Macroeconomic Variables and Stock Prices in Malaysia: An Empirical Analysis

The article investigates the dynamic interactions between seven macroeconomic variables and the stock prices for an emerging market, Malaysia, using cointegration and Granger causality tests. The results strongly suggest informational inefficiency in the Malaysian market. The bivariate analysis suggests cointegration between the stock prices and three macroeconomic variables – consumer prices, credit aggregates and official reserves. From bivariate error-correction models, we note the reactions of the stock prices to deviations from the long run equilibrium. These results are further strengthened when we extend the analysis to multivariate settings. We also note some evidence that the stock prices are Granger-caused by changes in the official reserves and exchange rates in the short run.     

Intraregional Cross-holding of Reserve Currencies： A Proposal for Asia to Deal with the Global Reserve Risks

Economists have put forward various proposals to deal with the growing risks of the global reserve currency system. In this paper we recommend that Asian economies hold each other＇s currencies as part of their foreign reserves. Different from crisis-fighting currency swap arrangements or crisis-rescuing fund mechanisms, this mechanism means that reserves wouM be held, with a regular arrangement in place and on an ongoing basis. We propose that the global reserve system shouM be pushed in the direction of diversification, which could be a transitional step toward a new single reserve system. This mechanism would not necessitate any currency being a globally accepted reserve currency but would mean that every currency carried some weight in the reserve system. Establishment of such a system would require significant development of regional bond markets and facilitation of macroeconomic surveillance among the economies.     

我国外汇储备规模、需求及其动态调整

文章分析了能较好解释我国外汇储备规模变动的主要影响变量；在此基础上利用动态调整模型确定我国的外汇储备需求方程，并依此来判断我国所持有的外汇储备是否充足，或是超量。结果表明：1996年以来，我国大部分年份的外汇储备供过于求，但外汇储备实际持有量与需求量之间的缺口有63％的部分在年度内得到了调整。     

Exchange Rate Regime and Demand for Reserves: Evidence from Kenya,Mexico and Philippines

This paper empirically investigates the demand for international reserves (and foreign exchange reserves) during fixed and floating exchange rates periods in three developing countries: Kenya, Mexico and Philippines. Based on theoretical models, three factors are identified as important for the demand of international reserves and foreign reserves: average propensity to import, volume of imports and variability of reserves. The paper employs the cointegration methodology and error correction method to investigate the relationships. Cointegration tests results indicate a reliable long-run stationary relationship between the international reserves (and foreign exchange reserves) and the stated explanatory variables across countries and sub-periods of fixed and clean float. The error correction results indicate causality from the explanatory variables to the reserves during both the short and long run. This is true during both the fixed and the floating periods.

Bank loans and the effects of monetary policy in China: VAR/VECM approach

In this paper, we test the differential effects of monetary policy shock on aspects of banks' balance sheets (deposits, loans, and securities) across bank categories (aggregate banks, state banks, and non-state banks) as well as on macroeconomic variables (output, consumer price index, exports, imports, and foreign exchange reserves). We do so by estimating VAR/VEC Models to uncover the transmission mechanisms of China's monetary policy. Also we identify the cointegrating vectors to establish the long-run relationship between these variables. By using monthly aggregate bank data and disaggregated data on bank and loan types from 1996 to 2006, our study suggests the existence of a bank lending channel, an interest rate channel and an asset price channel. Furthermore, we discuss and explore the distribution and growth effects of China's monetary policy on China's real economy. In addition, we investigate the effects of China's monetary policy on China's international trade. Finally, we identify the cointegrating vectors among these variables and set up VEC Models to uncover the long-run relationships that connect the indicators of monetary policy, bank balance sheet variables and the macroeconomic variables in China.     

Optimum Currency Areas in Emerging Market Regions: Evidence Based on the Symmetry of Economic Shocks

This paper examines which emerging market regions form optimum currency areas (OCAs) by assessing the symmetry of macroeconomic shocks. We extend the output-prices-VAR framework by adding net exports and the real effective exchange rate as endogenous variables. Based on theoretical considerations, we derive which shocks affect these variables in the long run: shocks to labor productivity, foreign trade, labor supply, and money supply. The considered economies of Central and Eastern Europe, the Commonwealth of Independent States, East and Southeast Asia, and South Asia, exhibit large enough shock symmetry to form a currency union; the economies of Africa, Latin America, and the Middle East do not.     

