Friedman Redux: External Adjustment and Exchange Rate Flexibility

This paper studies the question of whether exchange rate policy affects the impact of remittances on economic growth in recipient countries. The paper utilizes a comprehensive data set that comprises annual observations for 135 developing and transition countries, spanning 1970-2007. The data for exchange rate regimes is based on the Reinhart and Rogoff exchange rate regime classification, whereas the data for remittances and all other variables are from the World Bank's World Development Indicators database. The findings indicate that more flexible exchange rate regimes are associated with a greater increase in economic growth following an increase in remittances, but also that the impact of remittances on growth is positive under a fixed exchange rate regime. The estimates suggest that a 1 percent increase in remittances increases per capita growth by about 0.79 percent under a fixed exchange rate regime, and that this effect increases by about 0.13 percent for a 1 point increase in the exchange rate flexibility index. The results further suggest that the effect of remittances under a fixed exchange rate regime is positive in less financially developed countries as well, but do not provide conclusive evidence that this effect varies inversely with exchange rate flexibility in such economies as theorized.

The existing evidence on the volume effects of exchange rate risk and exchange rate regime choice is examined. The analysis involves estimating the effects of cross-country differences in exchange rate regime on export and import elasticities using a continuous measure of the degree of exchange rate flexibility. It is argued that risk for firms involved in international trade tends to decrease with greater exchange rate flexibility. In formulating our hypotheses we argued that the cross-country variation in U.S. export elasticities with respect to the real exchange rate and foreign GDPs is primarily attributable to the cross- country variation in bilateral exchange rate regime-related risk. The empirical results showed that U.S. export elasticities increase with the degree of bilateral exchange rate flexibility of the importing country. We interpreted this result as an indication that the total macroeconomic risk exporters face decreases as the degree of exchange rate flexibility increases.

The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e. exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.

The stability of exchange rate in Nigeria is a significant monetary policy target. The fact that monetary authorities in Nigeria have over the years made various efforts to minimize the huge divergence between the official, interbank/autonomous and parallel/ Bureau De change rates in Nigerian foreign exchange market through different exchange rates regimes such as the overall fixed and flexible exchange rates regimes overtime. Accordingly, this paper investigates the comparative analysis of the impact of fixed and flexible exchange rates management policies on economic growth of Nigeria for the period of 1980A-2016A: using vector error correction model (VECM). The empirical results indicated evidence of long run relationship among the variable of interest in the study and in all there is a positive impact of exchange rates management policies on economic growth of Nigeria. Another finding from the Granger causality test confirms a unidirectional short run causality that runs from real effective exchange rate (REER) to economic growth (RGDP). In addition, unidirectional causality that runs from oil price (OPR) to real interest rate (RIR) in Nigeria also exists. However, the need for policy intervention to review and correct the foreign exchange market segments distortions is highly recommended. Again, the Nigerian economy needs a standard set of export base diversification from its mono cultural oil export in order to boost the foreign exchange earnings of the Nigerian economy.

