Sources of Real Exchange Rate Volatility in Africa: The Case of ECOWAS*

Abstract: This study examines the impact of (real) demand shocks, (aggregate) supply shocks, and monetary shocks on real exchange rates in 13 West African countries. We observe that the real demand shocks explain most of the fluctuations in real exchange rates in all these countries. Accordingly, policymakers should adopt a careful demand management strategy by controlling government expenditure and taxes.     

Disaggregate Real Exchange Rate Behaviour

In this paper, we re-examine the “PPP Puzzle” using sectoral disaggregated data. Specifically, we first analyse the mean reversion speeds of real exchange rates for a number of different sectors in 11 industrial economies and then focus on relating these rates to variables identified in the literature as key determinants of CPI-based real exchange rates, namely: the trade balance, productivity and the mark up. In particular, we seek to understand to what extent the relationships existing at the aggregate level are borne out at the disaggregate level. We believe that this analysis can help shed light on the PPP puzzle.

Deflationary shocks and monetary rules: An open-economy scenario analysis

The paper considers the macroeconomic transmission of demand and supply shocks in an open economy under alternative assumptions on whether the zero interest floor (ZIF) is binding. It uses a two-country general-equilibrium simulation model calibrated to the Japanese economy vis-à-vis the rest of the world. Negative demand shocks have more prolonged and startling effects on the economy when the ZIF is binding than when it is not binding. Positive supply shocks can actually extend the period of time over which the ZIF may be expected to bind. More open economies hit the ZIF for a shorter period of time, and with less harmful effects. Deflationary supply shocks have different implications according to whether they are concentrated in the tradables rather than the nontradables sector. Price-level-path targeting rules are likely to provide better guidelines for monetary policy in a deflationary environment, and have desirable properties in normal times when the ZIF is not binding. J. Japanese Int. Economies 20 (4) (2006) 665–698.     

Deflation,Productivity Shocks and Gold: Evidence from the 1880–1914 Period

In this paper we examine the sources and impact of deflation on the growth experiences of the four dominant countries on the gold standard in the period 1880–1913: the United States, The United Kingdom, France and Germany. We distinguish between good deflation, (driven by positive aggregate supply shocks) and bad deflation (driven by aggregate demand shocks). We use an empirical Blanchard/Quah model which decomposes the behaviour of prices, output and the money stock into the impact of shocks such as a world price level shock, a domestic supply shock, and domestic demand shocks including a shock to the domestic gold stock. Our key finding is that the European economies were essentially classic in the sense that output was mainly supply driven and that money was neutral even when country specific gold stocks are included. In the United States, however, we observe both good and bad deflation.     

Cointegration Tests of Purchasing Power Parity: the Case of the Thai Baht*

This paper will examine the validity of the purchasing power parity (PPP) hypothesis for the Thai baht vis-à-vis the currencies of Thailand's key trading partners under the new exchange rate regime using the cointegration technique. The major conclusions obtained from this empirical analysis may be broadly summarized as follows. First, the empirical evidence, based on the DF and ADF statistics, seems to suggest that the nominal exchange rates and relative prices are well characterized as non-stationary I(1) processes. Second, the cointegration analysis provides no evidence in support of a long-run equilibrium relationship between bilateral nominal exchange rates for the Thai baht vis-à-vis the currencies of Thailand's major trading partners and the corresponding relative price ratios. This implies rejection of PPP for these countries. If this is the case, considerable care should be taken in assessing the long-run implications for the real exchange rate, and thus competitiveness against Thailand's key trading partners, of shocks to the nominal exchange rate.     

The Behavior of the Real Exchange Rate Under Fixed and Floating Exchange Rate Regimes

This article investigates the behavior of real exchange rates under fixed and flexible exchange rates. Using data from both the Bretton Woods and the modern floating periods, we decompose real exchange rate movements into components attributable to supply shocks, real demand shocks, monetary shocks, capital flows shocks, and real oil price shocks. Empirical results show that real demand shocks are an important source of real exchange rate movements under both fixed and flexible rates, while monetary shocks are negligible. Supply and oil price shocks seem to be more important under Bretton Woods, while capital flows shocks seem to explain a relatively higher proportion of real exchange rate movements under the modern floating period.     

Real Exchange Rate Stationarity in Latin America and Relative Purchasing Power Parity: A Regime Switching Approach

This paper tests for long-run purchasing power (PPP) among a sample of six Latin American economies. The key contribution of this paper is in terms of the econometric methodology where non-stationarity of the real exchange rate is tested within a Markov regime-switching framework. In contrast to existing studies, this paper defines two new concepts of PPP where one allows for the possibility that real exchange behaviour either switches between stationary and non-stationary regimes (partial PPP), or switches between stationary regimes characterised by differing degrees of persistence (varied PPP). Whereas standard univariate unit root testing suggests that Latin American real exchange rates are generally non-stationary, employment of the regime-switching methodology indicates that most of the sample is characterised by the existence of two distinct stationary regimes. Further analysis indicates that the high rates of inflation and exchange rate volatility experienced in Latin American have given some impetus towards facilitating long-run PPP.

