Monetary and Exchange Rate Policies for International Financial Stability: A Proposal

1988 ◽  
Vol 2 (1) ◽  
pp. 83-103 ◽  
Author(s):  
Ronald I McKinnon
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Purchasing Power Parity ◽  
Financial Stability ◽  
Foreign Exchange Market ◽  
The United States ◽  
Power Parity ◽  
Monetary Reform ◽  
Exchange Rate Fluctuations

What keeps the three major industrial blocs -- Western Europe, North America, and industrialized Asia -- from developing a common monetary standard to prevent exchange-rate fluctuations? One important reason is the differing theoretical perspectives of economic advisers. The first issue is whether or not a floating foreign exchange market -- where governments do not systematically target exchange rates -- is “efficient.” Many economists believe that exchange risk can be effectively hedged in forward markets so international monetary reform is unnecessary. Second, after a decade and a half of unremitting turbulence in the foreign exchange markets, economists cannot agree on “equilibrium” or desirable official targets for exchange rates if they were to be stabilized. The contending principles of purchasing power parity and of balanced trade yield very different estimates for the “correct” yen/dollar and mark/dollar exchange rates. Third, if the three major blocs can agree to fix nominal exchange rates within narrow bands, by what working rule should the new monetary standard be anchored to prevent worldwide inflation or deflation? After considering the magnitude of exchange-rate fluctuations since floating began in the early 1970s, I analyze these conceptual issues in the course of demonstrating how the central banks of Japan, the United States, and Germany (representing the continental European bloc) can establish fixed exchange rates and international monetary stability.

scholarly journals The “day-of-the-week” effects in the exchange rate of Latin American currencies

2019 ◽  
Vol 14 (PNEA) ◽  
pp. 485-507
Author(s):  
Roberto Joaquín Santillán Salgado ◽  
Alejandro Fonseca Ramírez ◽  
Luis Nelson Romero
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Latin American ◽  
Foreign Exchange Market ◽  
The United States ◽  
Management Decision ◽  
Exchange Market ◽  
Day Of The Week ◽  
The Exchange Rate

This paper examines the “day-of-the-week” anomaly in the foreign exchange market of six major Latin American countries’ currencies: (Argentina, Brazil, Chile, Colombia, Mexico, and Peru), all with respect to the United States’ dollar. The returns of daily exchange rates are stationary, so we use linear regressions combined with GARCH, TARCH and EGARCH models to explore the presence of the “day-of-the-week” anomaly. The results confirm the presence of “abnormal” effects in some of the currencies and in some days of the week, particularly on Fridays and Mondays. Moreover, volatility in exchange rates shows clustering behavior, as well as leverage effects, which are carefully modelled in our analysis. This paper contributes to the literature by studying the “day-of-the-week” effects in currency exchange rate markets, a clear innovation with respect to the typical stock market analysis. The results reported are useful for foreign exchange market traders, currency exposure management decision makers, monetary authorities, and financial policy designers in the countries included in the study. Indeed, the results suggest the presence of a typical behavior of the exchange rate of all the currencies included in the sample.

The Floating Dollar in the Greenback Period: A Test of Theories of Exchange-Rate Determination

1981 ◽  
Vol 41 (3) ◽  
pp. 629-650 ◽  
Author(s):  
Lawrence H. Officer
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Foreign Exchange ◽  
Purchasing Power Parity ◽  
Foreign Exchange Market ◽  
Purchasing Power ◽  
Exchange Market ◽  
Power Parity ◽  
Exchange Rate Determination ◽  
Income Effects

Some leading modern theories of exchange-rate determination are pitted against each other in explaining fundamental movements of the freely floating U.S. dollar in the foreign-exchange market during the greenback period, 1862–1878. A purchasing-power-parity theory augmented to incorporate interest-rate, and possibly income, effects provides the best explanation of the exchange rate. The standard works on the greenback period are subject to some amendments in light of the study.

scholarly journals Persistence And Asymmetry In Exchange Rate Volatility

2012 ◽  
Vol 11 (9) ◽  
pp. 971
Author(s):  
S. Aun Hassan
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Foreign Exchange Market ◽  
Exchange Rate Volatility ◽  
The United States ◽  
Good News ◽  
Economic Downturn ◽  
Exogenous Shocks ◽  
The Past

Recent economic downturn in the United States and Europe has affected major currencies around the world. This paper focuses on the behavior of exchange rates over the past decade to study how volatility pattern of these exchange rates responds to any exogenous shocks. The paper focuses on persistence and asymmetry in volatility of major exchange rates due to exogenous shocks. The paper employs a univariate GARCH and an EGRACH model to test the persistence and asymmetry of exchange rate volatility using data from the past decade plus. The results show high persistence and asymmetric behavior in volatility implying that the effect of good news on exchange rates is different from the effect of bad news. The results of this paper have important implications for foreign exchange investors and will provide a better understanding of the foreign exchange market to interested observers.

