a thorough literature assessment of 191 academic papers on CBDC in order to identify major research issues and knowledge gaps that may be addressed in the future. We find seven primary research themes linked to CBDC including (1) Central bank, (2) CBDC and other digital currency, (3) CBDC and money markets, (4) CBDC and monetary policy, (5) CBDC design and technologies, (6) CBDC and payment system, and (7) CBDC and financial stability and regulatory. The finding helps provide both overall and in-depth views of the current state of research in digital fiat currency topics, as well as drawing some important implications and suggestions on directions for the future research.     

Impact of exchange rate movements on exports: An analysis of Indian non-financial sector firms

We explore the real effective exchange rate (REER) effects on the share of exports of Indian non-financial sector firms for the period 2000–2010. Our empirical analysis reveals that, on average, there has been a strong and significant negative impact from currency appreciation and currency volatility on Indian firms' export shares. Labor costs are found to intensify the exchange rate effects on trade. Further, there is evidence that the Indian firms considered here respond asymmetrically to exchange rates. For instance, the REER change effect is more likely to be driven by a negative appreciation effect than a depreciation effect. Also, Indian firms that have smaller export shares tend to have a stronger response to both REER change and volatility. Compared with those exporting goods, firms that export services are more affected by exchange rate fluctuations. The findings, especially those on asymmetric responses, have important policy implications.     

The high-frequency response of exchange rates and interest rates to macroeconomic announcements

The joint movements of exchange rates and U.S. and foreign term structures over short-time windows around macro announcements are studied using a 14-year span of high-frequency data. In order to evaluate whether the joint effects can be reconciled with conventional theory, the implications of these joint movements for changes in expected future exchange rates and changes in foreign exchange risk premia are deduced. For several real macro announcements, a stronger than expected release appreciates the dollar today, and must either (i) lower the risk premium for holding foreign currency rather than dollars, or (ii) imply net expected dollar depreciation over the ensuing decade.     

Reinsurers' investment and underwriting portfolios and the exchange rates risk

Summary and concluding remarks The traditional analysis of the performance of large international reinsurers typically concentrates on the effect of exchange rates on profitability of the firm (NRG [9]). The multi-index model enables us to capture and analyze two additional effects: According to the Interest Rates Parity Theorem, the expected rates of return on foreign investments already reflect the expected change in the exchange rate. Therefore, a firm operating in a perfect market would be indifferent to the currency denomination of its financial assets. The firm should consider only the unexpected element in the exchange rate movements, i.e., the exchange risk. The uncertainty in the exchange rate contributes to the variability of the return on each investment and underwriting project. The firm must consider this new element of risk while constructing its investment and insurance portfolios. p ]The model can be used to examine and analyze alternative policies of the firm operating in international markets. For example, the model can be used to examine the “full hedge” policy, in which the insurer has a zero net position in any non-reference currency, or the policy of isolating national insurance markets.     

Effects of exchange rate variations on bilateral trade with a vehicle currency: Evidence from China and Singapore

Using a testable gravity-type bilateral trade model derived from an underlying demand and supply model, this paper explores the effects of exchange rate variations on bilateral trade in an exchange rate regime with a vehicle currency. The introduction of the vehicle currency allows us to figure out whether variations in the trade volume due to the fluctuation of the bilateral exchange rate are primarily due to changes in demand or in supply, or both. More specifically, in this theoretical framework, the appreciation of one country's currency against the vehicle currency is expected to promote its imports, but the effect of revaluation of the country's currency against the vehicle currency on its exports is ambiguous. Moreover, high volatility of the exchange rate of one country's currency against the vehicle currency is also expected to depress its import volume. From the empirical point of view, the decomposition of the bilateral exchange rate of two currencies into the bilateral rates of these two currencies against the vehicle currency provides a new alternative to avoid the econometric problem of potential reverse causality in assessing the effects. Through compiling a novel monthly bilateral-trade dataset between China and Singapore over 21 years or 252 months, we empirically test the predictions of our model, which get robust support from the results.     