External shocks and exchange rate regimes in Southeast Asia: A DSGE analysis

The promotion order between exchange rate marketization and capital account openness is one of the hotspots and debates in the field of international finance. Some scholars support the reform order of internal first, external next”, while others believe that they should be promoted in a coordinated manner. In view of the above two points, some scholars try to use econometric methods such as the Granger causality test and VAR model to determine the promotion order, but these methods are often limited to the selection of samples and depend on the data to a large degree, and different samples may draw different conclusions. Due to the lack of a reference system, the promotion order between exchange rate marketization and capital account openness is not determined. What is the basis or determination? The economic development level, total factor productivity or financial stability? If there is no basis, it is difficult to make a clear judgment on the promotion strategy. If the reference system is abandoned, the investigation only based on the data does not have practical significance. In view of this, this paper refers to the study of Rodriguez（2017）, constructs the influence equation of the exchange rate regime on total factor productivity（with capital account openness as the conversion variable）and the influence equation of capital account openness on total factor productivity（with the exchange rate system as the conversion variable）, respectively. Moreover, total factor productivity is selected as the reference system, and a non-linear modeling technology PSTR model is adopted to investigate the promotion strategy. It is revealed that the exchange rate regime has a significant non-linear effect on total factor productivity, the influence coefficient changes from negative to positive with the increase of capital account openness, which indicates that capital account openness can weaken the negative impact of exchange rate fluctuations on total factor productivity. The influence coefficient of capital account openness on total factor productivity is negative, and it shows obvious stage characteristics with the change of the exchange rate regime. When the exchange rate regime is flexible enough, its negative impact decreases significantly, which indicates that a more flexible exchange rate regime is conducive to absorbing the negative impact of capital account openness. Therefore, with total factor productivity as a reference system, there is a mutual adjustment mechanism between exchange rate marketization and capital account openness. Capital account openness is the premise of exchange rate marketization, and exchange rate marketization is also the prerequisite of capital account openness. They should be promoted in a coordinated way. Compared with the existing results, the possible contributions of this paper are as follows: First, the exchange rate regime and capital account openness are taken as the key explanatory variable and adjustment variable respectively, which enriches the literature with respect to the promotion order of exchange rate marketization and capital account openness, and overcomes the shortcomings of the existing literature that only employ one of them as the key explanatory variable and adjustment variable, making the research more comprehensive and detailed. Second, compared with most existing literature that directly adopt the interactive terms（only the first-order non-linear relations can be identified）, this paper utilizes a non-linear method—the PSTR model, which can identify higher-order non-linear relations and solve the problem of missing implicit non-linear relations. Third, compared with most existing literature focusing on economic growth or financial crisis, this paper conducts the analysis from the perspective of total factor productivity to re-judge the promotion order. The study can provide theoretical support and a decision-making basis for how to promote exchange rate marketization and capital account openness in the constitutive reform and transition from quantitative growth to qualitative development of China’s economic development.

The progress of regional integration in ECOWAS is leading to the desire to create an optimal monetary zone. This desire to create an optimal monetary zone is leading to a wave of divergent views on the effect and exchange rate regime of the single currency on trade. On the one hand, WAMZ countries want to adopt it with a flexible exchange rate, while on the other hand, WAEMU countries want to adopt it with a fixed exchange rate pegged to the euro. This divergence of views is at the heart of our problem. We need to analyze the effect of this currency and its flexible exchange rate regime on regional integration, more particularly the market integration of the Economic Community of West African States. Our evaluation is based on an augmented gravity model as the basic theoretical model, with the Pseudo Maximum Poisson Likelihood with High Dimension Fixed Effects (PPMHDFE) as the estimation method. This panel study is based on data from the World Bank (WDI), IMF (DOTS) and CEPII from 2009 to 2018. The question addressed by the analysis of the potential effect of sharing a single currency on integration by the ECOWAS market, allows us to arrive at two main results. (i) The potential effect of the single currency on trade is significant, robustness tests confirm the positive effect of currency sharing on trade. (ii) The flexible exchange rate has positive effects on trade. Thus, we therefore call on the political leaders of ECOWAS countries to make efforts to meet the convergence criteria and the establishment of this single currency in order to be the foundation of the single African currency, on the one hand. On the other hand, we recommend the adoption of a single currency with a variable exchange rate with a gradual approach.

