Foreign interest rate shocks and exchange rate regimes in East Asia

Using a theoretical dynamic stochastic general equilibrium model and an empirical panel vector autoregression, we assess the transmission of foreign real interest rate shocks on the volatility of various key macroeconomic variables in nine small open economies in East Asia taking into account the role of exchange rate regimes. Both the theoretical and empirical findings confirm the hypothesis that flexible exchange rate may work as a shock absorber when the economy is hit by foreign real interest rate shocks. The findings suggest a clear trade-off between the volatility of real exchange rate and real output to foreign interest rate shocks, both the US and G7 real interest rates, where the responses of real output are mitigated in countries that have more flexible exchange rate regime.     

Inflation targeting credibility and reputation: The consequences for the interest rate

The measurement of credibility and reputation is fundamental for the analysis of countries which adopted inflation targeting. Under this perspective, the objective of this article is to illustrate which measures of credibility and reputation are most useful in predicting variations of interest rates. Given a specific inflation target, this relationship is valuable for central bankers as well as for private agents trying to predict the central bank's policies. Due to the fact that Brazil represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a half decade can be observed, an analysis through several indices and its relation with the basic interest rate is made. The findings denote that the credibility indices based on reputation represent an alternative in the cases where the series of inflation expectation are not available. Furthermore, the empirical evidence confirms the hypothesis that higher credibility implies lower variations in the interest rate for controlling inflation.     

Impact of interest rates on Islamic and conventional banks: the case of Turkey

Identifying the impact of the interest rates upon Islamic banks is a key to understand the contribution of such institutions to the financial stability, designing monetary policies and devising a proper risk management applicable to these institutions. This article analyses and investigates the impact of interest rate shock upon the deposits and loans held by the conventional and Islamic banks with particular reference to the period between December 2005 and July 2009 based on Vector Error Correction (VEC) methodology. It is theoretically expected that the Islamic banks, relying on interest-free banking, shall not be affected by the interest rates; however, in concurrence with the previous studies, the article finds that the Islamic banks in Turkey are visibly influenced by interest rates.     

我国汇率与存款利率的关系研究：2000.1-2007.8

本文通过对2000年1月到2007年8月期间的人民币汇率与利率的关系进行了格兰杰因果检验,并采用单位根检验,建立VAR模型,通过脉冲响应函数和方差分解分析了二者的关系。结果表明,汇率变动影响着居民储蓄存款利率的变化较为显著,而居民储蓄存款利率影响汇率变动的力度较弱。我国存在着阻碍汇率利率联动的制度、经济等因素。     

Monetary policy, macroeconomic adjustment and currency speculation under floating exchange rates: the case of Bulgaria

This paper deals with the Bulgarian experience with exchange rate policy and the related macroeconomic adjustment in the transition period. It is argued that in the context of the Bulgarian macroeconomic environment, the exchange rate regime and the exchange rate policy (or the lack of such) did play a crucial role in determining the patterns of macroeconomic adjustment in this period. A simple general equilibrium model is suggested that provides some insights into the stylized performance of an economy under certain assumptions, similar to those characterizing the transitional state of the Bulgarian economy. Finally, some aspects of Bulgarian macroeconomic performance in recent years are analysed on the basis of the available empirical information and using the framework of the theoretical model. The paper concludes with the policy lessons of this experience.     

Inflation targeting in an import dependent indebted economy

This paper develops a one-sector Kaleckian model of an import dependent indebted small open economy; where the mark-up rate is sensitive to both changes in the interest rate and the exchange rate and foreigners provide part of the long-term finance. The short-run consequences of an inflation targeting policy in the form of high interest rates and strong domestic currency are explored. Among the possible short-run scenarios, the one most relevant for developing countries involves a decline in the profit rate, the capacity utilization rate and the rate of accumulation as well as the employment rate and the real wage. Leverage ratio of the firms and the extent of external indebtedness play an important role in bringing about this result. Long-run analysis reveals that this scenario is associated with instability in the long run and that, also in the long run, the extent of foreign indebtedness and the responsiveness of capital inflows to the return on existing portfolios are important in determining the direction of the effects of inflation targeting on the equilibrium debt–capital ratio.     

