Asymmetric effects of exchange rate movements on traditional and modern services exports: Evidence from a large emerging economy

The service sector in India has emerged as the ‘new engine of growth’ with an increasing share in output and exports. In this paper we analyse the effect of real exchange rate movements on service exports of India, incorporating goods exports, financial development, FDI inflows, world demand and the role of globalization as drivers. We find that while traditional service exports are negatively and significantly affected by the real exchange rate movements, the modern service exports are negatively but not significantly affected. By applying the asymmetric cointegration approach, the results also confirm the non-existence of any asymmetric relationship between the real exchange rate and service exports in India. Further, the results also show that the supply augmenting and demand-side factors are more dominant than the exchange rate to affect service exports from India.     

Exchange rate volatility and Japan–U.S. commodity trade: An asymmetry analysis

Exchange rate volatility is said to affect trade flows in either direction. When increased volatility is separated from decreased volatility, asymmetric analysis reveals even more support for the fact that both increased volatility and decreased volatility affect trade flows in either direction. We add to this new literature by considering 57 industries that trade between Japan and the US. In addition to providing evidence of asymmetric response of their trade flows to a measure of exchange rate volatility, our approach identifies industries that could benefit from increased exchange rate volatility and those that could be hurt. Similarly, we identify industries that could benefit from decreased volatility and those that could be hurt. The overall conclusion is the adverse effects of dollar–yen volatility on the trade between the two countries.     

The asymmetric effects of exchange rate fluctuations on output and prices: Evidence from developing countries

This paper examines the asymmetric effects of exchange rate fluctuations on real output and price in developing countries. The theoretical model decomposes movements in the exchange rate into anticipated and unanticipated components. Unanticipated currency fluctuations determine aggregate demand through exports, imports and the demand for domestic currency, and determine aggregate supply through the cost of imported intermediate goods. The evidence indicates that the supply channel leads to output contraction and price inflation in the face of unanticipated currency depreciation. In contrast, the reduction in net exports determines output contraction without reducing price inflation in the face of unanticipated currency appreciation.     

Endogenous exchange rate pass-through when nominal prices are set in advance

This paper develops a model of endogenous exchange rate pass-through within an open economy macroeconomic framework, where both pass-through and the exchange rate are simultaneously determined, and interact with one another. Pass-through is endogenous because firms choose the currency in which they set their export prices. There is a unique equilibrium rate of pass-through under the condition that exchange rate volatility rises as the degree of pass-through falls. We show that the relationship between exchange rate volatility and economic structure may be substantially affected by the presence of endogenous pass-through. Our key results show that pass-through is related to the relative stability of monetary policy. Countries with relatively low volatility of money growth will have relatively low rates of exchange rate pass-through, while countries with relatively high volatility of money growth will have relatively high pass-through rates.     

Impact of commodity prices on exchange rates in commodity-exporting countries

This paper studies the link between real exchange rates and commodity prices, over the period 1993M1–2018M12, for commodity-exporting countries by analysing countries individually and considering the possibility of structural breaks. Our results suggest that: (a) the movements in the price of the main commodity (i.e., the one whose share is at least 20% of total commodity export) affect significantly to the real exchange rate; (b) the sign of the effect of commodity prices on real exchange rate is not clearly positive (as was found by earlier analyses using panel data), but it depends on the country considered; and (c) the negative effects of the possession of natural resources observed in the past decades seem not to be now overwhelming.     

Stock exchange markets for new ventures

In Canada, a venture stock market lists microcap firms at a pre-revenue stage, and competes with both formal and informal venture capital (VC). This market provides a higher rate of return and seven times as many new listings to the main exchange as traditional VC. After they graduate to the main market, new listings on the main exchange succeed even if they are not venture-backed. Our results contradict the premise that because it lacks skills, tools and value-added capabilities, a public venture market is unable to compete with a private one.     

Modelling the asymmetric responses of price level to oil price changes in Qatar

This paper inspects the asymmetric effect of oil price on prices level in Qatar. To achieve that, we proceed by employing a nonlinear autoregressive distributed lag (ARDL) approach on data during the period 1990Q1–2014Q4. The estimation results show evidences of an incomplete and asymmetric influence of oil price on price level in the long term. Moreover, we find that price responses to negative changes in oil price is greater than its response to positive changes. Given Qatar’s economic features, a decrease in oil price could cause lower imports and production prices and consequently a substantial influence on domestic prices level. However, the lower effect of positive oil price changes on consumer prices can be explained by the subsidies system, the consumption patterns, and the exchange rate regime.     

Crude oil prices and the balance of trade: Asymmetric evidence from selected OPEC member countries

The contribution of this article is to assess whether the effects of crude oil price fluctuations on the trade balance are symmetric or asymmetric in the context of an individual oil-exporting country, specifically four OPEC member countries – Iran, Nigeria, Saudi Arabia, and Venezuela. To examine this subject thoroughly, we use three different measures of trade balances such as oil trade balance, non-oil trade balance, and total trade balance, and examine whether oil prices are asymmetrically passed on to the trade balances for those OPEC countries in the long- and short-run. After implementation of the nonlinear autoregressive distributed lag (ARDL) model, we find that changes in oil prices indeed have asymmetric effects on the oil trade balance for all four OPEC countries in the long-run, though not in the short-run. In the case of the non-oil and total trade balance, however, the asymmetry of oil price changes is not detected in both the long- and short-run.     

