THE IMPLICATIONS OF OECD GROWTH FOR SOUTH AFRICAN EXPORTS

This paper examines the role of OECD growth on South African exports using a vector error correction model. In the long run both OECD growth and the real effective exchange rate were found to influence South Africa's export performance, while in the short run, the real effective exchange rate was found to be an important driver of export growth. The policy implications that emerge from the study underscore the importance of fully exploiting current trading relationships, diversifying South African export destinations and enhancing competitiveness.     

THE YEN‐DOLLAR EXCHANGE RATE AND MALAYSIAN MACROECONOMIC DYNAMICS

This paper empirically assesses the effect of the yen‐dollar exchange rate on selected macroeconomic variables, namely, real output, price level, and money supply, for Malaysia. The results, which are based on a vector autoregressive framework, suggest that variations in the yen‐dollar rate can have significant influences on Malaysia's macroeconomic variables. More specifically, the yen‐dollar depreciation leads to contraction in real GDP and money supply. These results are fairly robust to alternative model specifications. We believe that, apart from providing important insights into the interactions between the yen‐dollar rate and domestic macroeconomic variables, our results contribute to the debate on choice of exchange rate regimes for Malaysia.     

THE IMPACT OF EXCHANGE RATE MOVEMENTS ON FOREIGN DIRECT INVESTMENT: MARKET‐ORIENTED VERSUS COST‐ORIENTED

This paper examines the impact of exchange rate movements on foreign direct investment (FDI). We first employ a real options model to show that while the depreciation of a host country's currency tends to stimulate FDI activity of cost‐oriented firms, the depreciation tends to deter FDI activity for market‐oriented firms. With industry panel data on Taiwan's outward FDI into China over the period 1991–2002, our empirical findings indicate that the exchange rate level and its volatility in addition to the relative wage rate have had a significant impact on Taiwanese firms’ outward FDI into China. In general, the empirical results are consistent with the prediction of the theory. Our results reveal that the relationship between exchange rates and FDI is crucially dependent on the motives of the investing firms. Without considering this fact in an empirical model, the testing results might suffer from aggregations bias.     

DO AFRICAN COUNTRIES MOVE ASYMMETRICALLY TOWARDS PURCHASING POWER PARITY?

This paper investigates the possibility that the adjustment towards long‐run relative purchasing power parity (PPP) is dependent upon the nature of deviations from PPP that are experienced. While existing studies involving developed and less developed countries often find against PPP having employed linear tests of non‐stationarity or non‐cointegration, we employ a new cointegration test, recently advocated by Enders and Siklos and Enders and Dibooglu, that tests for an asymmetric adjustment towards parity with respect to positive and negative deviations of the real exchange rate from its equilibrium value. Using a sample often African economies with data taken from the post‐Bretton Woods floating exchange rate era, long‐run PPP holds in eight of these cases if an explicit distinction is made between positive and negative deviations. Across the sample, we find variation in the type of asymmetry experienced and the roles played by price and nominal exchange rate adjustment.     

REER Imbalances and Macroeconomic Adjustments in the Proposed West African Monetary Union

With the spectre of the euro crisis hunting embryonic monetary unions, we use a dynamic model of a small open economy to analyse real effective exchange rate (REER) imbalances and examine whether the movements in the aggregate real exchange rates are consistent with the underlying macroeconomic fundamentals in the proposed West African Monetary Union (WAMU). Using both country‐oriented and WAMU panel‐based specifications, we show that the long‐run behaviour of the REERs can be explained by fluctuations in the terms of trade, productivity, investment, debt and openness. While there is still significant evidence of cross‐country differences in the relationship between underlying macroeconomic fundamentals and corresponding REERs, the embryonic WAMU has a stable error correction mechanism, with four of the five cointegration relations having signs that are consistent with the predictions from economic theory. Policy implications are discussed, and the conclusions of the analysis are a valuable contribution to the scholarly and policy debate over whether the creation of a sustainable monetary union should precede convergence in macroeconomic fundamentals that determine REER adjustments.     