Asian real interest rates, nonlinear dynamics, and international parity

This study tests for nonlinearities in the real interest differentials of four South East Asian economies with respect to Japan and the United States. The logistic and exponential smooth transition regression models are applied to monthly data over the sample period 1977M1–2000M3. There is evidence of nonlinearities in Asian real interest differentials where nonlinearities are often captured by the logistic smooth transition autoregressive (STAR) model. The extent of nonlinearities varies across the sample with the Singapore–Japan and Thailand–Japan differentials exhibiting the sharpest transition from one regime to another. Large shocks to real interest parity (RIP) are more likely to lead to the reestablishment of parity at a faster rate than small shocks. Modeling the nonlinear stochastic dynamics of RIP can thus be useful for policymaking purposes in recovering information on monetary and financial crises.     

Monetary and banking policy transmission through interest rates: an empirical application to the USA,Canada, the UK and the Eurozone

The main purpose of this paper is an examination of the pass‐through interest rate transmission from the wholesale rates (central bank and/or money market rates) to the retail rates (deposit and lending rates) of the banking system. Knowledge of the transmission substantially helps us to calculate the pass‐through interest rate margin or mark‐up in the banking systems under examination (USA, Canada, the UK and the Eurozone). The selection of the wholesale interest rate is also an important part of this pass‐through transmission framework because it is related to the money supply process and therefore the central bank's policy capabilities. In the empirical part, a Johansen (1988) cointegration based error‐correction procedure (ECM‐GE) is implemented for the wholesale interest rate selection. Then an LSE–Hendry general‐to‐specific model (GETS) is applied, for the revelation of the banking sector pass‐through interest rate behaviour. In the empirical part, on the issue of the wholesale interest rate selection, the USA and the Eurozone seem to favour the Money Market rate while the UK and Canada favour the central bank policy rate. The results indicate two types of interest rate pass‐through behaviour, with market structure implication – namely, the US and UK banking systems contrasted with Canada–Eurozone.     

Demographics and real interest rates: Inspecting the mechanism

The demographic transition can affect the equilibrium real interest rate through three channels. An increase in longevity—or expectations thereof—puts downward pressure on the real interest rate, as agents build up their savings in anticipation of a longer retirement period. A reduction in the population growth rate has two counteracting effects. On the one hand, capital per-worker rises, thus inducing lower real interest rates through a reduction in the marginal product of capital. On the other hand, the decline in population growth eventually leads to a higher dependency ratio (the fraction of retirees to workers). Because retirees save less than workers, this compositional effect lowers the aggregate savings rate and pushes real rates up. We calibrate a tractable life-cycle model to capture salient features of the demographic transition in developed economies, and find that its overall effect is a reduction of the equilibrium interest rate by at least one and a half percentage points between 1990 and 2014. Demographic trends have important implications for the conduct of monetary policy, especially in light of the zero lower bound on nominal interest rates. Other policies can offset the negative effects of the demographic transition on real rates with different degrees of success.     

Real exchange rate and exchange rate policy in Hungary

Five real exchange rate indicators are computed to assess the international competitiveness of Hungarian industry. These indicators are explained in econometric equations by employment, unemployment, productivity, interest spread and real producer wage. Causality tests reveal that external performance has an impact on real exchange rates, and contributes to explaining real exchange rates. There is very limited scope for policy intervention to constrain the negative effects of capital inflows without incurring other costs.     

Monetary policy and long-term US interest rates

This paper assesses the effect of federal funds rate innovations on longer-term US nominal interest rates across different periods. The evidence suggests that these responses change with changes in the monetary policy regime. Time periods considered are pre- and post-1979 and different Federal Reserve Chairman’s tenure. The response of longer-term interest rates to federal funds rate innovations are shown to be smaller and less persistent in the post-1979 period when the Federal Reserve placed more emphasis on inflation.     

Real exchange rates in emerging economies

We analyse the role of various investment margins in explaining the real exchange rate appreciation recorded in European transition countries. We present a model that introduces a quality investment margin and show that the margin is needed for replicating the observed pace of real exchange rate appreciation.     