scholarly journals HEDGING CURRENCY RISKS IN INTERNATIONAL BUSINESS USING THE OPPORTUNITIES OF THE INTERNATIONAL FOREIGN EXCHANGE MARKET

2021 ◽  
Author(s):  
Olena Liegostaieva
Keyword(s):  
Exchange Rate ◽  
Foreign Exchange ◽  
International Business ◽  
Foreign Exchange Market ◽  
Foreign Currency ◽  
Exchange Market ◽  
Currency Risk ◽  
Exchange Rate Fluctuations ◽  
Current Value ◽  
Financial Result

The article is devoted to the study of currency risk hedging in international business. The article notes that the international foreign exchange market is the largest and fastest growing of all world markets. The characteristic features of the international currency market are substantiated and offered. It is also noted that foreign exchange transactions provide economic ties between participants located on different sides of state borders: settlements between firms from different countries for the supply of goods and services, foreign investment, international tourism and business travel. It is determined that hedging of currency risks is the protection of funds from the unfavorable movement of exchange rates, and is carried out in fixing the current value of funds by concluding an agreement on the foreign exchange market. When hedging, the risk of exchange rate changes disappears, and this makes it possible to forecast the company's activities and see the financial result, which is not distorted by exchange rate fluctuations, which will allow you to determine product prices, calculate profits, etc. The main difference between hedging and other types of transactions is that its purpose is not to generate additional profits, but to reduce the risk of potential losses, as risk reduction is almost always necessary to pay, hedging, of course, involves additional costs. Hedging is a way to improve business planning. An enterprise wishing to use this service shall pledge the specified amount, from which losses on its positions will be deducted. In today's conditions, thanks to the foreign exchange market, there is a very reliable way to hedge currency risk. This method is to fix the current value of funds by concluding agreements in this market. With hedging, the company eliminates the risk of exchange rate fluctuations, and this allows you to forecast activities and see the financial result, which is not changed by exchange rate fluctuations. Allows you to pre-determine product prices, determine profits, etc. Thus, the principle of hedging in international business is to open a currency position in a foreign currency account for future transactions to convert funds.

Domestic Exchange Rates and Regional Economic Growth in the United States, 1899–1908: Evidence from Cointegration Analysis

1998 ◽  
Vol 58 (4) ◽  
pp. 1010-1026 ◽  
Author(s):  
Ronnie J. Phillips ◽  
Harvey Cutler
Keyword(s):  
United States ◽  
Economic Growth ◽  
Exchange Rate ◽  
Exchange Rates ◽  
Federal Reserve ◽  
Growth Rates ◽  
The United States ◽  
Cointegration Analysis ◽  
Regional Economic Growth ◽  
Exchange Rate Fluctuations

This article examines one feature of the pre—Federal Reserve financial system that has not been widely researched: the market for bank drafts (the “domestic exchanges”). Though the exchanges existed for nearly a century, critics argued that exchange rate fluctuations exacerbated financial panics. We find, using cointegration analysis over the period from 1899 to 1908, that differences in growth rates across regions caused predictable movements in rates. We conclude that the exchanges promoted efficiency in the payments system. This supports the view that the private sector might have developed a unified national system had the Fed not abolished the exchanges.

scholarly journals Chinese renminbi, Mexican peso U.S. dollar exchange rates and their competitive positions in export markets

2016 ◽  
Vol 11 (1) ◽  
pp. 42-51
Author(s):  
Chu V. Nguyen ◽  
Muhammad Mahboob Ali ◽  
Cory Angert
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Latin American ◽  
Purchasing Power Parity ◽  
Real Exchange Rates ◽  
Poor Performance ◽  
Power Parity ◽  
Contributing Factors ◽  
Mexican Peso ◽  
Chinese Yuan

Since, in the NAFTA era, the Mexican economy is much more advanced in the manufacturing sector than those of other Latin American countries, Mexico competes directly with China for U.S. imports. This study empirically investigates the behavior of the Mexican peso/Chinese yuan, Mexican peso/U.S. dollar, and Chinese yuan/U.S. dollar real exchange rates to determine whether the exchange rate policies serve as contributing factors to the subpar performance of the Mexican economy. The empirical findings suggest that the Mexican, Chinese, and U.S. real exchange rates, over the sample period, prove consistent with predations of the purchasing power parity theory; therefore, exchange rate policies may not be a contributing factor to the poor performance of the Mexican economy

scholarly journals The Interaction Between FX and Credit Risk as an Example of Intersection of Monetary and Financial Stability Policy Goals – The Case of Serbia

2016 ◽  
Vol 5 (2) ◽  
pp. 133-155
Author(s):  
Željko Jović
Keyword(s):  
Exchange Rate ◽  
Credit Risk ◽  
Exchange Rates ◽  
Foreign Exchange ◽  
Financial Stability ◽  
Financial System ◽  
Price Stability ◽  
Foreign Exchange Risk ◽  
Exchange Risk ◽  
The Impact

