Inflation and the Exchange Rate: The Role of Aggregate Demand Elasticity

This paper examines the effect of aggregate demand elasticity on the exchange rate when inflation occurs. We discover that both the source of the inflation, whether demand-pull or cost-push, and the elasticity of aggregate demand with respect to the price level, are of consequence for the exchange rate. We obtain two primary conclusions. First, the effect on the exchange rate of cost push inflation is ambiguous and is partially determined by the price level elasticity of aggregate demand. In particular, and assuming that the two examined countries have equivalent aggregate supply elasticities, we conclude that the nation with the less elastic aggregate demand function will see its currency appreciate relative to the other. Second, demand-pull inflation results in an unambiguous increase in the exchange rate but the size of that increase is partially a function of aggregate demand elasticity. Assuming again that two countries have equivalent aggregate supply elasticities, that country with the more elastic aggregate demand will experience currency appreciation.     

储蓄不足与供给约束型经济态势——近代中国经济运行的基本前提研究

多角度的考察表明,近代中国的总需求拉升价格的力度远大于总供给下压价格的力度,产出增长能力较弱;本币升值可以改善贸易收支,贸易条件成立;出口和进口的汇率弹性绝对值之和远小于1,马歇尔—勒纳条件不成立。因此,近代中国经济呈现供给约束型经济态势,总供给曲线的斜度应该是陡峭的。于是,在使用经济学理论框架分析近代中国经济时,应首先考虑所运用的理论之前提假设是否与近代中国的经济态势一致,从而避免产生南辕北辙的结论。     

RMB Appreciation,Output Growth,and Inflation

Following Dibooglu and Kutan(2005),we construct a structural VAR model to investigate the impact of RMB(the Chinese currency)appreciation on growth and inflation in China.The empirical results show that RMB appreciation has negative effects on output growth and inflation while neither effect is statistically significant.However,exchange rate shocks are important in the fluctuations of output growth and inflation.We also simulate the scenario of a sharp currency appreciation compared to the gradual approach adopted by the Chinese government.In the counterfactual analysis we find that a sharp appreciation would lead to more violent shocks in economic growth and inflation compared to the gradual approach.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Exchange rate sensitivity of the demand for money in developing countries

There is consensus among researches that under the present floating exchange rate system although developing countries peg their exchange rate to a major currency, they cannot avoid fluctuation in their effective exchange rates as long as major currencies fluctuate against one another. Few authors have investigated the effects of changes in effective exchange rates of developing countries on their imports, exports, trade balance, demand for international reserves, inflation etc. In this paper we try to inestigate the effects of effective exchange rates of developing countries on their demand for money. Previous authors who have estimated a money demand function, inclusive of an exchange rate variable (bilateral or effective), have restricted themselves to industrial countries only. By using quarterly data over the 1973–85 period, it is shown that in most developing countries, while the short-run effcts of depreciation could be in either direction, its long-run effects are negative indicating that depreciation causes a decline in the demand for domestic currency.     

A NEW COMPARATIVE STUDY ON THE FREE‐FLOATING AND CURRENCY BOARD REGIMES IN HONG KONG

This study aims to compare the performance of free‐floating and currency board regimes for Hong Kong by examining historical data of the two on the output growth and inflation rate. Structural vector autoregression has been applied in the empirical analysis. Without making a strong assumption of unit variance in the residual matrix, this study applies a more natural approach proposed by Cecchetti and Rich to recover the structural parameters. The study has further investigated the recovery of the economy under a demand shock under different exchange rate regimes, in order to provide some evidence to answer why Hong Kong's recovery process after the Asian financial crisis is relatively longer than that in other economies with a managed floating exchange rate regime. New evidence in this study indicates that output recovers much faster in a flexible exchange rate regime than in a fixed exchange rate regime after an aggregate demand shock. Furthermore, this study has applied a more robust method in the counterfactual analysis when comparing the two regimes. New evidence in this study suggests that a free‐floating regime may generate much smaller output variance in Hong Kong and deliver higher output and price levels to Hong Kong.     

Does devaluation improve trade balance in small island economies? The case of Fiji

A number of countries, mostly small and island economies manage fixed exchange and often devalue it as a stabilisation strategy. The current paper investigates the effectiveness of devaluation in improving trade balance with reference to Fiji. A small island economy has limited exportable and hence highly depends on imports for both consumption and production purposes. A devaluation, therefore, inflates domestic price and appreciates the real exchange immediately by raising importable consumption and discouraging imports used in domestic production. The paper applies various econometric models for empirical investigation of its impact and transmission mechanism. Strong long-run relationship found between real exchange rate and trade balance explains that appreciation of currency has been responsible for the rising trade deficit in the economy. Moreover, the devaluation did not demonstrate J-curve phenomenon. The effect of devaluation strongly contributed to the domestic inflation has been while quite weak on stimulating aggregate demand.     

