Modelling the impact of central bank intervention on exchange rate volatility under inflation targeting

This article empirically investigates the effect of central bank’s foreign exchange interventions on the level and volatility of the Uganda shilling/US dollar exchange rate (UGX/USD) under an inflation-targeting regime. Utilizing daily data spanning the period 1 September 2005, to 31 December 2015, we estimate a foreign exchange intervention model within a GARCH theoretic framework. Empirical results indicate that foreign exchange interventions have had mixed impact on the volatility of the exchange rate. We find that inflation targeting is capable of curbing temporary exchange rate shocks. Empirical results indicate that while order flow is capable of reducing exchange rate volatility, an increase in the operating target rate, the 7-day interbank rate tends to exacerbate exchange rate volatility. Our empirical results are robust to alternative model specifications. We argue that inflation targeting is an effective monetary policy tool for curbing exchange rate volatility.     

What to stabilize in the open economy*

We consider the question how “best” to maintain price‐level stability in an open economy, and evaluate three possible policy choices: (a) a constant money growth rate rule; (b) a fixed exchange rate; and (c) a policy of explicit commitment to a price‐level target. In each case we assume that policy is conducted by injecting reserves into or withdrawing reserves from the “banking system.” In evaluating the three regimes, we adopt the criterion that the “best” policy should leave the least scope for indeterminacy and “excessive” economic volatility. In a steady‐state equilibrium, the choice of regime is largely irrelevant; any steady‐state equilibrium under one regime can be duplicated by an appropriate choice of the “control” variable under any other regime. However, we show that the sets of equilibria under the three regimes are dramatically different. When all countries follow the policy of fixing a constant rate of money growth, there are no equilibria displaying endogenously arising volatility and there is no indeterminacy of equilibrium. Under a regime of fixed exchange rates, indeterminacies and endogenously arising fluctuations are impossible if and only if the country with the low “reserve‐to‐deposit” ratio is charged with maintaining the fixed rate. Finally, when one country targets the time path of its price level, under very weak conditions, there will be indeterminacy of equilibrium and endogenously arising volatility driven by expectations.     

MONETARY CREDIBILITY VS. VOTER APPROVAL: POLITICAL INSTITUTIONS AND EXCHANGE‐RATE STABILIZATION DURING CRISES

This paper analyzes how political institutions affect the execution of exchange‐rate policy. By focusing on policy‐makers' responses to the emergence of speculative pressure on their currencies, we argue that the effect of democratic institutions on exchange‐rate stability is likely to be conditioned by the officially announced exchange‐rate regime. Officially fixed exchange rates are the main instrument of autocrats to signal commitment to long‐term stability. Autocratic governments with strictly fixed exchange rates are thus more likely to defend their exchange rates than autocrats with an intermediate regime because the latter implicitly signal that they care less about monetary stability. In contrast, democrats defend more often in intermediately than in fully fixed official regimes by using a combination of external and internal adjustments, which reduce the negative effects of a devaluation on voters. Our analysis of 189 currency crises between 1975 and 1999 supports this conditional effect.     

汇率制度与宏观经济政策环境——以加拿大为例

加拿大属于典型的资源性经济,加元的汇率变化多受国际商品和石油价格的影响,超出了国内货币政策的控制范围,是独立浮动或是固定汇率？经过两次试验后,加拿大政府坚定地选择了独立浮动汇率制度,并最终实现了汇率政策与货币政策脱离,以此给予了加拿大银行较大的决策空间,使后者专注于维持较低的通货膨胀环境。同时,加拿大政府努力为汇率制度创造有利的宏观经济政策环境,财政政策和货币政策分工明确、相互支持,为汇率制度和经济增长奠定了可持续的坚实基础。本文以加拿大浮动汇率制度为主线,从财政政策、货币政策、政策搭配角度讨论其宏观经济政策框架,分析加元汇率制度的运行环境。在此基础上,本文探讨加拿大汇率政策及浮动汇率制度的作用与功能。本文第五部分对加拿大银行提出的汇率预测模型作出了较深入的分析。     

Macroeconomic dynamics in Macedonia and Slovakia: Structural estimation and comparison

This paper estimates a structural macroeconomic model using data for Macedonia and Slovakia to characterize possible challenges Macedonia can face concerning macroeconomic stabilization during its transition process. A comparison of the estimated model parameters suggests that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions show Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in the estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia's macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia's variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets with possible negative implications for financial stability.     

