Fiscal discipline and exchange rates: Does politics matter?

We look at the effect of exchange rate regimes on fiscal discipline, taking into account the effect of underlying political conditions. We present a model where strong politics (defined as policymakers facing longer political horizon and higher cohesion) are associated with better fiscal performance, but fixed exchange rates may revert this result and lead to less fiscal discipline. We confirm these hypotheses through regression analysis performed on a panel sample covering 79 countries from 1975 to 2012. Our empirical results also show that the positive effect of strong politics on fiscal discipline is not enough to counter the negative impact of being at/moving to fixed exchange rates. Our results are robust to a number of sensitivity checks, including the use of different estimators, alternative proxies for fiscal discipline and sub-sample analysis.     

Does political instability affect exchange rates in Arab Spring countries?

This article investigates the dynamic relationship between political instability and exchange rates in five Arab Spring countries over the period 1992Q1–2016Q4. We include macroeconomic fundamentals to identify the transmission channels through which political instability may affect exchange rates. Based on VAR and ARDL models, our results report that political instability is associated with a significant drop in the value of domestic currencies of these countries. Economic growth is found to be the key mechanism channel. We find also that the dependence between variables is more emphasized in the short run than in the long run.     

Does the traditional exchange rate fully explain firms’ exposure?

This study aims to explore the role of the cross exchange rate as a form of market competition, which has previously been omitted as an explanatory variable in estimating the risk exposure of the standard exchange. To the end, we develop a model of exporting firms that reflects exposure to market interaction and mark-up in a duopolistic export market. Using monthly data of stock returns and cross exchange rates of two oligopoly industries (i.e. semiconductor and steel & iron), our empirical evidence supports our hypothesis that cross exchange rates significantly explain firm value.     

Does exchange rate pegging enhance credibility? Evidence from the European Monetary System

The European Monetary System (EMS) has been credited with immediately enhancing the credibility of onetary policy among its member countries. However, there is little empirical evidence to support this view. This study provides evidence from exchange rate data that political actions taken to support the EMS enhanced rate arangement. Further, empirical results were sensitive to the specification of the estimating equations, and varied dramatically if risk premia (discounts) were absent from estimating equations.     

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.     

Does foreign exchange derivatives market promote R&D? International industry-level evidence

Efficient financial markets can motivate and nurture innovation. The foreign exchange derivatives (FXD) market, an important part of financial markets, provides instruments to hedge profits from currency fluctuations. However, whether and how FXD market development benefits innovation remains unclear. Using data from a sample of 45 developed and emerging economies, this paper is among the first to examine the impact of the development of the FXD market on industry-level research and development (R&D) investment. We find that a better-developed FXD market significantly enhances industry-level R&D investment, especially in emerging economies. When the average daily FXD turnover that measures FXD market development increases by one standard deviation, industry-level R&D expenses increase by 27% in the following year. This effect is more significant for industries with higher foreign exchange rate risk. Policymakers should consider the benefits of developing the FXD market to the real economy when optimising FXD regulations.     

Does purchasing power parity hold sometimes? Regime switching in real exchange rates

Standard unit root tests are not very powerful in drawing conclusions regarding the validity of Purchasing Power Parity (PPP). Rather than asking whether PPP holds throughout the whole sample period, we examine, in this study, if PPP holds sometimes by employing Hamilton-type (1989) Markov regime switching models. When at least one of multiple regimes is stationary, PPP holds locally within the regime. There are indeed various reasons that we should expect that the persistence of real exchange rates changes over time. Employing five real exchange rates spanning more than 100 years, we find herein strong evidence that the strength of PPP varies during the sample periods and that there exist stationary regimes in which PPP holds. Throughout the article, we also make comparisons to previous Markov regime switching estimation results by Kanas (2006) on the same data series. The new Markov switching model selection criterion of Smith et al. (2006), which is devised especially for discriminating Markov regime switching models, unambiguously indicates a preference for the Hamilton-type Markov regime switching model employed in this study. We also find that the evidence for PPP is not much different across different nominal exchange rate arrangements.     

Does ethnic diversity decrease economic interactions? Evidence from exchange networks in rural Gambia

Using a unique dataset collected in 59 rural Gambian villages, we study how ethnic heterogeneity is related to the structure of four economic exchange networks: land, labour, inputs and credit. We find that different measures of village‐level ethnic fragmentation are mostly uncorrelated with network structure. At a more disaggregated level, household heads belonging to ethnic minorities are not less central than those from the predominant ethnicity in any of the networks and, at the dyadic level, the fact that two households share ethnicity is not an economically significant predictor of link formation. Our results indicate that, in the particular setting of our study, the structure of the exchange networks is better defined by other variables than ethnicity and that ethnic heterogeneity is unlikely to be a driver for sub‐optimal economic exchanges.     

Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?

This paper aims at studying the sustainability of current accounts in Sub-Saharan Africa and determining whether this sustainability depends on the exchange rate regime. Relying on a formal theoretical framework and recent panel cointegration techniques, our findings show that current accounts have been globally sustainable in Sub-Saharan Africa countries over the 1980–2011 period. However, this sustainability has been lower for countries operating a fixed exchange rate regime or belonging to a monetary union. We also find that the difference in the level of sustainability could be explained by a higher persistence in the current account adjustment of countries operating under rigid exchange rate regimes.     

Does the introduction of stock exchange markets boost economic growth in African countries?