Rethinking Fast Growth in China＇s Foreign Exchange Reserves

I. Introduction Since 2000, China’s foreign exchange reserves have been growing fast. By the end of 2001, China’s foreign exchange reserves had exceeded US$200bn and by the end of 2002 had reached US$286.4bn. By the end of 2003, it had reached US$403.3bn and in 2004 it reached US$609.9bn. In 1999, China’s foreign exchange reserves accounted for 15.6 percent of its GDP. The ratio has been growing continually and was 36.88 percent of GDP by 2004 (see Table 1), making China the second…     

Revisiting the Exchange Rate Pass‐Through to Inflation in Africa’s Two Largest Economies: Nigeria and South Africa

This paper revisits the exchange rate pass‐through (ERPT) to inflation in Nigeria and South Africa by incorporating structural breaks and using time series variables, namely the consumer price index, nominal effective exchange rate, gross domestic product, and crude oil price. Based on the Maki cointegration test and a flexible estimation approach of the Autoregressive Distributed Lag (ARDL) model, our empirical evidence suggests that the long‐ and short‐run ERPT to inflation is complete for Nigeria, while for South Africa it is incomplete both in the long run and short run. This result indicates that prices are stickier in South Africa compared to Nigeria. The comparison between Nigeria and South Africa confirms the role of inflation targeting and central bank credibility on the ERPT. The results divulge further that output growth in Nigeria increases inflation in the long run while it is anti‐inflationary in the short run. For South Africa, the effect of output growth is negatively insignificant. In addition, the long‐run effect of oil price is negative and significant for Nigeria, while for South Africa the short‐run effect of oil price is positive and significant. Therefore, the findings of this paper will assist the monetary authorities to achieve monetary policy objectives.     

China's economic development: does exchange rate and FDI nexus matter?

This study aims to investigate the relationship between China's exchange rate, foreign direct investment (FDI) inflows, and economic development. We applied the bound testing approach on aggregate level data from 1981 to 2013. The results showed that the Chinese economy benefitted from a lower exchange rate over this period, and that there was a direct link between FDI inflows and economic development on an aggregate level both in the long and short run. The results of the Granger causality test identified a long‐ and short‐run association among these variables. The GMM estimations with dummies for financial crises and RMB exchange rate policy fluctuations also confirmed the growth enhancing impact of the exchange rate and FDI inflows. To promote sustainable economic development in the future, China should focus on improving the levels of domestic investment and human capital, as well as supervising the level of openness and capital controls.     

Assessing Vulnerability to Financial Crisis: Evidence from Indonesia

This paper examines the view that the recent Indonesian crisis was largely unforeseen. The broadest macroeconomic indicators were of virtually no help in presaging the crisis; neither were high-frequency financial indicators. But warnings were there, just below the surface, in some of the macro indicators and in certain structural weaknesses that were long recognised as threats to financial stability. That said, none of these warnings suggested crisis of the magnitude that eventually occurred. The Indonesian experience indicates that macroeconomic stability should never be taken for granted. Signs of vulnerability to financial instability include: the degree of reliance on gross private capital inflows (taking into account maturities and the implications for rollovers); the extent of unhedged foreign exchange positions; and certain indirect indicators, such as policy slippages and key personnel changes. Finally, in a world of volatile capital flows, crisis will tend to occur before standard economic data suggest that crisis is imminent.     

What Prompts the People＇s Bank of China to Change Its Monetary Policy Stance？ Evidence from a Discrete Choice Model

In the present paper, we model the policy stance of the People＇s Bank of China （PBC） as a latent variable, and the discrete changes in the reserve requirement ratio, policy interest rates, and the scale of open market operations are taken as signals of movement of this latent variable. We run a discrete choice regression that relates these observed indicators of policy stance to major trends of macroeconomic and financial developments, which are represented by common factors extracted from a large number of variables. The predicted value of the estimated model can then be interpreted as the implicit policy stance of the PBC. In a second step, we estimate how much of the variation in the PBC＇ s implicit stance can be explained by measures of its policy objectives on inflation, growth and financial stability. We find that deviations of CPI inflation from an implicit target and deviations of broad money growth from the announced targets, but not output gaps, figure significantly in the PBC＇s policy changes.     

