Also, while exogenous monetary policy shocks can dampen financial conditions in other countries, growthdriven monetary policy rate changes have the opposite effects. In fixed exchange rate regimes, governments set the value for the national currency in terms of a foreign currency. Exchange rate and monetary policy regimes in fiji fiji has been following the fixed exchange rate regime since 1975 and the fijian dollar was linked to a basket of five currencies of its major trading partners. Exchange rate policy and the responses to exogenous shocks. Apr 01, 2012 read exogenous shocks and exchange rate regimes, the world economy on deepdyve, the largest online rental service for scholarly research with thousands of academic publications available at your fingertips. On the other hand, selected country evidence during the 1990s reported in frankel 1999 and hausmann, gavin, pages, and stein.
Additionally, the range of stochastic shocks disturbing the world economy is limited of price. First, changes in the real exchange rate real appreciation and depreciation have a strong influence on the direction of trade. A major reason is that real exchange rate instability would incur costs in international trade and finance. External shocks, the exchange rate and macroprudential policy bis. However, these two shocks are not natural candidates for exogenous forces of the type that pro. In this section, we introduce the data used in this paper and explain why our historical setting and. Exchange rates as shock absorbers ucla anderson school. Following baseline fixed effects estimates for the full sample. One major concern surrounding this analysis is whether the real exchange rate may be treated as an exogenous policy instrument.
Exchangerate dynamics under stochastic regime shifts a unified approach kenneth a. For each shock we compare the magnitudes of the responses in each exchange rate regime and. Monetary policy divergence, net capital flows, and. Can foreign exchange intervention stem exchange rate. The paper derives the optimal exit decision in a stochastic framework when there are exogenous and irreversible benefits from the fixed exchangerate regime. Under the floating exchange rate regime cpi inflation starts with a positive value and then there is a sharp decline that makes the cpi inflation negative until the th quarter. Where demand shocks are important, we demonstrate an increase in specialization, trade and welfare under coor. Trade openness and exchange rate regimes request pdf.
Exogenous shocks and exchange rate regimes, the world. From the beginning of 2000, the british pound was replaced by euro. Using a panel vector autoregressive model with exogenous factors, it traces the mean. Exchange rate regimes fall into two categories, fixed and floating exchange rate regimes. Pdf exchange rate passthrough to domestic prices under.
Countryspecic shocks, such as productivity shocks, may impact on the real exchange rate leading to reverse causality. Transformative agenda for monetary and exchange rate policies africas debt sustainability and appropriate policy responses this technical paper was commissioned by the finance and private sector section, macroeconomic policy division, economic commission. Global credit supply shocks and exchange rate regimes nadav ben zeev bengurion university of the negev june 4, 2018 abstract the recent global. The empirical questions this paper tries to address are the following. In an equilibrium model, exchangerate change is an optimal response to exogenous shocks, and thus may well maximize national welfare.
We find that exogenous exchange rate shocks to the irish economy are sizeable, but not much more so than under previous regimes. The empirical findings support the view that the exchange rate regime matters as to how countries respond to exogenous external shocks like terms of trade shocks, in that. The exogenous shocks facilityhigh access component esfhac, which was established in 2008, has provided concessional financing to poverty reduction and growth trust prgteligible countries facing balance of payments needs caused by sudden and exogenous shocks. All else equal, this suggests that the adoption of strongly fixed exchange rate regimes in the region may not be too costly in terms of diminished ability to respond to exogenous external shocks. Terms of trade shocks, monetary instability and exchange. Using a panel vector autoregressive model with exogenous factors, it. Many economists argue that a flexible exchange rate regime is preferable to a fixed. The gradual abolition of foreign exchange controls in emerging economies has opened the corresponding author. Exchangerate dynamics under stochastic regime shifts. A common feature related to the exchangerate regime and foreign exchange policy among east asian countries is that they tend to maintain a trade surplus, have a high foreign reserve in us dollars, and keep their currencies exchange value low.