Into the Mussa puzzle: monetary policy regimes and the real exchange rate in a small open economy

Industrial countries moving from fixed to floating exchange rate regimes experience dramatic rises in the variability of the real exchange rate. This evidence, forcefully documented by Mussa [Nominal exchange regimes and the behavior of real exchange rates: evidence and implications. Carnegie-Rochester Conference Series on Public Policy 25 (1986) 117], is a puzzle because it is hard to reconcile with the assumption of flexible prices. This paper lays out a dynamic general equilibrium model of a small open economy that combines nominal price rigidity with a systematic behavior of monetary policy able to approximate a continuum of exchange rate regimes. A version of the model with complete exchange rate pass-through is broadly consistent with Mussa’s findings. Most importantly, this holds independently of the underlying source of fluctuations in the economy, stressing the role of the nominal exchange rate regime per se in affecting the variability of the real exchange rate. However, only a model featuring incomplete exchange rate pass-through can account for a broader range of exchange rate statistics. Finally there exist ranges of values for either the degree of openness or the elasticity of substitution between domestic and foreign goods for which the baseline model is also consistent with the empirical insensitivity of output volatility to the type of exchange rate regime, as documented by Baxter and Stockman [Journal of Monetary Economics 23 (1989) 377].     

J-curve in Turkish bilateral trade: A nonlinear approach

ABSTRACT

This study aims to bring further evidence on recent developments of the J-curve literature by employing linear and nonlinear autoregressive distributed lag (ARDL) approaches for Turkish bilateral trade data with respect to 18 European Union member countries over the period from 1990Q1 to 2017Q3. Findings obtained from the nonlinear ARDL model yield more support for the J-curve phenomenon compared to the linear model. This result provides evidence of an asymmetrical impact of appreciations and depreciations on the Turkish bilateral trade balances and suggests that allowing for nonlinearity in the adjustment process gives better results in terms of the J-curve effect.     

Asymmetric response of the US–India trade balance to exchange rate changes: Evidence from 68 industries

The relationship between the trade balance and the exchange rate continues to attract attention by international economists and has entered into new territory, mostly due to advances in econometric methods. The introduction of asymmetric error‐correction modelling and asymmetric cointegration using the nonlinear ARDL approach of Shin et al. (Festschrift in Honor of Peter Schmidt: Econometric methods and applications, Springer, 2014, 281) as compared to the symmetric and linear ARDL approach of Pesaran et al. (Journal of Applied Econometrics, 2001, 16, 289) has led us in a new direction to discover relatively better results. We apply these methods to the bilateral trade balance model of each of the 68 industries that trade between India and the USA. The nonlinear approach not only provides more support to the J‐curve effect, but also yields support in favour of short‐run and long‐run asymmetric effects of exchange rate changes in most of the industries.     

Foreign exchange rate and trade balance dynamics in East African countries

This study investigates the effects of real exchange rate on trade balance in East African countries. In contrast to past studies that have often focused on one country in the region and adopted traditional empirical methods that are subject to shortcomings, the present study employed the ARDL procedure and investigated the issue in 10 East African countries. The main results are as follows. First, real exchange depreciation significantly improves trade balance for four countries in individual country estimations, as well as in panel estimation. Second, the elasticity of trade balance with respect to real exchange rate is inelastic. Elasticity slightly increases after exchange rate liberalization but remains inelastic. Third, significant short-run fall was not found for trade balance, which suggests lack of evidence for J-curve relationship     

Order flow and exchange rate dynamics in electronic brokerage system data

We analyze the association between order flow and exchange rates using a new dataset representing a majority of global interdealer transactions in the two most-traded currency pairs at the one minute frequency over a six-year time period. This long span of high-frequency data allows us to gain new insights about the joint behavior of these series. We first confirm the presence of a substantial association between interdealer order flow and exchange rate returns at horizons ranging from 1 min to two weeks, but find that the association is substantially weaker at longer horizons. We study the time-variation of the association between exchange rate returns and order flow both intradaily and over the long term, and show that the relationship appears to be stronger when market liquidity is lower. Overall, our study supports the view that liquidity effects play an important role in the relationship between order flow and exchange rate changes. This by no means rules out a role for order flow as a channel by which fundamental information is transmitted to the market, as we show that our findings are quite consistent with a recent model by Bacchetta and Van Wincoop (2006: Can information heterogeneity explain the exchange rate determination puzzle? American Economic Review, 96, pp. 552–576.) that combines both liquidity and information effects.     