Informative trading or just costly noise? An analysis of Central Bank interventions

We conduct an empirical investigation of the impact of Central Bank intervention on the process of price formation in foreign exchange markets. The main contributions of this paper are (i) in considering the effects of official interventions on multiple dimensions of such a process beyond the first and second moment of currency returns and (ii) in exploiting insights from the analysis of market liquidity in proximity of these trades to explain their effectiveness. For that purpose, we employ a unique dataset of tick-by-tick indicative quotes and intraday (informative) sterilized spot interventions and (uninformative) customer transactions executed by the Swiss National Bank (SNB) on the Swiss Franc/U.S. Dollar exchange rate (CHFUSD) between 1996 and 1998. Using several empirical strategies (some of which are novel to the exchange rate literature), we find that the effectiveness of these trades is crucially related to their perceived information content, rather than to imperfect substitutability or inventory considerations. Indeed, regardless of their size, only SNB interventions (especially when unexpected or leaning against the wind) have significant and persistent effects on daily CHFUSD returns, although they often fail to smooth currency fluctuations. Nonetheless, only SNB interventions, regardless of their effectiveness, induce significant misinformation and heterogeneity of beliefs among market participants and deteriorate market liquidity. These externalities always translate into higher, economically significant transaction costs borne by investors.     

Optimal exchange rate flexibility with large labor unions

We study the optimal volatility of the exchange rate in a two-country model with sectoral non-atomistic wage setters, non-traded goods, nominal rigidities and alternative pricing assumptions – producer or local currency pricing. Labor unions internalize the sectoral impact of their wage settlements through firms' labor demand. With local currency pricing, exchange rate depreciation raises sales revenue, which in turn boosts domestic consumption and labor demand. Unions anticipate this effect and set higher wages accordingly. With small unions and low wage markup, optimal monetary policy enhances exchange rate movements to improve its terms of trade. With large unions and high wage markup, optimal monetary policy curbs exchange rate movements to restrain inflationary wage demands and to stabilize employment.     

开放经济下的“双支柱”调控稳定效应研究

本文研究了管理浮动汇率制下我国货币政策和宏观审慎政策双支柱的调控稳定效应。首先,本文从实证层面考察了人民币汇率升贬值对央行货币政策的非对称影响。接着,本文构建了包含银行部门与货币错配的开放宏观经济模型,重点分析了在面对美联储加息、人民币贬值压力的情况下,货币政策(包括对汇率的反应)和宏观审慎政策(对外债的逆周期调节)的配合如何影响宏观经济和金融的稳定。结论表明,如果缺少宏观审慎政策的配合,货币政策对汇率的反应将导致产出、通货膨胀和资产价格等经济金融变量的波动增大。在存在宏观审慎政策的前提下,相对于完全浮动汇率制,管理浮动汇率制从中长期看能进一步促进产出和外债等核心变量的稳定。     

Interest rate and liquidity risk management and the European money supply process

The monetary setup of the European Central Bank (ECB) centers around short-term securities repurchase agreements (repos) which ensure the flexibility of its money market management. However, a flexible repo-based monetary policy exposes banks to both interest rate risk and liquidity risk. This paper investigates the consequences for the money supply process and the conduct of monetary policy. We develop a loan supply model with maturity transformation and show how banks respond when future monetary policy is expected to become tighter or more uncertain. Our results also shed light on the rationale behind the use of different pricing rules in the ECB's repo auctions.     

Exchange Rate Crises and Fiscal Solvency

This paper combines insights from generation one currency crisis models and the fiscal theory of the price level (FTPL) to create a dynamic FTPL model of currency crises. The initial fixed‐exchange‐rate policy entails risks due to an upper bound on government debt and stochastic surplus shocks. Agents refuse to lend into a position for which the value of debt exceeds the present value of expected future surpluses. Policy switching, usually combined with currency depreciation, restores fiscal solvency and lending. This model can explain a wide variety of crises, including those involving sovereign default. We illustrate by explaining the crisis in Argentina (2001).     

Political/Policy Uncertainty,Corporate Disclosure,and Information Asymmetry*

Political/policy uncertainty causes significant disruption to capital markets around the world. This review synthesizes recent studies on this topic and provides suggestions for future research in this fast-growing area. Specifically, this review focuses on three areas of research: (i) the measurement of political/policy uncertainty, (ii) the impact of political/policy uncertainty on financial analysts' forecasts, and (iii) the impact of political/policy uncertainty on corporate disclosure. We find that political/policy uncertainty affects both corporate disclosures and financial analysts' forecasts and that these effects interact with information asymmetry in capital markets. Furthermore, we find that companies strategically change their disclosure practices during periods of heightened political/policy uncertainty.     

De facto exchange rate regimes and currency crises: Are pegged regimes with capital account liberalization really more prone to speculative attacks?