外汇储备增长对我国物价影响的实证分析

2007年以来,我国物价水平出现持续攀升的势头。2008年1～4月份,居民消费价格水平同比上涨8.2%。与物价上涨相对应的是我国外汇储备水平创出了历史新高,截至2008年6月末,我国外汇储备余额达1.8万亿美元。那么,外汇储备增长与物价上涨之间有没有直接的联系?本文从短期和长期两个视角,理论和实证相结合探讨了我国外汇储备增长对物价上涨的影响及其作用机制。     

Navigating the trilemma: Capital flows and monetary policy in China

In recent years China has faced an increasing trilemma—how to pursue an independent domestic monetary policy and limit exchange rate flexibility, while at the same time facing large and growing international capital flows. This paper analyzes the impact of the trilemma on China's monetary policy as the country liberalizes its good and financial markets and integrates with the world economy. It shows how China has sought to insulate its reserve money from the effects of balance of payments inflows by sterilizing through the issuance of central bank liabilities. However, we report empirical results indicating that sterilization dropped precipitously in 2006 in the face of the ongoing massive buildup of international reserves, leading to a surge in reserve money growth.We also estimate a vector error correction model linking the surge in China's reserve money to broad money, real GDP, and the price level. We use this model to explore the inflationary implications of different policy scenarios. Under a scenario of continued rapid reserve money growth (consistent with limited sterilization of foreign exchange reserve accumulation) and strong economic growth, the model predicts a rapid increase in inflation. A model simulation using an extension of the framework that incorporates recent increases in bank reserve requirements also implies a rapid rise in inflation. By contrast, model simulations incorporating a sharp slowdown in economic growth such as that seen in late 2008 and 2009 lead to less inflation pressure even with a substantial buildup in international reserves.     

FDI对我国外汇储备增长的实证分析——基于1986～2009年度数据的计量检验

本文基于前人研究,采用1986～2009年年度数据,实证研究了FDI对我国外汇储备增长的影响。结果表明,FDI是促进我国外汇储备增长的长期且十分重要的因素,这意味着我们应通过合理的外资政策引导FDI的流入,改善FDI的长期负面影响,以调和巨额外汇储备带来的不同效应。     

Was the Asian crisis a wake-up call?: Foreign reserves as self-protection

Digging deeper into the self-protection rationale for holding reserves, this paper examines the empirical link between reserve holding patterns and crisis vulnerability, comparing the pre- and post-Asian crisis periods, and across different groups of developing countries. Analyzing data for 51 developing countries during the period 1982–2004, this paper finds evidence that the elasticity of developing country reserves with respect to certain crisis vulnerability indicators like foreign debt service and total external liabilities seems to be higher in the post-Asian crisis period, suggesting that policymakers’ precautionary responsiveness by holding more reserves has increased. Grouping countries according to their type of vulnerability (commodity, debt or sudden stop related), countries prone to sudden stops in capital inflows also seem to have adjusted their policies the most towards higher precautionary reserve holding. Furthermore, from the point of view of self-protection, China's reserve holding patterns appear consistent with what developing countries more generally seem to be undertaking.     

