Growth and Demand in a Two-Country System with Pegged Exchange Rates: Real, Financial and Foreign Sector Implications

It is indisputable that the real sector of the economy requires investment, especially in the current technological age. Banks, on the other hand, possess significant financial resources, but due to insufficient, asymmetric information and the underdeveloped financial system, the interaction between the real and financial sectors is ineffective. The "late response" of the financial sector to changes in the real sector has become the cause of a chronic oversupply of financial services, resulting in a situation where the level of liquidity in banks is largely independent of economic cycles. The paper aims to identify the ways in which interest rate fluctuations impact the real and financial sectors of the RA economy and to evaluate this impact. The paper analyzes trends in the main indicators characterizing the real and financial sectors of RA, as well as the behavior of various types of interest rates according to the factors determining them. It comments on the macroeconomic developments in RA caused by interest rate fluctuations. With the help of econometric models, the study estimates the effect sizes between various links on the interest rate path. The study made it possible to highlight the problems with the transmission mechanisms of the monetary policy of RA and suggest possible solutions. As a result of the assessment, it was found that deposit and credit interest rates, interbank repo rates, and one-year government bond yield rates respond to changes in the refinancing rate of the Central Bank in different time lags.

This paper reviews the literature on financial crises focusing on three specific aspects. First, what are the main factors explaining financial crises? Since many theories on the sources of financial crises highlight the importance of sharp fluctuations in asset and credit markets, the paper briefly reviews theoretical and empirical studies on developments in these markets around financial crises. Second, what are the major types of financial crises? The paper focuses on the main theoretical and empirical explanations of four types of financial crises—currency crises, sudden stops, debt crises, and banking crises—and presents a survey of the literature that attempts to identify these episodes. Third, what are the real and financial sector implications of crises? The paper briefly reviews the short- and medium-run implications of crises for the real economy and financial sector. It concludes with a summary of the main lessons from the literature and future research directions.

Evaluating the role of capital controls and monetary policy in emerging market crises

Inflation Stabilization and BOP Crises in Developing Countries

In the article the direction of movement of financial resources in financialisation of modern economies. The system objects impact assessment imbalances movement of financial resources in the economy in terms of the prevalence of the financial sector over the real (social development, economic development, price indices of commodity markets, the stability of the financial sector, the convergence of the financial and real sectors, investment resources). Followed interconnection facilities imbalances traffic impact assessment in terms of financial resources financialisation of the economy with elements of classical model kruhopotokiv (households, firms, market factors of production, goods market, the financial market). Required systematized and auxiliary (optional) indicators to assess the extent imbalances movement of financial resources in terms of financialisation of the economy. The general structure of the integral index of evaluation of imbalances movement of financial resources in financialisation of the economy. Built integral index of financial development (based on use of methods of multivariate statistical analysis). The system of indicators characterizing objects evaluating imbalances movement of financial resources in terms of prevalence of the financial sector over the real economy. Thesis there is determined the components of the conceptual principles of research imbalances movement of financial resources in the economy in terms of its financialisation

For years now, Serbia de facto lives in a dual currency system. Local currency is being used for most of the transactions with relatively small amounts. Alongside with that, local currency is being used as a formal means of payment for transaction accounted in Euros, i.e. with FX clause. FX clause is being used to express prices in real sector (goods, services, real estate, salaries, rents), but also for lending and repayment purposes in financial sector. FX clause, from theoretical perspective, would make sense as means of controlling the risk of FX rate movement in future, but only for agents with FX inputs, i.e. expenditures. However, mainly due to high inflation and hyperinflation heritage, FX clause is being used often and basically wrong, as an instrument to control risk of loss of purchasing power due to inflation. For this purpose it would be appropriate to use indexing for changes in Consumer Price Index, as a measure of inflation, and not indexing for changes in FX rate, i.e. FX clause. This because inflation and movement in FX rate do not have to be, and in most cases are not, perfectly correlated. Despite this, FX clause is widespread in use in both real and financial sectors. This paper is analyzing negative economic and financial consequences of widespread FX clause usage for an overall economic system of a country.

We argue that recent currency crises reflect clashes between fundamentals and pegged exchange rates, just as did crises in the past. We reject the view that crises reflect self-fulfilling prophecies that are not closely related to measured fundamentals. Doubts about the timing of a market attack on a currency are less important than the fact that it is bound to happen if a government’s policies are inconsistent with pegged exchange rates. We base these conclusions on a review of currency crises in the historical record under metallic monetary regimes and of crises post-World War II under Bretton Woods, and since, in European and Latin American pegged exchange rate regimes.

Ohanian and Stockman's article examines a set of central issues associated with the effects of monetary policy in an open economy. The model presented by Ohanian and Stockman is one in which there are two tradable goods. In one sector, called that of good x, nominal prices are preset one period in advance. In the second sector, that of good y, price are perfectly flexible and adjust to clear the market. Agents in this economy hold money because of a cash-in-advance constraint and cannot use asset markets to diversify the effects associated with changes in money supply. All agents in the model are intertemporal optimizers and a rationing rule is used to determine trade whenever supply is not equal to demand. The authors show how this model can help understand two quite different sets of observations. First, they show that it can explain the pattern of price and quantity changes observed following a monetary contraction. Second, they show that, within this model, short-run monetary independence is compatible with a pegged exchange rate. Since these issues are rather separate, I will treat each in turn.