We assess whether the introduction of private equity capital markets affects economic growth in African countries. We address this issue by focussing on stock exchange markets as the predominant type of new equity markets, using a Diff-in-Diff regression method. The analysis uses a panel data set from 48 Sub-Saharan countries over the time range of 1970–2018. 23 countries are part of the “treated” group – which introduced international stock exchanges – and 25 “untreated” countries serve as the control group. Our results show that when compared with the time period prior to the introduction of stock exchange markets, GDP per capita rises by the amount of 532 US$ (around 40% of the Sub-Saharan average) after the introduction of equity capital markets in the treated countries. Over the ten years post introduction, the effect is hump-shaped, with effects becoming statistically significant from the first year after implementation, with a peak in the 5th year, and it then becomes statistically insignificant from then onwards.     

Does oil price variability affect ASEAN exchange rates? Evidence from panel cointegration test

Using panel data, this article investigates the long-run relationship between real oil prices and real exchange rates for selected ASEAN countries by utilizing quarterly data from 1973:Q1 to 2013:Q4. The modelling implementation starts with the determination of the stationarity condition of the variables which are found to be integrated of order one. Using Maddala and Wu’s (1999) panel cointegration test, the article finds evidence of cointegration among the variables. The fully modified OLS (FMOLS) and dynamic OLS (DOLS) are then used to estimate the long-run relationship between the variables, followed by applying Toda–Yamamoto causality test. The findings exhibit bidirectional causality between real oil prices and real exchange rates in the long run, where it is highly significant.     

Are BRICS exchange rates chaotic?

In this paper, we focus on the stochastic (chaotic) attributes of the US dollar-based exchange rates for Brazil, Russia, India, China and South Africa (BRICS) using a long-run monthly dataset covering 1812M01-2017M12, 1814M01-2017M12, 1822M07-2017M12, 1948M08-2017M12, and 1844M01-2017M12, respectively. For our purpose, we consider the Lyapunov exponents, robust to nonlinear and stochastic systems, in both full – samples and in rolling windows. For comparative purposes, we also evaluate a long-run dataset of a developed currency market, namely British pound over the period of 1791M01-2017M12. Our empirical findings detect chaotic behavior only episodically for all countries before the dissolution of the Bretton Woods system, with the exception of the Russian ruble. Overall, our findings suggest that the establishment of the free floating exchange rate system have altered the path of exchange rates removing chaotic dynamics from the phenomenon, and hence, the need for policymakers to intervene in the currency markets for the most important emerging market bloc, should be carefully examined.     

Monetary policy rules in Central and Eastern European Countries: Does the exchange rate matter?

We estimate monetary policy rules for six Central and Eastern European Countries (CEEC) during the period when they prepared for membership to the EU and monetary union. By taking changes in the policy settings explicitly into account and by splitting up the exchange rate impact into two different components we significantly improve estimation results for monetary policy rules in CEEC. We uncover that the focus of the interest rate setting behaviour in the Czech Republic, Hungary and Poland explicitly switched from defending the peg to targeting inflation. For Slovakia, however, there still seemed to be on ongoing focus on the exchange rate. Finally, Slovenia and, after a policy switch, Romania exhibit a solid relation with inflation as well.     

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.     

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.     

Does the exchange rate matter to bilateral trade between Korea and Japan? Evidence from commodity trade data

This study examines the short- and long-run effects of exchange rate changes on trade flows in the context of disaggregating industry data of bilateral trade between Korea and Japan. For this purpose, an autoregressive distributed lag (ARDL) approach is used. Results show that Korea's exports and imports are relatively sensitive to the bilateral exchange rate in the short-run, but less responsive in the long-run. It is also found that income in the two countries has significant impacts on the bilateral trade flows in both the short- and long-run. Finally, exchange rate uncertainty and Japanese FDI to Korea are found to have little impacts on Korea's trade with Japan in the short- and long-run.     

Does wage-inflation targeting complement foreign exchange intervention? An evaluation of a multi-target,two-instrument monetary policy framework

We assess the inclusion of wage inflation as an intermediate target of an emerging central bank using a dynamic stochastic general equilibrium model with sticky wages and prices calibrated for the South Korean economy. The model includes wage inflation as an additional target jointly with domestic price inflation and the output gap in a Taylor- type interest rate rule operating with a sterilized foreign exchange (FX) intervention rule. Our results show a complementary relationship between wage inflation targeting and price inflation targeting. That is, by supplementing price inflation targeting with wage inflation targeting, welfare improves for cases with and without sterilized FX intervention. When intervention is in place, wage inflation targeting has the added advantage of reducing the volatilities of nominal exchange rate and foreign exchange reserves thereby promoting a more sustainable conduct of FX intervention.     

Do foreign exchange forecasters apply asymmetric loss functions? Evidence from three major exchange rates

This article investigates which type of loss function is consistent with the hypothesis that major exchange rate forecasts, i.e. the euro, the British pound, and the Japanese yen vis-à-vis the US dollar, are rational. We apply a comprehensive data set, which also allows us to examine different forecast horizons and heterogeneity of forecasters.     

Do forecasters of major exchange rates herd?

This paper uses forecast data from 1995 through 2014 to examine, whether the market consensus of exchange rate forecasts has an effect on the forecasts of individual experts. Such an effect could take the form of herding or anti-herding. We use a very comprehensive data set to study experts' forecasts of three of the most important exchange rates. The results indicate that anti-herding vis-à-vis the consensus of forecasts occurs more often than herding. We also show how the increase in the forecasting horizon and financial crises affect the intensity of anti-herding behavior. Moreover, we report that the (anti-)herding behavior does not affect the forcasting performnce.