Money,inflation, and output growth: Does the aggregate demand-aggregate supply model explain the international evidence?

Money, Inflation, and Output Growth: Does the Aggregate Demand-Aggregate Supply Model Explain the International Evidence? - Using annual post-war data for 32 countries, it is shown that output and the price level are positively related along the aggregate supply and negatively related along the aggregate demand curve. This implies that the negative correlation between inflation and growth simply means that the price level has been countercyclical as aggregate supply shocks domi-nated aggregate demand shocks. It is also shown that money growth has positive and permanent effects on inflation, but may affect output only in the short run: in the long run, money is probably neutral.     

基于超调模型和虚拟经济视角的汇率动态分析

汇率决定及其动态调整分析是汇率理论的研究内核。文章以汇率超调模型为基础,突出虚拟经济与实体经济双轮驱动及其与宏观经济总供给和总需求关联运行的作用机理,结合非线性宏观金融理论在货币供需分析中引入可交易金融资产,尝试构建新的分析框架。在虚拟经济与实体经济视角下分析美元名义汇率的动态变化,并以此为基础进行实证研究,考察美元汇率及经济失调。     

UK shocks and Irish business cycles, 1922–79

This article examines the transmission of UK and global shocks to the Irish economy over the period 1922–79, using annual data for consumer prices and real GDP in a structural vector autoregression (SVAR) model. UK aggregate demand and supply shocks have large and significant effects on Irish CPI, but smaller effects on Irish real GDP. A historical decomposition indicates that UK aggregate supply and demand shocks played a more important role than domestic shocks in the evolution of Irish CPI. In contrast, the evolution of Irish real GDP is driven more by idiosyncratic domestic shocks than by UK shocks.     

Is reversion to PPP in euro exchange rates non-linear?

The paper tests for nonlinearities in the adjustment of the euro exchange rate towards purchasing power parity (PPP). It presents new survey based evidence consistent with non-linear patterns in euro exchange rate dynamics. Moreover, based on an exponential smooth transition autoregressive (ESTAR-) model, it finds strong evidence that the speed of mean reversion in euro exchange rates increases non-linearly with the magnitude of the PPP deviation. Accordingly, while the euro real exchange rate can be well approximated by a random walk if PPP deviations are small, in periods of significant deviations, gravitational forces are set to take root and bring the exchange rate back towards its long-term trend. Deviations from the PPP equilibrium for the euro-dollar rate need to be stronger in order to reach the same adjustment intensity as for other rates.

Revisiting the shocking aspects of Asian monetary unification

There is renewed interest in monetary cooperation in Asia. To the extent that such cooperation evolves to include discussions about co-ordination of exchange rate policies it is important to evaluate the desirability of such co-ordination. Such an evaluation involves in part an assessment of the cross-country correlation of macro-economic shocks, a criterion used in the past to assess the desirability of monetary unification. In revisiting this question this paper not only updates previous studies, but it makes two significant methodological contributions to the literature based on estimates of vector autoregression (VAR) models. Our empirical specification allows for the possibility that aggregate demand and aggregate supply shocks are contemporaneously correlated within each economy, on the one hand, and takes explicit account of third-country common influences on each economy, on the other. Our results show that previous findings in the literature do not always hold up when our modelling methodology is applied to the data. With respect to the implications for monetary unification our results do not clearly identify a group of countries for which shocks are unambiguously highly correlated and which therefore would be able to perform well with a common monetary policy. The correlation structure differs between aggregate demand shocks and aggregate supply shocks.     

DYNAMIC EFFECTS OF MONETARY POLICY SHOCKS IN MALAWI

This paper sets out to investigate the process through which monetary policy affects economic activity in Malawi. Using innovation accounting in a structural vector autoregressive model, it is established that monetary authorities in Malawi employ hybrid operating procedures and pursue both price stability and high growth and employment objectives. Two operating targets of monetary policy are identified, viz., bank rate and reserve money, and it is demonstrated that the former is a more effective measure of monetary policy than the latter. The study also illustrates that bank lending, exchange rates and aggregate money supply contain important additional information in the transmission process of monetary policy shocks in Malawi. Furthermore, it is shown that the floatation of the Malawi Kwacha in February 1994 had considerable effects on the country's monetary transmission process. In the post‐1994 period, the role of exchange rates became more conspicuous than before although its impact was weakened, and the importance of aggregate money supply and bank lending in transmitting monetary policy impulses was enhanced. Overall, the monetary transmission process evolved from a weak, blurred process to a somewhat strong, less ambiguous mechanism.     

Exchange rates,stock prices,and money markets: evidence from Singapore

This paper uses a monetary approach to analyze the asymmetric asset-price movements (exchange rates and stock prices) in Singapore, a small open economy with managed exchange rate targeting. The Singapore dollar exchange rates vis-à-vis the developed countries’ currencies are negatively related to stock prices whereas the relationship between the Singapore dollar-Malaysian ringgit exchange rate and stock prices is positive instead. The pattern of asymmetry is explained by the relative exchange-rate elasticity of real money demand and real money supply and evidenced by the distributed-lag regression and VAR analysis. Furthermore, the distributed-lag regression of monthly data suggests that fiscal revenues as well as fiscal expenditures exert positive influences on stock prices.     