External shocks affect economies through a variety of transmission channels. A widely used approach for assessing macroeconomic responses to such shocks is the global vector autoregressive (GVAR) model. In most applications, dimensionality is reduced through aggregation techniques, typically relying on foreign trade weights. In some cases, capital flows are used instead to capture financial linkages. This paper develops a GVAR model that jointly incorporates real and financial sectors by employing two types of weights: those based on foreign trade and those based on foreign direct investment (FDI) flows. We compare the results from this extended specification with those from a baseline model that includes only the real sector and trade-based weights. Impulse response functions of key macroeconomic indicators to a China output shock and an oil price shock are analysed. The results show that incorporating the financial sector and FDI-based weights leads to stronger and more pronounced responses in the short to medium term. The model produces dome-shaped impulse responses, consistent with findings in the empirical literature. However, differences between the two model specifications diminish over the long run, suggesting that the financial channel primarily influences short- and medium-term adjustment dynamics.

Chapter 10 A Stochastic Model of Real-Financial Interaction with Boundedly Rational Heterogeneous Agents

Risk sharing in an asymmetric environment

Most theoretical analysis of ∞exible vs. flxed exchange rates takes the degree of nominal rigidity to be independent of the exchange rate regime choice itself. But informal policy discussion often suggests that a credible exchange rate peg may increase internal price ∞exibility. This paper explores the relationship between exchange rate policy and price ∞exibility, in a model where price ∞exibility itself is an endogenous choice of proflt-maximizing flrms. A flxed exchange rate can afiect the optimal degree of price ∞exibility by altering the volatility of nominal demand facing price-setting flrms. We flnd that a unilateral peg, such as a Currency Board, adopted by a single country, will increase internal price ∞exibility, perhaps by a large amount. On the other hand, when an exchange rate peg is supported by bilateral participation of all monetary authorities such as in a Monetary Union, price ∞exibility may actually be less than under freely ∞oating exchange rates. Quantitatively, we flnd that the endogenous increase in price ∞exibility following a unilateral peg might be big enough that output volatility is no greater than it would be under a ∞oating exchange rate regime.

The financial sector plays a very significant role in triggering the economic growth of a country and also became the locomotive of growth in the real sector through capital accumulation and technological innovation. High performance financial sector will result in increased economic growth instead of economic growth is not the main cause of the improvement in the performance of the financial sector. This study aims to examine the relationship of causality between financial sector and economic growth in Indonesia, where the financial sector in the show by the monetization ratio, the ratio of loans, demand deposits and savings. By using secondary data for the period 2000-2010, This research uses the analytical framework cointegration and Vector Error Correction Model (VECM) between financial sector development and economic growth. The results showed that the financial sector indicated by the ratio of monetization, credit ratios, demand deposits and savings have no causal relationship with economic growth in Indonesia. Significant influence given variable demand deposits to economic growth. Instead of economic growth significantly affect the monetization and savings.

During a time of rising world interest rates, the central bank of a small open economy may be motivated to increase its own interest rate to keep from suffering a destabilizing outflow of capital and depreciation in the exchange rate. This is especially true for a small open economy with a current account deficit, which relies on foreign capital inflows to finance this deficit. This paper will investigate the underlying structural characteristics that would lead an economy with a floating exchange rate to adjust their interest rate in line with the foreign interest rate, and thus adopt a de facto exchange rate ”peg”. Using a panel data regression similar to that in Shambaugh (QJE 2004) and most recently in Klein and Shambaugh (AEJ Macro 2015), this paper shows that the method of current account financing has a large effect on whether or not the central bank will opt for exchange rate and capital flow stabilization during a time of rising world interest rates. A current account deficit financed mainly through reserve depletion or the accumulation of private sector debt will cause the central bank to pursue de facto exchange rate stabilization, whereas a current account deficit financed through equity or FDI will not. Quantitatively, reserve depletion of about 7% of GDP will motivate the central bank with a floating currency to adjust its interest rate in line with the foreign interest rate to where it appears that the central bank has an exchange rate peg.

Aim. To investigate the essence of the real sector of the Russian economy and identify the features of its impact on achieving economic security under sanctions.Objectives. To determine the essence of the real sector of the economy and assess its contribution to the stability of the national economy under sanctions; to identify the stages of development of the real sector of the Russian economy; to form an approach to regulating the real sector in the context of achieving economic security.Methodology. The research uses methods of comparative, structural, functional, and historical (retrospective) analysis, as well as tools of systemic and institutional approaches.Results. The real sector of the economy includes the production of goods and services, its functioning is associated with the creation of new value. This distinguishes it from the virtual and financial sectors where real, tangible goods are not created and where, in fact, the product formed in the real sector is redistributed. In crisis conditions, the developed real sector serves as the basis for the functioning of the economy and the satisfaction of basic economic needs, its stability determines national economic security.Conclusions. In modern conditions, characterized by sanctions pressure on Russia from unfriendly countries, the real sector of the economy plays an important role in ensuring the stability of the country’s economy as a whole. Its dynamics largely determines protection against traditional and new (sanctions-related) threats and risks to economic security. At the same time, there is a need for government support and regulation of the development of the real sector, which is associated with many different difficulties. To increase the effectiveness of this regulation, a permanent search for a balance between the use of planned and market instruments is required, the development of a mixed system of economic regulation that combines the tools of market and planned approaches. This will make it possible for the state to flexibly and adaptively manage the process of ensuring national economic security.