Malaysia-EU trade at the industry level: Is there an asymmetric response to exchange rate volatility?

Aftab et al. (Empirica 43:461–485, 2016) in this journal assessed the impact of exchange rate volatility on Malaysia-EU trade at commodity level using the linear ARDL approach of Pesaran et al. (J Appl Econom 16:289–326, 2001) and did not find significant effects in most of the 81 Malaysian exporting and 66 importing industries. In this paper, we argue for asymmetric effects of exchange rate volatility on the same industries’ trades which implies using Shin et al.’s (Festschrift in Honor of Peter Schmidt, Springer, New York, 2014) nonlinear ARDL approach. While we find short-run asymmetric effects of volatility in almost all industries, we find evidence of adjustment asymmetry in 17 exporting and nine importing industries. We also find significant impact or short-run cumulative asymmetry in 12 exporting and six importing industries. The most important finding is significant long-run asymmetric effects in 36 Malaysian exporting industries and 25 Malaysian importing industries. Clearly, trade flows react to an increased exchange rate volatility differently than to a decreased volatility.     

US–Indonesia trade at commodity level and the role of the exchange rate

Previous studies that assessed the impact of currency depreciation on inpayments and outpayments of Indonesia with her major trading partners did not find much significant results, especially in the trade with the United States. We wonder whether insignificant link between the real rupiah-dollar rate and Indonesia’s inpayments and outpayments with the United States is due to aggregation bias. To answer this question, we disaggregate the trade flows between the two countries by commodity and consider the sensitivity of inpayments of 108 US exporting industries and outpayments of 32 US importing industries from Indonesia. We find that most industries respond to exchange rate changes in the short run. In the long run, however, 32 inpayments schedule and 17 outpayments schedule are significantly affected. A 1% real depreciation of the dollar was found to improve US trade balance by 1.8%.     

Does black market exchange rate volatility deter the trade flows? Iranian experience

Previous studies that investigated the impact of exchange rate volatility on the trade flows, employed official exchange rate data to construct a measure of exchange rate uncertainty. In this paper we show that in countries that there is a black market for foreign exchange, the black market exchange rate volatility could have adverse effect on the trade flows. We show this by using data from Iran and cointegration analysis.     

Government expenditure,real exchange rate and the ‘decline’ of the manufacturing sector: Some empirical evidence

I show that the increase in government expenditure in European countries during the 1970s raise the relative price of non-traded goods. This relative price movement may explain why the share of manufacturing in private sector value added declined in those countries.     

What do we know about real exchange rate nonlinearities?

Nonlinear modeling of adjustments to purchasing power parity has recently gained much attention. However, a huge body of the empirical literature applies ESTAR models and neglects the existence of other competing nonlinear models. Among these, the Markov Switching AR model has a strong substantiation in international finance. Our contribution to the literature is fivefold: First, ESTAR and MSAR models from a unit root perspective are compared. To this end, a new unit root test against MSAR is proposed as the second contribution. Thirdly, the case of misspecified alternatives in a Monte Carlo setup with real world parameter constellations is studied. The ESTAR unit root test is not indicative, while the MSAR unit test is robust. Fourthly, the case of correctly specified alternatives is considered and low power of the ESTAR but not for the MSAR unit root test is observed. Fifthly, an empirical application to real exchange rates suggests that they may indeed be explained by Markov Switching dynamics rather than ESTAR.     

Do commercial real estate prices have predictive content for GDP?

Using a uniquely compiled database concerning rental prices of commercial real estates, which are property of the largest broker in the Netherlands, we examine whether these prices have predictive value for quarterly economic growth. In contrast to related studies, we document that the mean price contains no relevant information, whereas other properties of the price distributions have. We show that these distributions can be described by mixtures of two distributions, reflecting low-end and high-end price segments. Our main findings are that higher economic growth is predictable from more new buildings being rented, more variation in the price levels and a larger size of the low-price segment, while lower economic growth emerges when the differences in prices between high-end and low-end segments increase and when the average price level in the low-price segment increases.     