Capital Flows and Exchange Rate Volatility in India: How Crucial Are Reserves?

This paper tests if the adequacy of reserves helps reduce exchange rate volatility in an environment of financial globalization, market‐determined exchange rate and macroeconomic imbalances. It exploits the difference in the period after 2010 when India did not accumulate reserves but faced higher capital flow pressures, relative to a previous managed‐float period marked by significant absorption of surplus capital flows. Along with other determinants, the sensitivity of rupee volatility is examined. The paper finds that adequate reserve holdings significantly reduce exchange rate volatility irrespective of the exchange rate regime; the effect is more through influence upon market sentiment and confidence than actual intervention. It contributes to existing evidence on the role of reserves in mitigating exchange rate volatility amid capital flow swings and offers insights into the policy environment depicted in the trilemma.     

The model and empirical estimation of the optimal flexibility of RMB exchange-rate regime: A study based on the price-stabilization

Under the Mundell-Fleming-Dornbusch (M-F-D) framework, the paper develops a stochastic model to study the optimal choice of RMB exchange rate regime based on two objectives, namely the exchange rate stabilization and price stabilization. The paper finds that different policy objectives will lead to different optimal choices of RMB exchange-rate regime. If the central bank aims to stabilize the price level, the optimal choice would be a certain type of intermediate regime, or the optimal choice would be a fixed one if it aims to stabilize the RMB exchange rate. Based on the model, the paper empirically estimates China’s open economy parameters and uses them to estimate the optimal flexibility of RMB exchange rate regime. The paper points out that China should allow more exchange rate changes to absorb its foreign exchange market pressure in order to stabilize the general price level, which indicates that China should move toward a more flexible exchange rate regime.     

THE CHOICE OF EXCHANGE RATE REGIME AND THE VOLATILITY OF EXCHANGE RATES BEFORE AND AFTER THE ASIAN CRISIS: A COUNTERFACTUAL ANALYSIS*

This paper carries out a counterfactual analysis of the impact of alternative exchange rate regimes on the volatility of the nominal effective exchange rate (NEER) and the bilateral rate against the US dollar for nine East Asian countries, both before and after the Asian financial crisis. Our hypothetical regimes include a unilateral basket peg (UBP), a common basket peg (CBP) and a hard peg against the $US, but in contrast to previous counterfactual exercises which compute the weights for effective exchange rates on the basis of simple bloc aggregates, we apply a more disaggregated methodology using a larger number of trade partners and utilise ARCH/GARCH techniques to better capture the time‐varying characteristics of volatility. Our results suggest that a UBP would minimise effective exchange rate volatility for all countries both before and after the crisis and provides the highest regime gains compared to actual. Although the gains for a CBP are always less than those for a UBP the absolute differences between the two regimes appear to be small. In terms of bilateral exchange rates against the dollar the gains from a UBP or CBP could also be quite significant for the non‐dollar peggers, especially post‐crisis, since a fall in effective instability would be accompanied by a fall in bilateral instability.     

Real exchange rate volatility,financial crises and exchange rate regimes

This article examines real exchange rate (RER) volatility in 80 countries around the world, during the period 1970 to 2011. Two main questions are raised: are structural breaks in RER volatility related to changes in exchange rate regimes or financial crises? And do these two events affect the permanent and transitory components of RER volatility? To answer these, we employ two complementary procedures that consist in detecting structural breaks in the RER series and decomposing volatility into its permanent and transitory components. Our results suggest that structural breaks in RER volatility coincidence with financial crises and certain changes in nominal exchange rate regimes. Moreover, our findings confirm that RER volatility does increase with the global financial crises and detect that the more flexible the exchange rate regime, the higher the volatility of the RER using a de facto exchange rate classification.     

