Chinese exchange rate and price effects on G3 import prices

This paper explores the degree of price and exchange rate interdependence between China and the G3 (US, Japan and the Euro-zone) by undertaking a VAR based shock analysis. A GARCH framework is also employed to derive the conditional variances to uncover the extent of volatility transmission. We address two key issues. First as there have been concerns about low value-added cheap Chinese goods flooding G3 markets, we attempt to measure the impact of Chinese prices on G3 import prices. Second, we focus on the transmission of exchange rate shocks – a subject which we approach by examining shocks in China's bilateral exchange rate with each of these major trading partners (the US, Japan and the Euro Area). Our results indicate that reduced import prices from China are the channel through which aggregate domestic prices in the G3 remain depressed, while the impact of the RMB exchange rate with G3 currencies appears less powerful. This finding implies that the Chinese authorities’ RMB exchange rate policy is relatively unimportant and, in particular, that a revaluation of the RMB would not do much to reduce the US trade deficit. In terms of volatility spillover, the relatively flexible RMB exchange rate against the Euro results in RMB-EUR volatility having a stronger influence than the more tightly controlled RMB-USD rate on the volatility of Chinese export prices.     

我国出口汇率传递的非对称性:来自中日贸易的证据

文章扩展了Yang（2007）的厂商定价模型，对汇率传递非对称性、特点和成立条件进行理论分析，发现对称传递需要满足严格的条件，而现实中更常见的是非对称汇率传递。在一定条件下，商品需求弹性越大，越可能呈现出口国货币贬值传递率高而升值传递率低的特点。利用2000年1月至2011年12月我国出口日本的966种商品价格数据，发现汇率波动向价格传递具有非对称性：（1）人民币升值时，日元价格上涨较少；而贬值时，价格下降较多。我国出口商品的需求弹性较大，在日本市场上面对的是一个强竞争结构。（2）若月度升值超过一定幅度（测算约为2.43%），传递率又会有所上升，说明尽管日元价格易跌难涨，但在升值导致成本上涨较多、明显挤压利润时，厂商不得不适当提高日元售价。采用2000年至2018年9月日本从中国进口单位价值指数进行稳健性检验，得出类似结论。现阶段稳定的人民币名义汇率对我国出口企业是更为有利的。     

Exchange Rate Regimes: Middling Through

Abstract

The appropriate exchange rate regime, in the context of integration of currency markets with financial markets and of large international capital flows, continues to be a policy dilemma. It is found that the majority of countries are moving towards somewhat higher exchange and lower interest rate volatility. Features of foreign exchange (forex) markets could be partly motivating these choices. A model with noise trading, non-traded goods and price rigidities shows that bounds on the volatility of the exchange rate can lower noise trading in forex markets; decrease fundamental variance and improve real fundamentals in an emerging market economy (EME); and give more monetary policy autonomy. Central banks prefer secret interventions where they have an information advantage or fear destabilizing speculation. But in the model discussed in this article, short-term pre-announced interventions can control exchange rate volatility, pre-empt deviations in prices and real exchange rates, and allow markets to help central banks achieve their targets. The long-term crawl need not be announced. In conclusion, the regime's applicability to an EME is explored.     

The effect of exchange rate volatility on international trade in East Asia

In this paper, we empirically investigate the relationship between exchange rate volatility and international trade, focusing on East Asia. Our findings are summarized as follows: first, intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions. Second, one important source of the discouragement is that intermediate goods trade in international production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of East Asian trade. Third, the negative effect of the volatility is greater than that of tariffs and smaller than that of distance-related costs in East Asia.     

Product price differences across countries: determinants and effects

A substantial part of international differences in prices of individual products, both goods and services, can be explained by differences in per capita income, wage compression, or low wage dispersion among low-wage workers, and exchange rate fluctuations. Higher per capita income is associated with higher prices and higher wage dispersion with lower prices. The effects of higher income and wage dispersion are moderated for the more tradable products. The effects of wage dispersion, on the other hand, are magnified for the more labor-intensive products, particularly low-skill services. The differences in prices across countries are reflected in differences in the composition of consumption. Countries in which prices of labor-intensive services are very high, such as the Nordic countries, consume much less of them. For some services, the shares of GDP consumed in high-price countries are less than 20% of the shares in low-price countries. Since these are services of very low tradability, the low consumption levels of these services imply low employment in them.     