关键货币境外余额的国际政治经济学——美国的境外美元管理及其对中国的影响

关键货币境外余额是重要的国际经济变量,它不仅会影响关键货币的国际地位和全球金融市场稳定,也关系到境外关键货币持有国的经济稳定和储备资产安全。关键货币国通过经济、外交甚至军事手段对境外货币余额的规模、资产配置、地区分布以及持有者结构实施管理,以便实现对外融资、获取经济安全和榨取财富等多重目标。在金融危机背景下,基于经济安全、国际博弈和对外融资的目的,美国大致会阶段性地吸引美元回流并调控其在国外的分布,但美元霸权地位和美国国内的两党政治体制将使其境外美元余额的规模在长期内进一步扩张,因此人民币近期仍面临升值压力,欧洲和新兴市场国家金融动荡将会持续甚至加剧。随着中国国内资产价格的下跌,美元的升值和回流在中期时段内可能会冲击中国宏观经济稳定;如果美国不能控制其财政赤字,中国将长期面临美债和美元违约的巨大风险。中国需要降低宏观脆弱性,加速调整经济发展模式,从根本上摆脱美元陷阱。     

China＇s Rapid Accumulation of Foreign Exchange Reserves and Its Policy Implications

In late February 2006, China surpassed Japan to become the world's largest holder of foreign exchange reserves. Beijing is now faced with the growing challenge of how to handle these vast reserves effectively. Although China's soaring foreign exchange reserves indicate that its overall strength has grown, they have created internal and external pressures on the balance of the economy, and introduced risks to the financial system. It is estimated in the present study that foreign exchange reserves of approximately US$ 400bn in 2005 would have been appropriate under circumstances of a managed floating exchange rate regime and capital control. China's actual reserves have far exceeded its normal demand. The objective of China is to maintain an optimal level that maximizes net benefits as a whole. Four main policy options are available for China to achieve its target: spending and investing foreign exchange reserves, gradual liberalization of the capital account, diversification of foreign exchange reserves and a switch in holders of foreign exchange reserves. Spending and investing in foreign exchange reserves can be undertaken in combination with liberalization in the capital account, given careful consideration of the risks involved. Liberalization should be extensive but gradual so that companies and individuals can adjust to changes in financial markets and manage portfolios while avoiding unnecessary risks. (Edited by Xiaoming Feng)     

Optimum international reserves and sovereign risk: Evidence from India

This paper empirically determines the optimal level of international reserves for India by explicitly incorporating the country's sovereign risk associated with the default on external debt. The optimum level of reserves is determined by minimizing the central bank's cost function, which consists of costs due to high reserve holdings and costs due to reserve depletion. The simulated optimum reserves for the period 1994–2010 indicate that actual reserves are higher than the optimum value across the sample period, except during 1997–1998.     

Extending the determinants of currency substitution in Nigeria: Any role for financial innovation?

Existing literature suggests that macroeconomic and institutional factors are the drivers of currency substitution. The persistent and significant incidence of currency substitution during the period of mixed performance of macroeconomic variables suggests the existence of a knowledge gap on the drivers of currency substitution during the era of rapid technological innovation. To contribute to this literature, we augmented the traditional money demand model of the determinants of currency substitution to introduce financial innovation. We use Nigerian data from 2005Q1 to 2019Q4 and Pesaran et al. (2001, https://doi.org/10.1002/jae.616 ) autoregressive distributed lag (ARDL) bound test approach to cointegration to estimate the models. The results confirm the presence of short-run and long-run relationships between financial technology and currency substitution in Nigeria. In effect, the deployment of financial technology in developing payment system infrastructure creates additional incentives for economic agents to hold foreign currency deposit. Economic managers must, therefore, mainstream credible monetary and fiscal policies to moderate the effect of financial innovation on currency substitution.     

Macroeconomic Effects of Commodity Price Shocks in a Low‐income Economy: The Case of Tobacco in Malawi

A major concern for developing economies is a dependence on commodities when their prices are volatile as a major change in the international commodity price can have important implications for economic growth. While some cross‐country studies exist, there is lack of country specific studies that take into account the different characteristics of low‐income economies. This paper contributes to the growing literature by considering the case of Malawi and the macroeconomic impact of price shocks in its major export crop of tobacco. Using a structural vector autoregression (SVAR) approach on quarterly Malawian data from 1980:1 to 2012:4, the paper establishes that a positive tobacco price shock has a significant positive impact on the country's gross domestic product, decreasing consumer prices and inducing real exchange rate appreciation. The results are robust to alternative specifications of a SVAR on difference stationary data and cointegrating VAR. The cointegrating VAR confirms the existence of a long run‐relationship among the variables and causality that runs from tobacco prices.