Misalignments of real exchange rates and the credibility of nominal currency bands

Misalignments of Real Exchange Rates and the Credibility of Nominal Currency Bands. — This paper analyzes a sticky-price target zone model in which realignment risk is modeled endogenously as a function of the degree of real exchange rate misalignments. The implications of the model are used to investigate the credibility of selected nominal ERM exchange rate bands. We find that a lack of credibility of the ERM currency bands occurs mostly in countries with substantial swings and persistent misalignments of real exchange rates. These findings suggest that the major real appreciations in some European bilateral real exchange rates between 1987 and 1992 have been pivotal in triggering the ERM currency crises of 1992 and 1993.     

Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa

Do government spending patterns and composition influence the behaviour of the real exchange rate in sub‐Saharan Africa (SSA)? First, we present a two‐sector small open economy model which proposes that government spending together with productivity differential leads to real exchange rate appreciation. Then, we take these propositions to SSA data and perform a coordinated empirical analysis. Interestingly, we find empirical support for the propositions in SSA. Finally, we disaggregate government spending into three components—consumption, investment and transfer payments—and check whether the composition of government spending provides any insight into the behaviour of the real exchange rate in SSA. Our results suggest that government composition does influence the real exchange rate in SSA. Specifically, we find that government consumption induces a real appreciation while government investment leads to a real depreciation. Although these findings yield appropriate magnitudes and signed directions, their effects are not always significant.     

Testing the Marshall–Lerner Condition in Kenya

In this paper we examine the Marshall–Lerner (ML) condition for the Kenyan economy. In particular, we use quarterly data on the log of real exchange rates, export/import ratio and relative (US) income for the time period 1996q1‐2011q4, and employ techniques based on the concept of long memory or long‐range dependence. Specifically, we use fractional integration and cointegration methods, which are more general than standard approaches based exclusively on integer degrees of differentiation. The results indicate that there exists a well‐defined, cointegrating relationship linking the balance of payments to the real exchange rate and relative income, and that the ML condition is satisfied in the long run, although the convergence process is relatively slow. They also imply that a moderate depreciation of the Kenyan shilling may have a stabilising influence on the balance of trade through the current account without the need for high interest rates.     

What Caused the Korean Currency Crisis in 1997?*: Weak Fundamentals or Self‐fulfilling Expectations*

The present paper investigates which factor is primarily responsible for the sharp depreciation of the Korean won against the US dollar in 1997, using a bivariate vector autoregressive model of real and nominal exchange rates. In the present study, we directly identify the relative importance of fundamental and non‐fundamental factors from the raw data series on exchange rates. This approach is different from most previous studies on the Korean currency crisis, which use proxy variables to represent the two factors. The empirical results show that the collapse of the Korean currency in 1997 appears to be mostly a result of the weakened macroeconomic fundamentals of the economy with, to a limited extent, some non‐fundamental factors.     

THE ROLE OF COMMODITY TERMS OF TRADE IN THE DETERMINATION OF THE REAL EXCHANGE RATES OF THE MEDITERRANEAN COUNTRIES

The aim of this paper is to investigate whether there exists a long‐run relationship between the real exchange rate and the commodity terms of trade in the so‐called Mediterranean or MENA countries. These economies are good candidates for this type of formulation, as are commodity exporting countries. Using cointegration techniques, we find long‐run relationships linking the real exchange rate and a commodity‐based measure of the terms of trade. Therefore, commodity terms of trade are a potential explanation for the apparent nonstationarity of MENA countries’ real exchange rates previously found in the empirical literature.     

Influence of RMB Cross‐border Settlement on the Chinese Economy

In 2014, the amount of RMB cross‐border settlement had reached RMB7.6tn. It is important to evaluate the potential influence of RMB internationalization on China's macroeconomy. In the present study, a framework that includes monetary supply and demand was created to analyze the influences of RMB cross‐border settlement on China's domestic interest rate, asset price and foreign exchange reserves. It is found that RMB settlement in different BOP items leads to very different effects on China's real economy and the financial market. Based on the analysis, we provide a framework of the policy priorities for RMB internationalization, with the RMB cross‐border settlement items divided into three groups with different priorities. Meanwhile, to support RMB internationalization, exchange rate reforms should be adopted as a priority and a prudent attitude maintained regarding capital account liberalization.     