Price Common Volatility or Volume Common Volatility? Evidence from Taiwan's Exchange Rate and Stock Markets

This paper investigates the common volatility structure of stock and exchange rate markets of Taiwan. The two markets are often linked together and we are interested in knowing whether price or volume is a good proxy to pursue this issue. We claim that Taiwanese government interventions distort the timing of conventional price volatility clustering in the two markets. The unrestricted trading volumes reveal more information regarding the market than price. We find that common volatility does exist in the stock and exchange markets and this fact is uncovered more easily by using trading volume than by using prices.     

Exchange rate regimes and real exchange rate volatility: Does inflation targeting help or hurt?

This paper revisits the comparison of the effects of inflation targeters versus hard fixers and intermediate exchange rate regimes. In particular, we are interested in exploring the impact of inflation targeting (IT) on real effective exchange rate (REER) volatility for a panel of 62 developing countries over the period 2006–2012. We also analyze the impact of IT regimes on REER in terms of its two component parts, i.e. relative tradable prices across countries as well as sectoral prices of tradables and nontradables within countries. The paper accounts for self-selection concerns regarding policy adoption and examines the effects of commodity exports and foreign exchange intervention. Notably, IT regimes seem to have experienced greater REER volatility, largely driven by external prices in developed countries. For developing countries, IT regimes show no difference in REER volatility, though there is some evidence that they have lower volatility in internal prices.     

Nontradable Goods and the Real Exchange Rate

How important are nontradable goods and distribution costs to explain real exchange rate dynamics? We answer this question by estimating a general equilibrium model with intermediate and final tradable and nontradable goods. We find that the estimated model can match characteristics of the data that are relevant in international macroeconomics, such as real exchange rate persistence and volatility, and the correlation between the real exchange rate and other variables. The distinction between tradable and nontradable goods is key to understand real exchange rate fluctuations, but the introduction of distribution costs is not. Nontradable sector technology shocks explain about one third of real exchange rate volatility. We also show that, in order to explain the low correlation between the ratio of relative consumption and the real exchange rates across countries, demand shocks are necessary.     

Price convergence in the EU—an aggregate and disaggregate approach

This article examines the price dispersion in the European Union (EU) over 15 years (1990–2005). An extensive overview of the literature offers inconclusive results with the half-lives of price shocks from 2.8 to 282 months. Until now, most of the empirical research has been either micro or macro based. In contrast, we conducted a complex analysis utilizing both aggregate and disaggregate price data. The macro approach is based on a Comparative Price Level index calculated as the ratio between PPPs and exchange rate. The disaggregate analysis utilizes the actual prices of almost 150 individual products sold in the 15 capital cities of the EU. We conducted sigma and beta convergence in the analysis of both datasets. There are several differences in results depending on whether the calculation was based on indices or actual prices. Additionally, the model is tested to measure the contribution of different factors in explaining the observed convergence pattern. Most of the explanatory power comes from the differences in GDP (or wages), exchange rate volatility and differences in taxes. The Euro effect when controlling for exchange rate volatility, is not significant.     

Testing for cointegration with threshold effect between stock prices and exchange rates in Japan and Taiwan

This paper empirically investigates the exchange rate effects of the New Taiwan dollar against the Japanese Yen (NTD/JPY) on stock prices in Japan and Taiwan from January 1991 to Mach 2008. Our study employs the newly threshold error-correction model (TECM) elaborated by Enders and Granger [Enders, W., Granger, C.W.F., 1998. Unit-root tests and asymmetric adjustment with an example using the term structure of interest rates. Journal of Business Economics & Statistics 16, 304–311] and Enders and Siklos [Enders, W., Siklos, P.L., 2001. Cointegration and threshold adjustment. Journal of Business Economics & Statistics 19, 166–176], assuming the nature of the relationship between the variables is on the basis of non-linearity. The empirical evidence suggests that there is a long-run equilibrium relationship between NTD/JPY and the stock prices of Japan and Taiwan during the time period investigated. However, an asymmetric threshold cointegration relationship only exists in Taiwan’s financial market. Furthermore, we extend our research by taking into account the effect of the U.S. exchange rate specifically on Taiwan’s financial market. This research also finds a long-term equilibrium and asymmetric causal relationships between NTD/USD and the stock prices of Taiwan. In addition, the results of TECM Granger-Causality tests show that no short-run causal relationship exists between the two financial assets considered for both countries’ cases. However, in the long run a positive causal relationship running from either the Japan or U.S. exchange rate to the stock prices of Taiwan strongly argues for the traditional approach.     