Investment and the real exchange rate’s profitability channel in Mexico

The paper estimates different versions of an equation for private investment in Mexico during the post-liberalization period 1988–2013, with the aim of studying the operation of the recently discussed real exchange rate’s profitability channel. During this period, the real exchange rate (RER) was broadly positively correlated with the Mexican price/wage ratio and the Mexican/US relative profit margin in the manufacturing sector, particularly so when the RER experienced large fluctuations, before the end of disinflation in the early 2000s. In the estimations, the effect of the profit margin appears to be ‘deeper’, wiping out the effect of the RER when the two variables are included together in the investment equation. From this, the paper argues that the positive effect of the RER on investment, observed in previous studies that omitted the profit margin, reflects indirectly the positive link of the RER with the profit margin, supporting the existence of a profitability channel in Mexico.     

“New” monetary policy instruments and exchange rate volatility

Turkish economy has been suffering from rises in financial flows since the last two decades that these flows have raised financial stability challenges across emerging economies including Turkey. Regarding the ability of the central banks to decrease the financial risks including volatile exchange rate, the Central Bank of the Republic of Turkey has designed and implemented a new policy mix. In this study, we investigated the effect of new policy instruments (IRC, RRR and ROM) on the volatilities of US dollar, euro, British pound and basket rate for Turkish economy between January 2, 2002 and December 9, 2014 by using ARMA-GARCH, ARMA-EGARCH and SWARCH models. From the estimation results, we could not reach enough evidence that the IRC and RRR instruments could decrease the volatilities of exchange rates under investigation while the ROM instrument was successful, especially on US dollar and basket rate. We also found strong evidence in favour of asymmetric volatility, indicating that the positive shocks led to greater exchange rate volatility than negative ones.     

Non‐linear effect of exchange rate volatility on exports: the role of financial sector development in emerging East Asian economies

This paper empirically examines the role of financial sector development in influencing the impact of exchange rate volatility on the exports of five emerging East Asian countries – China, Indonesia, Malaysia, the Philippines and Thailand – using a GMM‐IV estimation method. The results indicate that the effect of exchange rate volatility on exports is conditional on the level of financial sector development. The less financially developed an economy, the more its exports are adversely affected by exchange rate volatility. In addition, a stable exchange rate seems to be a necessary condition to achieve export promotion via a currency depreciation in these economies.     

The real exchange rate in Brazil Mean reversion or random walk in the long run?

This paper studies the behavior of the real exchange rate in Brazil over the longest possible period for which data are available: 1855–1990. Does the real exchange rate follow a random walk or does it revert to its mean, possibly nonstationary, level? The evidence is mixed. Formal tests can not reject the hypothesis of nonstationary behavior, although the judgement is borderline. However, time-series identification favors a stationary interpretation, and simple autoregressive processes for the real exchange rate yield extremely robust and satisfactory estimates.     

The real exchange rate and economic growth: are developing countries different?

Recent research has found a positive relationship between real exchange rate (RER) undervaluation and economic growth. Different rationales for this association have been offered, but they all imply that the mechanisms involved should be stronger in developing countries. Rodrik (2008 Rodrik, D. 2008. The real exchange rate and economic growth. Brookings Papers on Economic Activity, 2: 365–412.  [Google Scholar]) explicitly analyzed and found evidence that the RER–growth relationship is more prevalent in developing countries. We show that his finding is sensitive to the criterion used to divide the sample between developed and developing countries. Using alternative classification criteria and empirical strategies to evaluate the existence of asymmetries between groups of countries, we find that the effect of currency undervaluation on growth is indeed larger and more robust for developing economies. However, the relationship between RER undervaluation and per capita GDP is non-monotonic, and is limited largely to the least developed and richest countries. This discontinuity constitutes a puzzle that calls for closer analysis.     