China's interest in a revaluation of the yuan 1

This paper aims to illustrate how an equilibrium exchange rate of the Yuan would contribute to China's achievement of non-inflationary full employment – defined as internal balance by James Meade in 1951 Meade, James E. 1951. The theory of international economic policy, Vol I: The balance of payments, London: Oxford University Press.  [Google Scholar], as well as the balance of international payments. In terms of Meade's model, China currently has both excess demand and a payments surplus, so that it would benefit from revaluation, which helps curb internal inflation and the external foreign surplus simultaneously. For China, specifically, revaluation would support combating price increases and facilitate a shift of resources into consumption and raising living standards. The paper also examines three common reasons advanced by groups in favor of avoiding appreciation of the RMB, finding none of them theoretically or empirically convincing. The pursuit of both growth/employment and price stability objectives makes China unable to afford having an undervalued exchange rate.     

On the predictability of daytime and night-time yen/dollar exchange rates

This article first shows that the yen/dollar rate tended to appreciate in Japan daytime but to depreciate in Japan night-time in the 2000s. The result is very paradoxical because the asymmetry implies that the intra-daily yen/dollar rate had predictable stochastic trends in the 2000s. The article then investigates whether lagged dependent variables and various external shocks were responsible to the asymmetric feature. We find that once we control the effects of lagged dependent variables and external shocks, the daytime yen/dollar rate tended to appreciate when it had appreciated on the day before, while the night-time yen/dollar rate tended to depreciate when it had depreciated on the day before.     

汇率影响、货币供给与通货膨胀

本文从人民银行近期政策与通货膨胀的现实意义出发,回顾了理论界有关通货膨胀主要成因的观点,并指出输入型通胀、需求拉动型通胀和成本推动型通胀是国内学者普遍认为当下通货膨胀压力的主要成因。根据经典理论分析,我国当下的通货膨胀压力是人民币汇率制度导致我国基础货币被动增发以及扩张性货币政策指导下超量货币供给所带来的流动性过剩问题。     

On the determination of real interest rates in Europe

In this paper a loanable funds model is estimated over the period 1959–1990 for the determination of after-tax expected real interest rates using aggregated data for four European countries under the assumption that high capital mobility in Europe implies a common capital market. It is concluded that real interest rates in the European Community were mainly driven by movements in temporary income, expected inflation, lagged investment, money growth, and the oil price. Moreover, our aggregate, model appears to be reasonably stable. Finally, individual country rates are shown to depend on the European rate as well as some country-specific variables, suggesting a limited degree of isolation from international financial markets for the countries concerned.At the time of writing the author was still affiliated with the Department of Economics at the University of Groningen. Hence, any views expressed here are those of the author and do not necessarily represent those of De Nederlandsche Bank. This paper benefitted very much from stimulating comments made by Willem Buiter, Kanhaya Gupta, Jakob de Haan, Flip de Kam, Kees Koedijk, and an anonymous referee. The author would like to thank Jan-Egbert Sturm for technical assistence. Of course, the usual disclaimer applies.     

Bilateral real exchange rates and migration

Migrants who move across borders are, to a large extent, motivated by the prospect of earning higher incomes at destination, which can be partly transferred back to their countries of origin via remittances. This suggests that the real exchange rate can influence the incentives to migrate, as it determines the purchasing power of expected income in terms of the currency of the origin country. This article investigates empirically how bilateral real exchange rate fluctuations influence international migration flows. To do so, we build a dataset of 30 OECD destination countries and 165 origin countries over the period 1980–2011 and estimate an equation derived from a micro-founded random utility maximization model that allows for unobserved heterogeneity between migrants and non-migrants. Our results show that migration flows are highly responsive to bilateral real exchange rates: A 10% real appreciation of the currency of the destination country is associated with an 18.2–19.4% increase in migration flows.     

Inflation,growth and exchange rate regimes in small open economies

Summary. This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Endogenously arising volatility may be observed independently of the exchange rate regime. Private information - with high rates of domestic inflation - increases the scope for indeterminacy and economic fluctuations.Received: 26 March 2002, Revised: 29 October 2002JEL Classification Numbers: E32, E44, F33.P.L. Hernandez-Verme: I would like to thank Leonardo Auernheimer, Valerie Bencivenga, Dean Corbae, Scott Freeman, Todd Keister, Beatrix Paal, and Maxwell Stinchcombe for very helpful comments and suggestions. Very special thanks are due to Bruce D. Smith. The paper also benefited from the discussions in the seminars in CIDE, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, Indiana University, ITAM, Purdue University, the Second Annual Missouri Economics Conference, Texas A&M, the University of Missouri and the University of Texas at Austin.