Exchange Rates,Domestic Prices,and Central Bank Actions: Recent U.S. Experience

Central banks that are primarily concerned with the behavior of prices will use monetary policy to try to insulate prices from exchange rate changes. Prices then appear unresponsive to changes in the exchange rate. The observed relationships between prices and the exchange rate will reflect central bank actions instead of the underlying relationship between exchange rates and prices. This paper explicitly recognizes the role that policy plays in determining the observable relationships between exchange rates and prices, and in so doing, it illustrates how the underlying relationships can be unraveled. Using three different empirical approaches, we examine the recent experience of the United States. We find that the prices of various nondurable goods, and even of some services, respond modestly to the exchange rate, and we find that the responses emerge most clearly when the role of monetary policy is explicitly considered. These findings are consistent with the hypothesis that the Federal Reserve acts to mitigate the effects of exchange rate fluctuations on domestic prices.     

Exchange Rate Pass-through in a Small Open Economy: the Importance of the Distribution Sector

The degree of exchange rate pass-through to domestic goods prices has important implications for monetary policy in small open economies with floating exchange rates. Evidence indicates that pass-through is faster to import prices than to consumer prices. Price setting behaviour in the distribution sector is suggested as one important explanation. If distribution costs and trade margins are important price components of imported consumer goods, adjustment of import prices and consumer prices to exchange rate movements may differ. We present evidence on these issues for Norway by estimating a cointegrated VAR model for the pricing behaviour in the distribution sector, paying particular attention to exchange rate channels likely to operate through trade margins. Embedding this model into a large scale macroeconometric model of the Norwegian economy, which inter alia includes the pricing-to-market hypothesis and price-wage and wage-wage spirals between industries, we find exchange rate pass-through to be quite rapid to import prices and fairly slow to consumer prices. We show the importance of the pricing behaviour in the distribution sector in that trade margins act as cushions to exchange rate fluctuations, thereby delaying pass-through significantly to consumer prices. A forecasting exercise demonstrates that exchange rate pass-through to trade margins has not changed in the wake of the financial crises and the switch to inflation targeting. We also find significant inflationary effects of exchange rate changes even in the short run, an insight important for inflation targeting central banks.     

Vertical Trade,Exchange Rate Pass-Through,and the Exchange Rate Regime

We compare the welfare of different combinations of monetary and currency policies in an open-economy macroeconomic model that incorporates two important features of many small open economies: a high level of vertical international trade and a high degree of exchange rate pass-through. In this environment, a small economy prefers a fixed exchange rate regime over a flexible regime, while the larger economy prefers a flexible exchange rate regime. There are two main causes underlying our results. First, in the presence of sticky prices, relative prices adjust through changes in the exchange rate. Multiple stages of production and trade make it more difficult for one exchange rate to balance the whole economy by adjusting several relative prices simultaneously throughout the vertical chain of production and trade. More specifically, there is a tradeoff between delivering an efficient relative price between home and foreign final goods and delivering an efficient relative price between home and foreign intermediate goods. Second, because the small economy faces a high degree of exchange rate pass-through under a flexible regime, it suffers from a lack of efficient relative prices in vertical trade. The larger economy, however, does not face this problem because its level of exchange rate pass-through is low.     

汇率变动对我国进口产品价格的传递效应——基于细分商品层面的分析

本文在汇率价格传递理论分析的基础上,采用自回归分布滞后模型在细分商品层面就人民币汇率变动对进口商品价格的传递进行了研究。研究发现,汇率传递的大小在我国不同行业的不同商品间有较大差异,我国进口商品价格存在不完全传递现象,甚至部分商品存在逆传递。对于原材料类产品,汇率对价格的影响是相当迅速的,随着深加工的进行影响会出现时滞。     

Slow Pass-through Around the World: A New Import for Developing Countries?

Developing countries traditionally experience pass-through of exchange rate changes that is greater and more rapid than high-income countries experience. This is true equally of the determination of prices of imported goods, prices of local competitors’ products, and the general CPI. But developing countries in the 1990s experienced a rapid downward trend in the degree of pass-through and speed of adjustment, more so than did high-income countries. As a consequence, slow and incomplete pass-through is no longer exclusively a luxury of industrial countries. Using a new data set—prices of eight narrowly defined brand commodities, observed in 76 countries—we find empirical support for some of the factors that have been hypothesized in the literature, but not for others. Significant determinants of the pass-through coefficient include per capita incomes, bilateral distance, tariffs, country size, wages, long-term inflation, and long-term exchange rate variability. Some of these factors changed during the 1990s. Part (and only part) of the downward trend in pass-through to imported goods prices, and in turn to competitors’ prices and the CPI, can be explained by changes in the monetary environment—including a fall in long-term inflation. Real wages work to reduce pass-through to competitors’ prices and the CPI, confirming the hypothesized role of distribution and retail costs in pricing to market. Rising distribution costs, due perhaps to the Balassa-Samuelson-Baumol effect, could contribute to the decline in the pass-through coefficient in some developing countries.     