This paper investigates the effects of exchange rate regimes and alternative monetary policy rules for an emerging market economy that is subject to a volatile external environment in the form of. Appendix describes the exchange rate regimes in each country in the sample. Theoretically speaking, the real exchange rate is very important in economic activities for at least two reasons. Exchange rate regimes and location prepared by luca antonio riccil authorized for distribution by peter isard. Due to these complications, failing to account for the endogenous response of. As the preceding discussion suggests, determining whether flexible exchange rate regimes are indeed able to insulate the economy from external shocks, and. Exogenous shocks and exchange rate regimes, the world economy. Exchange rate regimes and welfare losses from foreign. Second, we provide evidence that exogenous real exchange rate shocks represent demand shocks in the global market for crude oil. Some empirical evidence on the effects of shocks to monetary policy on exchange rates authors.
Pdf the bank of russia intends to introduce inflation targeting policy and exchange rate free floating regime in three years. The paper derives the optimal exit decision in a stochastic framework when there are exogenous and irreversible benefits from the fixed exchange rate regime. Pdf the exchange rate regime and economic stability. Monetary policy spillovers under intermediate exchange rate. The debate on the policy response to external shocks in emerging market. However, the output response is significantly smaller and smoother. Using a panel vector autoregressive model with exogenous factors, it traces the. Left to itself, the financial system accentuates these expansions and contractions. The relative importance of the two types of shocks can be calibrated to reproduce the observed increase in real exchange rate variability in industrialized countries under. At first glance, there is a fundamental difference between direct trade and entrepot trade in that the former involves only two countries, and therefore a single exchange rate, while the latter involves three countries, and two exchange rates. Government spending shocks, sovereign risk and the exchange. The behavior of the real exchange rate under fixed and.
This paper discusses desirable exchange rate regimes and how countries can. The exogenous shocks facility high access component esfhac. A flexible nominal exchange rate generally makes it easier for the real exchange rate to adjust in the face of exogenous shocks when prices or wages are sticky. Exchange rate regimes and sudden stops nadav ben zeev bengurion university of the negev november 8, 2017 abstract the recent global. Full paper 241 kb pdf keywords exchange rate regimes pdf files. Mar 25, 2020 the exogenous shocks facilityhigh access component esfhac, which was established in 2008, has provided concessional financing to poverty reduction and growth trust prgteligible countries facing balance of payments needs caused by sudden and exogenous shocks. A common feature related to the exchangerate regime and foreign exchange policy among east asian countries is that they tend to maintain a trade surplus, have a high foreign reserve in us dollars, and keep their currencies exchange value low in order to support their export sector. Foreign exchange reserve adequacy and exogenous shocks. The results show that output and government consumption fall in response to an oil price decline. In choosing an exchange rate regime, it is important to consider which regime best facilitates macroeconomic adjustment and economic integration. Transformative agenda for monetary and exchange rate policies.
An additional complication is that under pegged exchange rates, negative external shock tend to generate a costly adjustment process. Pdf termsoftrade shocks and exchange rate regimes in. In the absence of sovereign risk, the traditional mundellfleming model pre. In an equilibrium model, exchange rate change is an optimal response to exogenous shocks, and thus may well maximize national welfare. Other exchange rate systems will be mentioned in passing. External shocks under different exchange rate regimes in low. Exchange rate passthrough to domestic prices under. Pdf foreign exchange reserve adequacy and exogenous shocks. Exogenous shocks and growth crises in lowincome countries. Pdf responsiveness of exchange rates to external price shocks as well as their ability to.
Golden fetters and the causal effects of countercyclical. We document a considerable and persistent increase in. Using a dynamic stochastic general equilibrium dsge model with nominal price rigidity and imperfect competition, we examine the impact of termsoftrade and foreign interest rate shocks on some key macroeconomic variables for a small open economy under different exchange rate regimes. This is easily illustrated through a theory known as the purchasing power parity theory, which in its absolute. Exchange rate regime firm entry stabilization policy abstract this paper studies the dynamics of output and export margins in the aftermath of global shocks in. In this paper, we study whether fxi has been an effective tool to dampen the effects of these inflows on the exchange rate. Effects of monetary and macroprudential policies on. Using recent advances in the classification of exchange rate regimes, this paper finds. Flow demand and storage demand shocks account for an additional 31%, suggesting a modestly important role of actual and expected global business cycle dynamics for the determination of the real exchange rate. If there is some price rigidity, however, a floating exchange rate may not be optimal. Tax revenue performance and vulnerability in developing countries. This paper examines the macroeconomic effects of an adverse oil price shock under different exchange rate and fiscal policy arrangements in 40 oilexporting countries from 1973 to 2010 using panel vector autoregression techniques. Exchange rate regimes, specialization and trade volume. In order to correct these exogenous shocks and restore balance in the economies, stringent fiscal and monetary policies were required.