Possible Best Currency Basket Selection from the Perspective of Real Effective Exchange Rate

We calculated the real effective exchange rate indexes and measured their volatilities based on four currency baskets to find which currency basket is optimal for achieving China's policy target of keeping exchange rates stable. The volatility of the bilateral exchange rate between the RMB and the US dollar is also calculated to make a comparative analysis. Results showed that the bilateral exchange rate of the RMB and the US dollar is only stable in special time periods. In most time periods, pegging to the G3 currency basket is optimal to achieve the goal of stabilizing exchange rates while pegging to the AMU currency basket will result in the most volatile exchange rates.     

Monetary policy and noise traders: A welfare analysis

This paper studies the choice of monetary policy regime in a small open economy with noise traders in forex markets. We focus on two simple rules: fixed exchange rates and inflation targeting. We contrast the above two rules against optimal policy with commitment under productivity shocks. In general, the presence of noise traders increases the desirability of a fixed exchange rate regime. We also evaluate the welfare impact of Tobin taxes in this milieu. These taxes help unambiguously in the absence of productivity shocks; their welfare impact under productivity shocks depends on the monetary regime in place and trade elasticity between domestic and foreign goods.     

Value,Distribution and Capital: A review essay

This article identifies two possible alternative approaches to questions of exchange rate policy within a broadly keynesian frame work. One argument is that the implementation of keynesian’ policies in single jurisdiction requires a ‘managed’ or ‘dirty’ float, while the other would stress the benefits of a greater degree of nominal exchange rate stability as a means of reducing uncertainty and the volatility of expectations. We argue in favour of the former, on the grounds that it will not be possible to pursue a lsquo;cheap money’ policy to reduce real interest rates in a single jurisdiction unless there is some room to manoeuvre on exchange rates. A ‘fixed but adjustable’ exchange rate regime is less attractive because of the potential for deflationary bias in a hegemonic system with fixed exchange rates. Also, the politicization of exchange rate policy in such an environment makes necessary adjustments, particularly in a reflationary direction, more difficult than they otherwise would be. The recent history of the ERM in Europe provides examples of both phenomena.     

Optimal exchange rate policy for a small oil-exporting country: A dynamic general equilibrium perspective

This paper examines the choice of optimal exchange rate regime for an oil-exporting small open economy using a welfare-based model. The paper extends the standard New Keynesian Small Open Economy model to include three countries: a small oil-exporting country and two large foreign countries. The model also features three sectors: traded, non-traded, and primary-commodity (crude-oil). The sources of uncertainty are random monetary (demand), productivity (real), and real oil price (supply) shocks. Despite the absence of a non-oil traded sector in this primary-commodity economy, the welfare analysis suggests that flexible exchange rate regimes can reduce external shocks and consumption volatility given certain caveats about pricing-schemes. The analysis also suggests that a basket peg is more welfare-improving than a unilateral peg, as higher volatility of the anchor currency reduces consumer welfare.     

Exchange rate volatility and regime change: A Visegrad comparison

We analyze exchange rate volatility in the Visegrad Four countries during the period in which they abandoned tight regimes for more flexible ones. We account for path dependency, asymmetric shocks, and movements in interest rates. In addition, we allow for a generalized error distribution. The overall findings are that path-dependent volatility has a limited effect on exchange rate developments and that the introduction of floating regimes tends to increase exchange rate volatility. During the period of flexible regimes, volatility was mainly driven by surprises. Asymmetric effects of news tend to decrease volatility under the floating regime. Interest differentials impact exchange rate volatility contemporaneously under either regime, although we find no intertemporal effect of interest differentials. Journal of Comparative Economics 34 (4) (2006) 727–753.     

The role of monetary policy credibility in explaining the decline in exchange rate pass-through in South Africa

This paper investigates the key factors that explain the documented decline in the exchange rate pass-through in South Africa over the past two decades. The paper finds that this outcome is largely due to improved monetary policy credibility. The South African Reserve Bank has become more credible since the adoption of the inflation target regime through improved communication, transparency, and independence. We show that credibility is enhanced through a gradual disinflation process and reduction of inflation volatility. As result, expectations of agents have become well-anchored at levels that are consistent with its objectives of keeping inflation within the official target range of 3–6 percent even in the presence of external shocks. This in turn reduces the exchange rate pass-through. This finding is important from a monetary policy perspective not only for South Africa but other emerging economies such as Turkey as it shows that improving monetary policy credibility is a key ingredient to reducing exchange rate pass-through.     