Surfing the waves of globalization: Asia and financial globalization in the context of the trilemma

Using the “trilemma indexes” developed by Aizenman et al. (2010) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—we examine how policy configurations affect macroeconomic performances, with focus on the Asian economies. We find that the three policy choices matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a level higher than a threshold (about 20% of GDP). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation rate. We find that trilemma policy configurations affect output volatility through the investment or trade channel depending on the openness of the economies. Our results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatility of the real exchange rate. These economies’ sizeable amount of IR holding appears to enhance the stabilizing effect of the trilemma policy choices, and this may help explain the recent phenomenal buildup of IR in the region.     

Economic Liberalization and Conditional Volatility of Exchange Rate in Sub‐Saharan Africa: Asymmetric GARCH Analysis

Abstract: For small open economies, an understanding of movements in the exchange rate is imperative in analyzing trade and capital flows. In addition, reliable forecasting of exchange rate volatility is important in risk‐taking assessment and investment decision‐making, both of which are critical to long‐term growth. Using an asymmetric GARCH‐type approach, this paper examines the implications of economic liberalization on the stochastic behavior of the exchange rate series in a sample of sub‐Sahara African (SSA) countries over the 1970–2004 period. The results indicate that exchange rate volatility is variable, and is less volatile under fixed exchange rate regime (pre‐economic liberalization) and higher under flexible regime (post‐economic liberalization), that is, it is asymmetric. For most of the countries, the EGARCH and TGARCH models are robust to parameter stability and gives better forecasting performance compared to the standard GARCH model.     

The Impact of Korea's Exchange Rate Volatility on Korean Trade

This study uses a GARCH-in-mean model to analyse the impact of Korea's nominal exchange rate volatility on exports and export prices over the current flexible-rate period. The volatility of Korea's won increases the exchange risk of exporters and leads to changes in export volume and price. This paper provides some evidence that nominal exchange rate volatility has had a statistically significant impact on real exports over the current floating-rate period. We show that persistence-in-variance of exchange rates affects the market for exports in Korea. An important result is that the effect of exchange rate volatility on trade variables is shown to be significant. We find that the GARCH conditional variance has a statistically significant impact on the reduced form equations. The magnitude of the effect is generally stronger for export quantities than prices. This result is contradicts that of Kroner and Lastrapes's analysis. This is explained by the fact that Korean exporters choose the strategy of pricing to maintain market share instead of adjusting export prices to reflect exchange rate changes, even when this cuts profit margins.     

Exchange rate exposure of sectoral returns and volatilities: Evidence from Japanese industrial sectors

Most studies of exchange rate exposure of stock returns do not address three relevant aspects simultaneously. They are, namely: sensitivity of stock returns to exchange rate changes; sensitivity of volatility of stock returns to volatility of changes in foreign exchange market; and the correlation between volatilities of stock returns and exchange rate changes. In this paper, we employ a bivariate GJR-GARCH model to examine all such aspects of exchange rate exposure of sectoral indexes in Japanese industries. Based on a sample data of fourteen sectors, we find significant evidence of exposed returns and its asymmetric conditional volatility of exchange rate exposure. In addition, returns in many sectors are correlated with those of exchange rate changes. We also find support for the “averaged-out exposure and asymmetries” argument. Our findings have direct implications for practitioners in formulating investment decisions and currency hedging strategies.     

The Impact of Korea's Exchange Rate Volatility on Korean Trade

This study uses a GARCH-in-mean model to analyse the impact of Korea's nominal exchange rate volatility on exports and export prices over the current flexible-rate period. The volatility of Korea's won increases the exchange risk of exporters and leads to changes in export volume and price. This paper provides some evidence that nominal exchange rate volatility has had a statistically significant impact on real exports over the current floating-rate period. We show that persistence-in-variance of exchange rates affects the market for exports in Korea. An important result is that the effect of exchange rate volatility on trade variables is shown to be significant. We find that the GARCH conditional variance has a statistically significant impact on the reduced form equations. The magnitude of the effect is generally stronger for export quantities than prices. This result is contradicts that of Kroner and Lastrapes's analysis. This is explained by the fact that Korean exporters choose the strategy of pricing to maintain market share instead of adjusting export prices to reflect exchange rate changes, even when this cuts profit margins.