This paper empirically examines whether de facto exchange rate regimes affect the occurrence of currency crises in 84 countries over the 1980–2001 period by using the probit model. We employ the de facto classification of Reinhart and Rogoff (2004) that allows us to estimate the impact of relatively long-lived exchange rate regimes on currency crises with much greater precision. We find that pegged regimes significantly decrease the likelihood of currency crises compared with floating regimes. By using the combined data of exchange rate regimes and the existence of capital controls, we also find interesting evidence that pegged regimes with capital account liberalization significantly lower the likelihood of currency crises compared with other regimes. These results are robust to a wide variety of samples and models. From the standpoint of the macroeconomic policy trilemma, we can conjecture that pegged regimes with capital account liberalization are substantially less prone to speculative attacks because they can enhance greater credibility in their currencies by abandoning monetary policy autonomy.     

Dollarization and currency exchange

We use a dual currency money search model to study dollarization. Agents hold portfolios consisting of two currencies, one of which is risky. We use numerical methods to solve for the steady-state distributions of currency portfolios, transaction patterns, and value functions. As risk increases, agents increasingly use the safe currency as a medium of exchange—dollarization occurs. Furthermore, the safe currency trades for multiple units of the risky currency. This type of currency exchange, and the corresponding nominal exchange rate, are often observed in black market or unofficial currency exchange markets in developing countries. Due to decentralized trading, a distribution of exchange rates arises, whose mean and variance change in predictable ways when currency risk increases.     

Firm-level effects of asymmetric intervention in foreign exchange markets: Evidence from the Swiss currency floor

In January 2015, the Swiss National Bank (SNB) abandoned the Swiss franc's exchange rate floor against the Euro. This paper is the first to study the firm-level effects of this asymmetric type of central bank intervention in foreign exchange markets. Using weekly stock returns for a sample of Swiss non-financial firms, I find significant reductions in total stock return volatility as well as market risk following the introduction of the currency floor. Accounting for the asymmetric nature of the intervention, I show that the enforcement of this policy solely manifests in a significant reduction of incremental EUR/CHF exchange rate risk exposures of exporting firms, while importing firms experience reductions in proportion to the market portfolio only. Thus, the asymmetric policy design is reflected in asymmetric responses of firm-level currency exposures. All effects, however, do not depend on the extent of business activity in the Eurozone. The overall results suggest that the currency floor was successful in supporting the performance of the Swiss economy by effectively reducing stock return sensitivities to market fluctuations and EUR/CHF exchange rate volatility.     

Dual foreign currency markets and the role of expectations: Evidence from the Pacific Basin countries

This paper analyzes the role of expectations about the government policy in the official foreign currency market in determining the black market premium. We use data for the recent float from six emerging markets of the Pacific Basin where active black markets for foreign currency exist, namely, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. To test the impact of anticipated and unanticipated shocks to the official exchange rate on the black market premium, we employ the two-step procedure of Hoffman et al. [Hoffman, D.L., Low, S.A., Schlagenhauf, D.E., 1984. Tests of rationality, neutrality and market efficiency: a Monte Carlo analysis of alternative test statistics. J. Monet. Econ. 14, 339–363] which provides corrected F-statistics and allows us to draw valid inference in the presence of generated regressors. The main finding of our analysis is that anticipated and unanticipated shocks to the official exchange rate have an impact on the black market premium in all six Pacific Basin countries. These results suggest that portfolio balance models provide the suitable theoretical framework for analyzing the behaviour of the black market premium in the markets for foreign currency in the Pacific Basin countries. Furthermore, this implies that economic agents in these countries are sensitive to expected returns in foreign exchange.     

Forecasting Emerging Market Exchange Rates from Foreign Equity Options

The use of derivatives to infer future exchange rates has long been a subject of interest in the international finance literature. With the recent currency crises in Mexico, Southeast Asia, and Brazil, work on exchange rate expectations in emerging markets is of particular interest. For some emerging markets, foreign equity options are the only liquid exchange‐traded derivatives with currency information embedded in their prices. Given that emerging markets sometimes undergo currency realignment with discrete jumps in their exchange rate, estimation of risk‐neutral probability density functions from foreign equity option data provides valuable evidence concerning market expectations. To illustrate the use of foreign equity options in estimating market beliefs, we consider Telmex options around the 1994 peso devaluation and find evidence that markets anticipated the change in the Mexican government's foreign exchange policy.