Investigating first‐stage exchange rate pass‐through: Sectoral and macro evidence from euro area countries

In this paper, we evaluate the first‐stage pass‐through, namely the responsiveness of import prices to the exchange rate changes, for a sample of euro area (EA) countries. Our study aimed to shed further light on the role of microeconomic factors versus macroeconomic factors in influencing the extent of the exchange rate pass‐through (ERPT). As a first step, we conduct a sectoral analysis using disaggregated import prices data. We find a much higher degree of pass‐through for more homogeneous goods and commodities, such as oil and raw materials, than for highly differentiated manufactured products, such as machinery and transport equipment. Our results confirm that cross‐country differences in pass‐through rates may be due to divergences in the product composition of imports. The higher share of imports from sectors with lower degrees of pass‐through, the lower ERPT for an economy will be. In a next step, we investigate for the impact of some macroeconomics factors or common events experienced by EA members on the extent of pass‐through. Using the system generalised method of moments within a dynamic panel‐data model, our estimates indicate that decline of import‐price sensitivity to the exchange rate is not significant since the introduction of the single currency. Our findings suggest instead that the weakness of the euro during the first 3 years of the monetary union significantly raised the extent of the ERPT. This outcome could explain why the sensitivity of import prices has not fallen since 1999. We also point out a significant role played by the inflation in the Eurozone, as the responsiveness of import prices to exchange rate fluctuations tends to decline in a low and more stable inflation environment. Overall, our findings support the view that the extent of pass‐through is comprised of both macro‐ and microeconomic aspects that policymakers should take into account.     

Lending booms, sharp reversals and real exchange rate dynamics

Emerging markets in the 1990s experienced periods of booms followed by collapses in gross domestic product, consumption, traded and non-traded sector output and real exchange rate movements alongside unprecedented movements in foreign investor participation in these economies. An important feature of these episodes is the asymmetry in the pattern of booms and collapses. We introduce a natural search friction into the foreign investment decision in a small open economy and demonstrate that this can generate the asymmetry observed in the data. The magnitude of the reversals predicted by the model can be quantitatively large and empirically relevant.     

Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy

This paper develops a two-sector model in which intersectoral capital movements involve adjustment costs, expressed as capital lost in the transformation process. These costs have important consequences for the dynamics of capital accumulation and particularly for real exchange rate dynamics. Persistent deviations of the real exchange rate from its equilibrium are derived and for plausible values of the adjustment cost parameters are consistent with the observed degree of real exchange rate persistence. For low adjustment costs the dynamics are qualitatively similar to those of the standard Heckscher-Ohlin technology. For high adjustment costs, the model converges to the specific-factors model. Thus our framework includes these two standard models as polar extremes.     

Explaining the exchange rate pass-through in different prices

This paper examines the performance of a variety of new open economy macroeconomic models in explaining the exchange rate pass-through in a wide range of prices. Quantitative versions of different models are used to derive the dynamic response of various prices to an exchange rate shock. Predicted responses are compared with the evidence based on VAR models to examine how well different models fit the data. The results show that the best-fitting model incorporates a number of features highlighted by different strands of the literature: sticky prices, sticky wages, distribution costs and a combination of local (LCP) and producer currency pricing (PCP).     

The dynamics of exchange rate regimes: Fixes, floats, and flips

The impermanence of fixed exchange rates has become a stylized fact in international finance. The combination of the “mirage” view that pegs do not really peg with the “fear of floating” view that floats do not really float generates the conclusion that exchange rate regimes are, in practice, unimportant for the behavior of the exchange rate. This is consistent with evidence on the irrelevance of exchange rate regimes for general macroeconomic performance. Recent studies, however, show that the exchange rate regime matters. This can be understood by considering the dynamics of exchange rate regimes. We demonstrate that the “mirage” view is somewhat misleading and incomplete. Pegs frequently break, but many do last. Also, there is a high degree of flipping, that is, the re-formation of pegs that have broken. Thus, a fixed exchange rate today is a good predictor that one will exist in the future. We also investigate the quantitative effect of fixed exchange rates. While the “fear of floating” view suggests little actual difference in fixed and floating rates with respect to exchange rate volatility, we show that fixed exchange rates exhibit considerably greater bilateral exchange rate stability than flexible rates, both today and in the future.     

International financial integration and real exchange rate long-run dynamics in emerging countries: Some panel evidence

The aim of this article is to provide new empirical evidence on the impact of international financial integration on the long-run Real Exchange Rate (RER) in 39 developing countries belonging to three different geographical regions (Latin America, Asia and MENA). It covers the period 1979–2004, and carries out ‘second-generation’ tests for non-stationary panels. Several factors, including international financial integration, are shown to drive the long-run RER in emerging countries. It is found that the new financial environment characterised by international financial integration leads to a depreciation of the RER in the long run. Further, RER misalignments take the form of an under-valuation in most MENA countries and an over-valuation in most Latin American and Asian countries.     

Banking crises and exchange rate regimes: is there a link?

This paper investigates the linkages between banking crises and exchange rate regimes, using a comprehensive cross-country dataset for the last two decades. The paper examines whether the choice of exchange rate regime affects the likelihood, cost, and duration of banking crises. Empirical results seem to indicate that adopting a fixed exchange rate diminishes the likelihood of banking crises among developing countries. However, once crises occur, the real costs associated with them appear to be larger in countries with fixed exchange rates. The duration of crises does not seem to be robustly affected by the exchange rate policy.