A major reason is that real exchangerate instability would incur costs in international trade and finance. Each sector of the economy in the gali model is very brie. Monetary policy spillovers under intermediate exchange. Pdf termsoftrade shocks and exchange rate regimes in east. Klein and shambaugh 201545 broke this trend by studying monetary autonomy while considering intermediate exchange rate regimes as a class of their own. We estimate var model to investigate 1 responsiveness of exchange rate to the exogenous price shock to examine the dynamics volatility in the exchange rate leading path followed by the unexpected oil price shockand 2 effect of the unexpected exchange rate shift to domestic price indexes to examine its distribution along the internal. To deal with endogeneity issues, we look at the response of different countries to plausibly exogenous gross inflows, and explore the cross country. Read exogenous shocks and exchange rate regimes, the world economy on deepdyve, the largest online rental service for scholarly research with thousands of academic publications available at your fingertips. Output stabilization in fixed and floating regimes does.
Exchange rate regimes, inflation and output volatility in. If a countrys real exchange rate experiences depreciation, other factors held constant, her goods and. Froot graduate school of business, harvard university, boston, ma 02163, usa, and national bureau of economic research maurice obstfeid university of california, berkeley. Some empirical evidence on the effects of shocks to monetary. In a separate demonstration of the importance of the exchange rate regime,we narrow our focus to two countries with fixed rate regimes, ecuador and argentina, to show how forcefully changes in the terms of trade will drive eco. Foreign interest rate shocks and exchange rate regimes in east asia.
Tax revenue performance and vulnerability in developing. Global credit supply shocks and exchange rate regimes. Since the government does not intervene in exchange markets under the new regime, the exchange rate floats. The debate on exchange rate regimes exchange rate regimes fall into two categories, fixed and floating exchange rate regimes. Some empirical evidence on the effects of shocks to. Government spending shocks, sovereign risk and the exchange rate regime dennis bonamx jasper lukkezen. Essays on the optimal choice of exchange rate regime in emerging. Abstract using a dynamic stochastic general equilibrium dsge model with nominal price rigidity and imperfect competition, we examine the. Government spending shocks, sovereign risk and the exchange rate regime dennis bonamx jasper lukkezen19th december 20 abstract keynesian theory predicts output responses upon a. Termsoftrade shocks and exchange rate regimes in a small open economy. Exogenous shocks and exchange rate regimes chia 2012. Monetary policy divergence, net capital flows, and exchange. The key question of this paper is whether maintaining a relatively weak nominal and real exchange rate, such as through some form of sterilised intervention, or intervention coupled with capital controls, or any policy which has the same e.
Adjustments of regular and nonregular workers to exogenous. Exchange rate regime an overview sciencedirect topics. Government spending shocks, sovereign risk and the. Exchange rate regimes and welfare losses from foreign crises. The merit which is often attributed to flexible exchange rate regimes over fixed exchange rate regimes is their ability to insulate the economy more effectively against real shocks friedman, 1953. Using a sample of developing countries with different exchange rate regimes, we test whether, after controlling for a variety of factors, those with managed exchange rates achieve lower inflation and suffer higher output and inflation variability than. Sep 12, 2016 under the fixed exchange rate regime both cpi and domestic inflation start with positive values and then return to steady state levels slowly.
Moreover, the endogenous policy response is likely to vary across countries depending on their capital account and exchange rate regimes. Exchange rate passthrough to domestic prices under different. Collapses of fixed exchangerate regimes as breakdown in. Maintaining a fixed value of one currency in terms of another requires. Exchange rate regimes and location prepared by luca antonio riccil authorized for distribution by peter isard june 1997 abstract. As described earlier, we wish to examine the effects of three distinct shocks technology, preference and monetary policy shock on output, inflation, interest rate, employment, terms of trade and nominal exchange rate of the model under two different exchange rate regimes fixed and floating. Many emerging market economies have relied on foreign exchange intervention fxi in response to gross capital inflows.