Evidence on inflation–output trade-off in developing and industrial countries

This paper subjects Lucas's output–inflation trade-off study to further empirical investigation. The cross-country study divides the 111 countries covered into 90 developing countries and 21 advanced countries. Lucas's proposition is that volatility of aggregate demand growth should reduce the impact of aggregate demand growth on the cyclical output and the implication of this is that there is no output–inflation trade-off in line with the natural rate theory. We employ annual data over periods that fall between 1958 and 1985 in order to conduct the test. Our findings suggest that Lucas's proposition is valid for developed economies but not for developing economies.     

Optimal monetary policy for a small open economy

This paper focuses on the design of monetary policy rules for a small open economy. The model features optimizing behavior, general equilibrium and price stickiness. The real exchange rate is shown to affect the firm's real marginal cost, aggregate supply and aggregate demand. The welfare objective depends on the openness of the economy, and the optimal policy rule differs from that which obtains in a closed economy. The inflation versus output gap stabilization trade-off is caused by the real exchange rate. The implied optimal monetary policy regime is domestic inflation target coupled with controlled floating of the real exchange rate.     

人民币汇率、国内总需求与通货膨胀——基于汇率传递理论的实证研究

通货膨胀一直是中国政府直接面对而又必须谨慎处理的经济问题。本文以汇率传递理论为视角,运用自回归分布滞后模型（ARDL）考察了1980-2010年人民币汇率、国内总需求、世界商品价格与通货膨胀之间的长期均衡和短期调整关系。长期看来,人民币升值并未像国际经济学理论描述的那样可以抑制通货膨胀,相反却显著地抬高了国内价格水平;中国通货膨胀的成因具有需求拉上的特点,且不存在明显的世界通货膨胀的输入途径。短期看来,中国通货膨胀的动态调整具有明显的滞后特征,且由短期变动向长期均衡调整的速度较快。     

Exchange rate,price, and output inter-relationships in Ghana: evidence from vector autoregressions

This paper explores the dynamic inter-relationships among the currency exchange rate, consumer price inflation, and real output growth, as well as the roles of money and interest rates in output and price determination. Time series data and vector autoregression models are used. Results suggest that there are significant inter-relationships between the exchange rate and inflation, monetary shocks matter only when explaining money itself and the price level, and interest rate-dependent monetary policies in the absence of financial modernization are ineffective     

产出缺口和货币缺口对中国通货膨胀的影响分析

通货膨胀形成的两个重要原因是总需求的过度膨胀和货币供应量的过快增长。利用HP滤波衡量产出缺口和货币缺口,并利用1999—2007年的季度时间数据检验两者对中国通货膨胀的影响。结果表明,产出缺12和货币缺口都是中国通货膨胀的重要原因,且货币缺口对中国通货膨胀的影响远远大于产出缺口影响。     

Nominal Wage Flexibility and Economic Performance: Evidence and Implications Across Industrial Countries

By considering the theoretical connection between labour and product markets, the paper evaluates the economic relationship of these markets within the contractual wage rigidity New Keynesian explanation of business cycles. The empirical analysis focuses on the short‐run cyclical behaviour of real output, prices and wages for 19 industrial countries. Time‐series and cross‐sectional regressions are estimated. Cross‐sectional cyclical correlations in the labour and goods markets are also evaluated across countries. Consistent with the theoretical predictions, aggregate uncertainty is an important factor in increasing the flexibility of the nominal wage in response to aggregate demand shocks. Wage flexibility accelerates price inflation and moderates the response of real output growth to aggregate demand shocks. Wage flexibility does not appear to be an important factor in differentiating the real and inflationary effects of energy price shocks across countries. Finally, aggregate uncertainty increases the responsiveness of output and price to productivity shocks.     