Abstract The financial system of Serbia is highly bank-centric and euroised, which is a common specific feature of financial systems in developing countries. High level of euroisation represents an adequate environment for the development of emphasized interaction of foreign exchange and credit risks; therefore, creation of the spillover mechanism of foreign exchange risk to credit risk is immanent for euroised systems. Although maintaining the stability of the dinar exchange rate is a secondary goal of the National Bank of Serbia in relation to price and financial stability as the primary goals, in terms of existence of the aforesaid spillover mechanism, maintaining stability of the dinar exchange rate represents the area where there is an interaction between the goals of monetary policy (price stability) and those of financial stability policy (maintaining and strengthening the financial system’s stability). In order to explore whether the spillover mechanism of foreign exchange risk to credit risk exists in Serbia’s financial system, the vector autoregressive (VAR) model is applied on data from the Serbian banking sector to quantify the impact of changes in the dinar exchange rates on the rate of non-performing loans (NPLs); the sample was formed in the period of increased instability of the dinar exchange rate, from 31 January 2008 to 31 December 2010. As we have quantitatively confirmed the impact of increase in the dinar exchange rate on the increase of 90-120 days past due NPLs, we can conclude that the existence of expressed interaction between foreign exchange risk and credit risk in the Serbian financial system represents a paradigm of the regulator’s need to achieve contemporary goals of monetary and financial stability policy by maintaining relative stability of the dinar exchange rates. Depreciation of the local currency has inflationary pressure on price stability and simultaneously influences the achievement of financial stability goals through the spillover mechanism of foreign exchange risk to credit risk. In addition to taking systematic measures to reduce the level of euroisation and introduce the specific regulatory requirements, in order to protect banks and clients from the dinar exchange rate volatility, the regulator faces extremely important task of maintaining relative stability of the dinar exchange rate as the instrument to simultaneous achievement of goals of monetary and financial stability policies.

Purchasing Power Parity and Real Exchange Rates

2019 ◽  
Author(s):  
Menzie D. Chinn
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Purchasing Power Parity ◽  
Time Horizon ◽  
Nominal Exchange Rate ◽  
Purchasing Power ◽  
Power Parity ◽  
The Real ◽  
Short Run

The idea that prices and exchange rates adjust so as to equalize the common-currency price of identical bundles of goods—purchasing power parity (PPP)—is a topic of central importance in international finance. If PPP holds continuously, then nominal exchange rate changes do not influence trade flows. If PPP does not hold in the short run, but does in the long run, then monetary factors can affect the real exchange rate only temporarily. Substantial evidence has accumulated—with the advent of new statistical tests, alternative data sets, and longer spans of data—that purchasing power parity does not typically hold in the short run. One reason why PPP doesn’t hold in the short run might be due to sticky prices, in combination with other factors, such as trade barriers. The evidence is mixed for the longer run. Variations in the real exchange rate in the longer run can also be driven by shocks to demand, arising from changes in government spending, the terms of trade, as well as wealth and debt stocks. At time horizon of decades, trend movements in the real exchange rate—that is, systematically trending deviations in PPP—could be due to the presence of nontraded goods, combined with real factors such as differentials in productivity growth. The well-known positive association between the price level and income levels—also known as the “Penn Effect”—is consistent with this channel. Whether PPP holds then depends on the time period, the time horizon, and the currencies examined.

scholarly journals Exchange rates and immigration policy

2021 ◽  
Vol 9 (1) ◽  
Author(s):  
Adrian J. Shin
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Host Country ◽  
Immigration Policy ◽  
Purchasing Power Parity ◽  
Temporal Variations ◽  
Power Parity ◽  
Host Countries ◽  
And Migration ◽  
Exchange Rate Depreciation

AbstractWhat explains cross-national and temporal variations in migrant rights? This article argues that policymakers implement more exclusionary or inclusive policies toward migrants in response to exchange-rate fluctuations. Since exchange rates affect the real value of remittances, exchange-rate depreciation of the host state’s currency makes migration less valuable for existing and potential migrants, while exchange-rate appreciation increases the degree of migrant pressure on the host state by doing the opposite. This well-documented relationship between exchange rate valuation and migration movements affects how host country governments craft immigration policy. Under exchange-rate depreciation, policymakers will implement more inclusive policies to deter the “exit” of migrants and maintain a stable supply of labor. Under exchange-rate appreciation, increased migration pressures heighten public anxiety over immigration in the host country, in turn causing policymakers to restrict further immigration by implementing more exclusionary policies. Consistent with the argument, the empirical results show that the purchasing-power-parity (PPP) currency values of migrants’ home countries are positively correlated with more pro-migrant policies in host countries.

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