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.     

Unconventional monetary policy in emerging markets

Channels of monetary transmission likely to work in an emerging market (EM) are presented. The Indian accommodative policy cycle, and the papers in this special issue, is used to analyse unconventional aspects of EM monetary policy. It is argued that conditions used to justify unconventional monetary policy in advanced economies routinely hold in EMs.     

Identifying Long Run Supply Curve of India

Identifications of a vertical then a horizontal supply curve are successively imposed on Indian time series inflation and industrial output growth data in a two-equation Structural Vector Autoregression (SVAR) model. The results provide an indirect test of the identifications. A high elasticity of long run supply cannot be ruled out, because supply shocks have a large impact on inflation and demand has a large and persistent effect on output levels. But supply is subject to frequent shocks. Estimated structural shocks, capture historical recessions and turning points well. Pro-cyclical policy induced demand shocks aggravated negative supply shocks or failed to take full advantage of positive supply side developments.

     

The Indian exchange rate and Central Bank action: An EGARCH analysis

We analyze the impact of conventional monetary policy measures such as interest rates, intervention, and other quantitative measures, on exchange rate level and volatility, and compare these to the impact of Central Bank communication using dummy variables in the best of a family of GARCH models estimated with daily and monthly Indian data. Since India has a managed float, we also test if the measures affect the level of the exchange rate. We find variations in the Euro/Dollar rate strongly affect the Rupee/Dollar level and volatility. The interest rate differential has strong perverse effects, tending to increase variance and depreciate the Indian currency. News decreases volatility as it adds to scarce information. Domestic policy variables affect both level and volatility, and persist at the monthly frequency, but sometimes work at cross-purposes. Communication channels have potential but were not used effectively.     

Corporate Social Responsibility as a Signalling Device for Foreign Direct Investment

A rise in CSR (corporate social responsibility) has accompanied rise in foreign direct investment (FDI) to developing countries in the 1990s. CSR may be serving a signalling function when the entering firm is of an unknown type. Although countries are now competing keenly to attract foreign firms, even so, excessive tax or excess transfers by firms can still cause a Prisoner’s Dilemma structure to the payoffs resulting in an inefficient Nash equilibrium. CSR allows the accommodating firm to reveal its type, making cooperation the equilibrium outcome. The game differs from standard models since signalling changes the payoffs. A unique separating equilibrium exists where only the accommodating firms signal. But, under certain parameter values, a pooling equilibrium where all firms signal, becomes possible. A number of results are derived including the size of CSR expenditure required as a fraction of profits. An example demonstrates their relevance in practical situations.     

The Effect of Gender on the Motivation of Members of Generation Y College Students to Volunteer

Nonprofit organizations (NPOs) serve a unique purpose, filling gaps left by governments and for-profits. NPOs have the potential to do a lot of good in their communities. However, these organizations are often resource-constrained, both financially and in terms of human capital. Furthermore, NPOs are often judged on the ratio of administration costs to program costs. For these reasons, personnel in small NPOs are often diverted from the organization’s mission to administrative functions. Outsourcing, as research has shown in for-profits, offers the opportunity to refocus human capital to the mission cost effectively. However, there is little research on outsourcing for small NPOs. This study focuses on small NPOs in regard to outsourcing administrative functions. The study found that small NPOs often use staff time and board resources on administrative functions to keep costs down and may not understand the benefits of outsourcing.     

A general equilibrium open economy model for emerging markets: Monetary policy with a dualistic labor market

An optimizing model of a small open emerging market economy (SOEME) with dualistic labor markets and two types of consumers, delivers a tractable model for monetary policy. Differences between the SOEME and the SOE are derived. Parameters depend on features of the labor market and on consumption inequality, and affect the natural interest rate, terms of trade and potential output. The supply curve turns out to be flatter and more volatile, with a larger number of shift factors, including policy-determined terms of trade. A simple basic version of the model is simulated in order to compare different policy targets in response to a cost shock. Flexible domestic inflation targeting gives the lowest volatility although there are trade-offs. Exchange rate volatility is relatively lower but still makes a major contribution to controlling inflation. Flexible CPI inflation targeting performs better when combined with some kind of managed floating. Inflation targeting has to be flexible. With more backward-looking behavior the policy response to a shock is reduced.     

The Impact of Structure and Openness on The Causal Ordering Of Interest,Inflation and Exchange Rates

Journal of Quantitative Economics - In a country with a very large population at low per capita income, the interaction between the price of food and wages is a major determinant of inflation. But,...     

Portfolio Composition and Valuation Effects in Emerging Market Economies*

ABSTRACT

The increase in cross-border assets and liabilities of nations with globalization, implies small asset price and currency movements create large wealth changes. The national net external position is increasingly driven by valuation effects, which the current account does not capture. We analyze valuation effects for a group of seven emerging economies, namely Brazil, Colombia, India, Republic of Korea, Mexico, Peru and Turkey for the time period 2005:Q1-2015:Q4 by scrutinizing their external asset portfolio while controlling for country fundamentals. Both asset and liability categories of Direct Investment equity are found to positively impact valuation. Equity liabilities and debt assets of Portfolio Investment positively influence valuation. Debt liabilities of all kinds of investment negatively impact valuation. Countries with stronger currency tend to gain through valuation effects. An appreciated real effective exchange rate is associated with higher valuation gains. We also found non-linear effects of the composition of external debt portfolio by interacting external portfolio and country characteristics. The external portfolio selection of emerging economies (with more in Direct Investment equity liabilities and Portfolio Investment debt assets) in the period has shielded them from global volatility, and enabled valuation gains.