UK External Imbalances and the Sterling: Are they on a Sustainable Path?

An updated version of Krugman’s 1993 MMF framework is used to consider the implications of buoyant domestic demand for the real exchange rate and debt dynamics. The updating includes a Taylor rule for monetary policy and explicit treatment of external assets and liabilities. In response to an exogenous rise in the aggregate demand, short-run appreciation of the real exchange rate is followed by a prolonged decline as external debt accumulates and net wealth deteriorates. Whether in equilibrium the real exchange rate is stronger or weaker depends crucially on a comparison of real interest rates and the growth rate. If the domestic growth rate is higher than global real interest rates, the currency may strengthen in the long run despite the deterioration of net external assets. To see whether the strength of sterling is sustainable, the analysis is briefly calibrated to UK data over the last decade. Blanchard et al. (The US current account and the dollar. CEPR DP no 4888, 2005) suggest that international liabilities to be treated as imperfect substitutes: so we check to see how this would affect our results.

PPP: <Emphasis Type="Italic">Delusion</Emphasis> or <Emphasis Type="Italic">Reality</Emphasis>? Evidence from a Nonlinear Analysis

In this paper we analyze the validity of the purchasing power parity (PPP) in a nonlinear framework using data for 18 bilateral US dollar exchange rates. Following Enders and Ludlow (2002), we use unit root and cointegration tests that do not assume a specific nonlinear adjustment. We find evidence of non-linear mean reversion in deviations from the PPP equilibrium in 11 out of 18 currencies. Additionally, to disentangle the respective contribution of exchange rate and prices to the adjustment toward the long run equilibrium, we estimate a Vector Error Correction Model. According to our empirical analysis, there exists a nonlinear mechanism to correct for deviation from the PPP equilibrium that comes mainly from the exchange rates. This is consistent with theoretical arguments on international goods markets under transaction costs as well as with an emerging strand of empirical literature. These results highlight the importance of neglecting the possibility of nonlinearity in the debate about the PPP and provide empirical evidence that supports the scenario of the PPP hypothesis as a reality.     

An Evaluation of Friedman's Monetary Instability Hypothesis

In this article, I examine what I call Milton Friedman's Monetary Instability Hypothesis. Drawing on Friedman's work, I argue that there are two main components to this view. The first component is the idea that deviations between the public's demand for money and the supply of money are an important source of economic fluctuations. The second component of this view is that these deviations are primarily caused by fluctuations in the supply of money rather than the demand for money. Each of these components can be tested independently. To do so, I estimate an otherwise standard New Keynesian model, amended to include a money demand function consistent with Friedman's work and a money growth rule, for a period from 1875 to 1963. This structural model allows me to separately identify shocks to the money supply and shocks to money demand. I then use variance decompositions to assess the relative importance of shocks to the supply and demand for money. I find that shocks to the monetary base can account for up to 28% of the fluctuations in output whereas money demand shocks can account for less than 1% of such fluctuations. This provides support for Friedman's view.     

Determinants of Malaysian Trade Balance: An ARDL Bound Testing Approach – A Commentary

Abstract

This commentary is served as an additional light both from theoretical and empirical perspectives, on the study by Duasa (Global Economic Review, 2007, 36, pp. 89–102) who examined the short- and long-run relationships between trade balance, real exchange rates, income, and money supply for Malaysia. The final words I would like to make are that the results documented by Duasa require further investigation before it can be generalized.     

Effect of Money Supply on Real Output and Price in China

Over the past 30 years, China has achieved remarkable long-term economic growth. Using quarterly data, we study the effects of money supply on real output and inflation in China between 1993 and 2008. To this end, we use money supply shocks afler filtering out the expected component of the money supply. Our findings provide evidence supporting the asymmetric effect of positive and negative money supply shocks on real output and inflation in China. That is, real GDP growth in China responds to negative money supply shocks but not positive money supply shocks. In addition, inflation responds to positive money supply shocks but not negative money supply shocks. We conclude that the People＇s Bank of China＇ s policy of steady monetary growth appears to be appropriate. Our study offers important policy implications for China.     

Testing PPP for the South African Rand/US Dollar Real Exchange Rate at Different Data Frequencies

This paper tests the PPP hypothesis for the South African rand/US dollar real exchange rate using a fractional integration framework. The results suggest that the real exchange rate of the South African rand with respect to the US dollar is a highly dependent variable with an order of integration very close to 1. This finding is not affected by the data frequency considered (daily, weekly or monthly). Also, there appears to be a single break in December 2001 (possibly corresponding to a change in the monetary policy framework), with the unit root null being rejected in favour of d > 1 for the periods before the break, but not afterwards. Thus, our results strongly reject the PPP hypothesis for the South African rand/US dollar rate across data frequencies, since shocks are found to affect the exchange rate forever.