Exchange Rate Pass‐through to China's Export Price: A Product‐level Investigation

Exchange rate movement usually results in changes in the production costs of exporting firms, and, therefore, the prices and the quantity of traded products. The present paper constructs a theoretical model to demonstrate that export products with higher productivity, or with larger market share, or of higher quality will experience a less complete pass‐through. Using the six‐digit harmonized system export data from the CEPII database over the period of 2000 to 2013, the present paper examines how product heterogeneity affects the exchange rate pass‐through of Chinese exports. The empirical results show that the most competitive Chinese export products, or those least affected by exchange rate risks, are those of higher quality, with higher technological complexity and at the high end of the international value chain. Therefore, Chinese exporting firms should pay more attention to improving export quality and upgrading technology to better cope with exchange rate risks and to enjoy more bargaining power in the international market.     

人民币实际汇率波动对中欧进出口贸易影响的实证研究

本文通过建立GARCH模型量度了人民币对欧元实际汇率的波动性,并运用协整检验模型、误差修正模型、脉冲响应函数和方差分解技术就人民币实际汇率变动对中国与欧元区之间进出口贸易的影响进行分析。分析结果表明,中国对欧元区出口在长期内随汇率波动而增加,而进口却随汇率波动而减少;在短期内汇率波动推动中国进口,抑制中国出口。人民币升值在长期内给双边出口均造成伤害,但对中国出口伤害更大;在短期内人民币贬值将对中国进出口均有推动作用。本文分析还表明,在长期内,中国对欧元区出口收入效应远远大于欧元区对华出口收入效应;在短期内,中国实际收入变动对欧元区出口表现负向冲击,而欧元区实际收入变动对中国出口表现为正向冲击。中国汇率制度改革对中国出口欧元区产生推动作用,对欧元区出口产生抑制作用,且前者大于后者。实际汇率水平及其波动性变化对欧元区对华出口变动的解释力高于中国实际收入水平变化的解释力,而对于中国对欧元区出口的变动,欧元区实际收入水平变动的解释力高于实际汇率水平及其波动性变化的解释力。     

Macroeconomic Effects of Commodity Price Shocks in a Low‐income Economy: The Case of Tobacco in Malawi

A major concern for developing economies is a dependence on commodities when their prices are volatile as a major change in the international commodity price can have important implications for economic growth. While some cross‐country studies exist, there is lack of country specific studies that take into account the different characteristics of low‐income economies. This paper contributes to the growing literature by considering the case of Malawi and the macroeconomic impact of price shocks in its major export crop of tobacco. Using a structural vector autoregression (SVAR) approach on quarterly Malawian data from 1980:1 to 2012:4, the paper establishes that a positive tobacco price shock has a significant positive impact on the country's gross domestic product, decreasing consumer prices and inducing real exchange rate appreciation. The results are robust to alternative specifications of a SVAR on difference stationary data and cointegrating VAR. The cointegrating VAR confirms the existence of a long run‐relationship among the variables and causality that runs from tobacco prices.     

Real exchange rates and unit root tests

Real Exchange Rates and Unit Root Tests. — This paper examines monthly OECD exchange rate data (1979–1997) using univariate and panel data unit root tests. Some of these tests support the hypothesis of a unit root. But tests of cointegration reveal the existence of weak purchasing power parity relationships between bilateral nominal exchange rates and relative prices. We suggest that researchers need not conduct unit root tests on real exchange rate data when a modified version of PPP is used; or if there is a long enough time series. Given the definition of real exchange rates, the indicator should be stationary and should have intrinsic mean reverting behaviour.     