Part 1 Balance-of-payments accounting and the foreign-exchange market: concepts of the balance of payments the accounting balance of payments balance-of-payments equilibrium more on the concept of equilibrium the foreign-exchange market the demand for dollars the supply of dollars capital movements and speculation the forward rate of exchange types of exchange-rate regime fixed versus flexible exchange rates exchange rate reform. Part 2 The capital account of the balance of payments: the components of the capital account official reserves special drawing rights the balancing item the capital account and the net external wealth of the U.K. Part 3 Exchange rate determination: theories of exchange rate determination purchasing power parity current balance model the importance of theories of expectations formation the Mundell-Fleming model exchange rate overshooting models the portfolio model of exchange rate determination speculatice bubble models of exchange rate determination exchange rate determination - what have we learnt? exchange rate systems and policies fixed versus flexible exchange rates types of exchange rate regime controls on capital movements exchange rate policy in the 1990s. Part 4 The balance of payments and the national economy: the integration of the balance of payments into the nationnal accounts the conflict between balance-of-payments equilibrium and other objectives of economic policy income equilibrium in an open economy and the foreign-trade mulitplier the foreign-trade multiplier relating imports to expenditure the 'new' foreign-trade multiplier with foreign repercussions balance-of-payments adjustment the classical price-specie flow mechanism the elasticity approach the absorption approach the monetary approach. Part 5 The elasticity approach to the balance of payments: the Marshall-Lerner condition derived devaluation and the response of firms lags and the J-curve effect devaluation and inflation payments imbalance in the World economy devaluation and the terms of trade the difficulties of measuring price elasticities. Part 6 The absorption approach to the balance of payments: the direct effect of devaluation on income the direct effect of devaluation on absorption the interaction between changes in income and changes in absorption strengths and dangers of the absorption approach the monetary aspects of balance-of-payments deficits domestic credit expansion. Part 7 The monetary approach to the balance of payments. Part 8 Simultaneous internal and external balance: internal and external balance under flexible exchange rates with no capital movements internal and external balance under fixed exchange rate woth capital movementsl internal and external balance in an IS-LM curve framework the use of monetary and fiscal policy under alternative exchange-rate regimes the assignment of policies in the United Kingdom. (part contents).

Even after more than a decade of low inflation, Croatia remains highly dollarized. Commercial banks avoid currency mismatch by indexing loans to the exchange rate. Although this eliminates direct currency risk, it creates credit risk, because any larger depreciation might induce borrower defaults. Monetary and exchange rate policies focus on exchange rate smoothing to safeguard financial stability. Dollarization has prevented the use of monetary policy to stabilize output. Given Croatia's likely entry into the EU and adoption of the Euro, dedollarization seems unfeasible. Rather than attempting to reverse dollarization, the central bank has taken measures to make the banking system more robust to shocks. (JEL E52, E58, F31, G21, P24)

This research examines the empirical model of external debt, exchange rate, and unemployment in selected ASEAN Countries during 1980-2017. The countries included Indonesia, Malaysia, Thailand and the Philippines. The data were collected from the World Bank publications. The ARDL-ECM and Granger Causality Test (GCT) were employed to address the research objectives. The findings indicated that there were short-term effects on each empirical model (external debt, exchange rate, and unemployment). Furthermore, the stability test exhibited that the models were precise and stable. The GCT result showed that there was a causal between external debt, exchange rate, and unemployment, especially in Indonesia. Moreover, the linkages between external debt, exchange rate, and unemployment in selected ASEAN Countries were co-movement. Therefore, the governments are expected to emphasis on macroeconomic policies, such as pro-stability of the exchange rate, external debt risk management, and pro-poor.

Sustainability of macroeconomic policies in selected MENA countries: Post financial and debt crises