流动性过剩影响因素的实证分析

通过货币的供求对比测度出流动性过剩,采用主成分分析方法研究了流动性过剩的影响因素。实证结果表明,货币存量的持续高位、经济增长、持续低利率与人民币升值、物价指数的高涨、外汇储备和净出口增加导致流动性过剩,资产价格与流动性过剩之间存在反向关系,各因素之间存在着交互影响。实证结果与理论分析结论高度吻合。     

CURRENCY AREAS AND MONETARY COORDINATION*

We integrate a monetary search model into open‐economy macro to analyze the gains from coordinating on inflation. Search frictions and local congestion lead to a determinate exchange rate between two currencies. Relative prices deviate from the law of one price. Because the deviations depend on the cross‐country differential in money growth, each country is tempted to inflate to exploit the deviations. Policy coordination reduces inflation and improves welfare for all countries. In contrast to traditional models, the gains from coordination continue to exist even after each country optimally sets a direct tax on the foreign use of the country's currency.     

Currency internationalization and valuation effects: based on the threshold model

ABSTRACT

Based on the three functions of currency internationalization, including exchange medium, pricing currency and foreign reserve, this paper explores how the degree of currency internationalization affects the impact of the exchange rate and the asset price on valuation effects. Using samples of 161 countries or regions from 2001 to 2016 and the threshold regression method, we find that, firstly, there is a threshold effect of the exchange rate on valuation effects due to currency internationalization. The higher the comprehensive level of currency internationalization is, the greater the positive impact of the exchange rate on valuation effects will be. Secondly, the threshold effect of the asset price on valuation effects due to currency internationalization is not significant because of the high stickiness of asset price. Besides, compared with developed countries, currency internationalization is more important to increase valuation effects through exchange rate channel and asset price channel in developing countries or regions. Finally, there are some differences in the three types of currency internationalization functions. The promotion of exchange medium function will lead to a greater positive impact of the exchange rate on valuation effects, as well as pricing currency function. However, the foreign reserve function has no such effect.     

中国货币供给与通货膨胀的关联性研究

关于货币供给与通货膨胀的关联性,学者们还没有形成一致的看法.理论上,货币供给与通货膨胀具有一定的关联性.通货膨胀有需求拉动型和成本推动型,在通货膨胀的原因中有“货币因素”,也有“非货币因素”.实证检验表明:中国货币供应量与物价指数不存在长期的稳定均衡关系,但货币供应量是物价指数的格兰杰原因,反之则不然.事实上,中国通货膨胀或通货膨胀压力一方面是与货币供给有关,另一方面还与结构性因素有关.因此,要实现中国经济的低通胀运行:一是实行总量均衡和结构合理的货币供给模式;二是采取更有效的货币政策;三是推进经济结构调整,实现国际收支平衡;四是深化金融体系改革,增强中央银行货币控制能力;五是进行汇率机制改革;六是通过财政政策调整供需结构.     

A model of inflation and expectations in Latin America

This paper attempts to overcome certain shortcomings in the existing tests of various theories of inflation and cyclical income growth. It does so by appending a simple model of expectations formation to a simple macroeconomic simultaneous equation model of aggregate supply and demand. Some of the theoretical building blocs are reformulated so as to be more realistic for developing countries. Simultaneous equation estimation techniques are applied to a pooled sample of time series data for 16 Latin American countries. The authors provide empirical evidence supporting the revised hypotheses and offering new insights into the relationships among the actual and expected rates of inflation, the rate of income growth, and the growth rate of the money supply.     

人民币升值对中国股票市场的影响机制分析

汇率和股票价格波动之间具有很强的相关性,汇率的变动会通过贸易、货币供应、利率、心理预期等机制引起股价的波动。虽然受外汇管制、金融市场发展程度及市场开放度的影响,人民币汇率通过传统的传递机制对中国股票价格波动受到一定限制,但在人民币持续升值的压力下,外资以直接和间接方式对国内股票市场造成的冲击已是不争的事实。     

Catching up: The role of demand, supply and regulated price effects on the real exchange rates of four accession countries

The main aim of this paper is to examine the exchange rate behaviour of a group of four transitional, EU accession countries, with a view to making policy recommendations regarding their full accession to the European Monetary Union. We employ a dynamic OLS panel estimator to investigate the relative importance of demand and supply influences on the exchange rates of these countries. Our analysis shows that both supply‐ and demand‐side effects are important for the accession countries, although their overall effect on inflation differentials and competitiveness seems to be small. An additional focus of the paper is the examination of the role that administrated, or regulated, prices and the productivity of the distribution sector play in the real exchange rate dynamics. Using a unique database we show that administrative prices have been a powerful force behind price and real exchange developments for our group of accession countries. The distribution sector is shown to have an independent effect on the internal price ratio over and above that generated by the Balassa–Samuelson effect.