A PANEL DATA APPROACH TO THE BEHAVIOURAL EQUILIBRIUM EXCHANGE RATE OF THE ZAR

The question of currency over- or undervaluation is often asked and implies the existence of an equilibrium exchange rate (EER). The aim of this research was to determine the long-term EER of the South African rand using the behavioural equilibrium exchange rate (BEER) methodology. This paper used a panel of data from South Africa's main trading partners to estimate the relationship between the EER and its fundamental determinants using dynamic ordinary least squares (OLS) and fully modified OLS. The average coefficients obtained describe the long-term behaviour of the individual countries' real exchange rates. Substituting the observed fundamental time series into the estimated equation derives the EER for each country and over- and undervaluation can be determined. The results indicated that the fundamental value of the exchange rate was driven by economic growth, the openness of the economy, its foreign reserves, the real gold price and capital expenditure. The exchange rate also fluctuated considerably around its equilibrium level but there is not long sustained periods of over- and undervaluation.     

Inflation Targeting in ASEAN‐10

The paper addresses the empirical question of whether economies that do not systematically target inflation (non‐inflation targeters) experience higher exchange rate volatility as compared with inflation targeters in 10 countries of the Association of Southeast Asian Nation (ASEAN) from 1990 to 2010. The paper examines the role of real exchange rate, exchange rate volatility and the reaction functions of central banks using dynamic panel estimation techniques. The results indicate that the output gap offers more useful information than the inflation gap in setting interest rates for inflation targeters, implying that the real term is more important than the nominal term. In turn, this suggests that an increase in interest rate can be wielded swiftly to reduce real gross domestic product and suppress inflation. The real exchange rate appears as a weaker determinant in setting interest rates for non‐inflation targeters. Inflation targeters experienced lower exchange rate volatility compared with non‐targeters in the ASEAN, which implies that implementation costs to their domestic economies may be marginally lower. Meanwhile, the non‐targeters follow a mixed strategy as both the inflation and real exchange rate are used as instruments to set the interest rates.     

THE ARGENTINEAN CURRENCY CRISIS: A MARKOV‐SWITCHING MODEL ESTIMATION

In 2002, the Argentinean currency board came to a sudden and dramatic end. Although the country had been suffering from weak economic fundamentals for years, the timing and severity of the currency crisis surprised most observers. The present study analyzes the role of fundamentals and self‐fulfilling speculation in the Argentinean crisis. Arguing within a theoretical model of a fixed exchange rate system that allows for multiple equilibria, we show that the crisis, although associated with weak fundamentals, cannot be explained by these macroeconomic factors alone. Estimating a univariate Markov‐switching model, the current study shows that shifts in agents’ beliefs did indeed also play a crucial role.     

DOLLARIZATION OF DEBT CONTRACTS: EVIDENCE FROM CHILEAN FIRMS

This paper uses a new data set to estimate the causes and consequences of foreign currency debt in firms' balance sheets. The evidence from this sample of Chilean firms indicates that dollar‐denominated debt increases with firms' size and degree of exposure to foreign competition. We find evidence that dollar‐denominated debt combines with exchange rate movements to produce a negative balance‐sheet effect that reduces firms' investment in periods of strong exchange rate depreciation. This negative balance‐sheet effect is associated with long‐term debt and appears to be nonlinear in the amount of real exchange rate depreciation.     

人民币实际汇率与中国就业——基于内生劳动力供给模型的实证研究

本文首先在个体跨期最优理论模型中引入内生劳动力供给因素,建立以中国就业为研究对象的理论模型和相应的计量模型,然后运用Johansen协整分析法、Granger因果检验法及VEC模型探讨1985～2007年期间人民币实际汇率对中国就业的影响。结果表明:长期而言,人民币实际汇率贬值将促进中国就业,人民币实际汇率升值则会抑制就业;而世界实际利率与中国就业显著正相关。在短期内,人民币汇率调整对就业影响存在一定的滞后性,甚至会出现与长期关系相反的现象;世界实际利率与中国就业关系与长期相左。根据上述分析结果,本文提出了相关的政策建议。