Optimal monetary policy under flexible exchange rates

Previous articleNext article No AccessA Model of the Canadian Economy Under Fixed and Fluctuating Exchange RatesRudolf R. RhombergRudolf R. Rhomberg Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 72, Number 1Feb., 1964 Article DOIhttps://doi.org/10.1086/258851 Views: 9Total views on this site Citations: 23Citations are reported from Crossref Copyright 1964 The University of ChicagoPDF download Crossref reports the following articles citing this article:Ayumu Sugawara The IMF and Canada: From Floating to Fixed Exchange Rates, (Jan 2015): 207–223.https://doi.org/10.1007/978-4-431-55351-9_10Władysław Welfe Macroeconometric Models of the United States and Canada, (Jan 2013): 15–46.https://doi.org/10.1007/978-3-642-34468-8_3Michael D. Bordo, Tamara Gomes, Lawrence L. Schembri Canada and the IMF: Trailblazer or Prodigal Son?, Open Economies Review 21, no.22 (Oct 2009): 309–333.https://doi.org/10.1007/s11079-009-9134-8Russell S. Boyer Reflections on Milton Friedman's contributions to open economy money/macro, Journal of International Money and Finance 28, no.77 (Nov 2009): 1097–1116.https://doi.org/10.1016/j.jimonfin.2009.06.006Francis W. Ahking Testing long-run purchasing power parity with a Bayesian unit root approach: the experience of Canada in the 1950s, Applied Economics 29, no.66 (Oct 2010): 813–819.https://doi.org/10.1080/000368497326732Kanta Marwah A prototype model of the foreign exchange market of Canada, Economic Modelling 2, no.22 (Apr 1985): 93–124.https://doi.org/10.1016/0264-9993(85)90017-3Kanta Marwah, Lawrence R Klein, Ronald G Bodkin Bilateral capital flows and the exchange rate, European Economic Review 29, no.11 (Jan 1985): 89–110.https://doi.org/10.1016/0014-2921(85)90039-XKanta Marwah, Lawrence R. Klein A Model of Foreign Exchange Markets: Endogenising Capital Flows and Exchange Rates, (Jan 1983): 61–95.https://doi.org/10.1007/978-3-7091-8724-1_3JAY H. LEVIN DEVALUATION, THE J-CURVE, AND FLEXIBLE EXCHANGE RATES, The Manchester School 48, no.44 (Dec 1980): 355–377.https://doi.org/10.1111/j.1467-9957.1980.tb00729.xMarie C. Thursby The resource reallocation costs of fixed and flexible exchange rates, Journal of International Economics 10, no.11 (Feb 1980): 79–90.https://doi.org/10.1016/0022-1996(80)90032-XU. R. Kohli Simultaneous technologies and demand and supply conditions in international trade, Empirical Economics 4, no.44 (Dec 1979): 235–246.https://doi.org/10.1007/BF01764295John F. Helliwell Policy modeling of foreign exchange rates, Journal of Policy Modeling 1, no.33 (Sep 1979): 425–444.https://doi.org/10.1016/0161-8938(79)90007-3James M. Holmes, David J. Smyth The relation between international capital flows and interest rates: A theoretical analysis, De Economist 125, no.11 (Mar 1977): 95–109.https://doi.org/10.1007/BF01239240M. A. Akhtar, A. K. M. A. Rob The canadian experience with flexible exchange rates, Atlantic Economic Journal 4, no.22 (Mar 1976): 19–30.https://doi.org/10.1007/BF02302153Alfred Steinherr Economic policy in the short run under fixed exchange rates, Recherches économiques de Louvain 39, no.44 (Aug 2016): 419–436.https://doi.org/10.1017/S0770451800037210 James M. Holmes The Process of International Adjustment under Conditions of Full Employment: A Keynesian View Revised, Journal of Political Economy 81, no.66 (Oct 2015): 1407–1429.https://doi.org/10.1086/260134 Sven W. Arndt Policy Choices in an Open Economy: Some Dynamic Considerations, Journal of Political Economy 81, no.44 (Oct 2015): 916–935.https://doi.org/10.1086/260088Jimmy W. Wheeler Domestic Policy and International Exchange Rate Movements, A Review, The American Economist 16, no.22 (Oct 1972): 123–128.https://doi.org/10.1177/056943457201600217 Zoran Hodjera Short-Term Capital Movements of the United Kingdom, 1963-1967, Journal of Political Economy 79, no.44 (Oct 2015): 739–775.https://doi.org/10.1086/259786Dale M. Heien STRUCTURAL STABILITY AND THE ESTIMATION OF INTERNATIONAL IMPORT PRICE ELASTICITIES, Kyklos 21, no.44 (Nov 1968): 695–712.https://doi.org/10.1111/j.1467-6435.1968.tb00138.x Paul Wonnacott Comment: Monetary and Fiscal Policy for an Economy with Fixed Exchange Rates, Journal of Political Economy 76, no.4, Part 24, Part 2 (Oct 2015): 944–946.https://doi.org/10.1086/259459THOMAS MAYER THE LAG IN THE EFFECT OF MONETARY POLICY: SOME CRITICISMS, Economic Inquiry 5, no.44 (Sep 1967): 324–342.https://doi.org/10.1111/j.1465-7295.1967.tb01954.xKeith A. J. Hay Money and Cycles in Post-Confederation Canada, Journal of Political Economy 75, no.33 (Oct 2015): 263–273.https://doi.org/10.1086/259277

A new financial order in Asia: Will a RMB bloc emerge?

NAFTA’s Financial Convergence: Measurement by Dynamic Moment Analysis of Daily FX Forward Term Premiums