How frequent a BEER? Assessing the impact of data frequency on real exchange rate misalignment estimation

This article explores the robustness of Behavioural Equilibrium Exchange Rate models, employed to estimate real effective exchange rate misalignments, to the frequency of the underlying data. It compares misalignments stemming from an annual model, estimated since 1980, and a comparable quarterly model, estimated since 1999. The two sets of estimates are similar. Moreover, the in-sample power of quarterly REER misalignments in explaining subsequent REER developments is higher than that of the annual estimates. This article therefore suggests that the “optimal” frequency of a BEER model depends on whether its resulting estimates are employed for research purposes or for policy-making activities.     

Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective

To estimate how monetary policy works in small open economies, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of small open economies (including Australia, Chile, Colombia, Peru, and New Zealand) is rather similar to that observed in closed economies. Our results also indicate, however, that there are strong differences due to the shocks from the international financial markets (mainly risk premium shocks). These differences explain most of the variability of the real exchange rate, which has important reallocation effects in the short run. Our results are consistent with an old idea from the Mundell–Fleming model: namely, a real depreciation to confront a risk premium shock is expansive or procyclical, in contradiction to the predictions of the balance sheet effect, the J curve effect, and the introduction of working capital into RBC models. In line with this last result, we have strong evidence that only in one of the five countries analyzed in this study does not intervene the real exchange rate, the case of New Zealand.     

Do transport costs have a differential effect on trade at the sectoral level?

This article aims to analyse the determinants of transport costs and to investigate their influence in international trade with a sample of disaggregate trade data. First, we estimate a transport-cost function using cross-section data on maritime and overland transport for four sectors: agro-industry, ceramic tiles, motor vehicle parts and accessories, and electrical and mechanical household appliances, obtained from interviews held with Spanish exporters and logistics operators in 2001. Second, we study the relationship between transport costs and trade and estimate the elasticity of trade with respect to transport costs for each sector. Important differences for high value- and low value-added sectors are observed. The trade-equation estimation shows that higher transport costs significantly deter trade, especially in high value-added sectors.     

Growth under exchange rate volatility: Does access to foreign or domestic equity markets matter?

Employing a firm-level dataset, this paper explores the effects of exchange rate volatility on the growth performances of domestic versus foreign, and publicly traded versus non-traded private manufacturing firms in a major developing country, Turkey. The empirical results using dynamic panel data estimation techniques and comprehensive robustness tests suggest that exchange rate volatility has a significant growth reducing effect on manufacturing firms. However, having access to foreign, and to a lesser degree, domestic equity markets is found to reduce these negative effects at significant levels. These findings continue to hold after controlling for firm heterogeneity due to differences in export orientation, external indebtedness, profitability, productivity, size, industrial characteristics, and time-variant institutional changes.     

Do exchange rate changes have symmetric or asymmetric effects on the demand for money in Turkey?

As a result of the research conducted by Nobel Laureate Robert Mundell (1963), most studies estimating the demand for money today do include the exchange rate in their specification to account for currency substitution. Previous studies that did this for the Turkish demand for money assumed that exchange rate changes do have symmetric effects on the demand for money in Turkey. In this article, we question this assumption. By using the nonlinear ARDL approach, we show that indeed exchange rate changes do have short-run and long-run asymmetric effects on the M1 demand for money. Introducing nonlinearity also yields a stable money demand.     

Are exchange rate changes normally distributed?

Although assumed to be normal, daily returns in reality are leptokurtic. Monthly returns, however, are shown to be more normally distributed. Evidence was found of dependence on consecutive daily price changes, which may be an explanation for the leptokurtosis.     

Exchange rate pass-through in the Asian countries: does inflation volatility matter?

This paper presents a nonlinear relationship between exchange rate pass-through (ERPT) and inflation volatility. Through the lens of a threshold framework, we uncover a clear evidence of near to one ERPT to consumer prices once inflation volatility crosses a threshold level of 4.17. Clearly, there are significant differences in the degree of ERPT between the high and low inflation volatility in the inflation targeting (IT) and non-IT Asian countries.