A Tale of Two Currencies: the Asian Crisis and the Exchange Rate Regimes of Hong Kong and Singapore

Hong Kong has maintained a pegged exchange rate since 1983, while Singapore has been on a floating regime since the early 1970s. This paper provides an interpretation of the different performance of the Hong Kong and Singapore economy that could be attributable to the differences in their exchange rate regime. We develop a model that can help to interpret the differences in both the longer run trends in inflation and real exchange rates in Hong Kong and Singapore as well as the short differences in macroeconomic and real exchange rate volatility. The difference in the response of the two economies to the Asian crisis is also consistent with our model.     

美联储量化宽松政策对全球资产价格的非平衡溢出效应

本文采用全局向量自回归模型分析了美联储QE对采用不同货币政策框架、汇率制度和资本流动管理制度国家和地区的不同影响。“货币政策钉住货币供应量+宽松钉住汇率制度+资本账户可兑换”的国家其货币政策应兼顾本国物价水平稳定，同时加强宏观审慎政策对资产价格的逆周期调节，避免出现实体经济紧缩而金融繁荣的现象。“货币政策钉住通货膨胀+浮动汇率+资本账户可兑换”的国家应强化宏观审慎政策对资产价格的调节以应对金融资产泡沫。     

Exchange rate volatility and export performance: a cointegrated VAR approach

During the last decades Norwegian exporters have–despite various forms of exchange rate targeting–faced a rather volatile exchange rate which may have influenced their behaviour. Recently, the shift to inflation targeting and a freely floating exchange rate has brought about an even more volatile exchange rate. We examine the causal link between export performance and exchange rate volatility across different monetary policy regimes within the cointegrated Vector Autoregression (VAR) framework using the implied conditional variance from a Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model as a measure of volatility. Although treating the volatility measure as either a stationary or a nonstationary variable in the VAR, we are not able to find any evidence suggesting that export performance has been significantly affected by exchange rate uncertainty. We find, however, that volatility changes proxied by blip dummies related to the monetary policy change from a fixed to a managed floating exchange rate and the Asian financial crises during the 1990s enter significantly in a dynamic model for export growth–in which the level of relative prices and world market demand together with the level of exports constitute a significant cointegration relationship. A forecasting exercise on the dynamic model rejects the hypothesis that increased exchange rate volatility in the wake of inflation targeting in the monetary policy has had a significant impact on export performance.     

Capital Inflows,Dutch Disease Effects,and Monetary Policy in a Small Open Economy

This paper studies the role of monetary policy in a small open economy that experiences Dutch disease effects as a result of capital inflows, and examines the issue of whether such a policy should seek to address these effects from a welfare perspective. I find that Dutch disease effects occur under a fixed nominal exchange rate regime. However, a monetary policy regime characterized by generalized Taylor interest rate rules featuring either the real exchange rate or the nominal exchange rate avert Dutch disease effects. Welfare results reveal that the optimal rule is a generalized Taylor rule consistent with nominal exchange rate flexibility.     

Does the quality of political institutions affect intra-industry trade within trade blocs? The ASEAN perspective

There has been a renewed resolve for deeper integration and cooperation within ASEAN. Intra-industry trade (IIT) is often viewed as a way of achieving economic as well as political integration. This article tests for the effect that political regime and governance may have on the intensity of IIT. We particularly examine if quality of political institutions which includes corruption and democracy indices as well as economic factors comprising corporate tax rate, regional FDI flow, flexibility of exchange rate regime, size of the market, economic distance affect the intensity of horizontal and vertical IIT. The study finds that control of corruption and good governance both increase the vertical IIT but not the horizontal IIT. The study further finds that intra-economy FDI flow, stable exchange rate regime, market size and proximity positively affect IIT within the trade bloc. However the negative effect of corporate tax rate suggests that if countries were to coordinate their tax policies, they could avoid harmful tax competition and promote IIT across their borders. The findings regarding the effect those economic and political factors have on the intensity of IIT certainly warrants the attention of policy makers and researchers alike.