Exchange rate volatility and its effect on macroeconomic management in swaziland central bank of swaziland, 2014 3 swaziland cbs annual report, 2008. Volatility forecasts of the following closing exchange rates. However, there are several factors that could slow or interrupt these countries emuintegration process. This research is concerning on the determinants of foreign exchange rate in malaysia, in other. Well also see that volatility of exchange rates and correlations between exchange rates are predictable, and well examine the implications for currency option pricing, risk management, and portfolio selection. Since then, exchange rate volatility at the emu periphery is steadily declining approaching the east asian level. This point was made clearly by mark 1995, and has found strong recent support by eichenbaum, et al. Evidence for such a corr elation is also abundant for major equity and bond markets cornell. The volatility of exchange rates was measured by the variance of residuals in a garch1,1 model of the exchange rate. In order to capture the impact of economic openness on exchange rate volatility and thus foreign direct investment.
Real exchange rate volatility and domestic consumption in. Macroeconomic fundamentals and the exchange rate volatility. Similarly, since the collapse of the bretton wood system in 1973, there has been a renewed interest worldwide into the study of exchange rate volatility and its determinants. At the present time, new members of the eu are trying to achieve this stability. This is accomplished by generating exchange rate volatility figures by the garch1,1 methodology. Rose 21 using a gravity model with a sample of 186. Sources of real exchange rate volatility in the ghanaian. Shortrun effective volatility of the real exchange rate by country groups, 19702002. For instance, the mean tax to gdp is approximately 14 percent while the average inflation rate is. Introduction a strong correlation seems to exist between trading volume and price volatility i n major currency markets baillie and bollerslev 1991, dacorogna, et al. The study examined the main determinants of real exchange rates fluctuations in ghana using the autoregressive distributed lag ardl approach bound testing approach. In spite of its obvious importance, few studies have examined the effects of exchange rate volatility. The study specifically sought the influence of exchange rate volatility proxy by official nairadollar rate, real gross domestic product and interest rate proxy by lending rate on export proxy by net export in nigeria between 1985 and 2016. A setback of foreign exchange rate will causes a lot of troubles in a nation.
The objective of this study is to determine the sources of exchange rate volatility in turkey for the period 19742016. The large impact that monetary variables have on exchange rate volatility implies that policymakers should maintain sound monetary. Determinants of exchangerate volatility czech journal of. A new set of theories evolved, explaining exchange rate behaviour and how exchange rate 4 volatility forecasts are usually used for risk management, option pricing, portfolio allocation, trading strategies, and model evaluation zivot, 2009. In the literature on the determinants of exchange rate volatility, there are various empirical studies using time series or panel data analysis methodologies on different countries or groups of countries. Analytical results are based on specific assumptions and only hold in certain cases. In a fixed exchange rate system, the exchange rate was being allowed to volatility only within very narrow boundaries. Some new evidence for regional asean countries by norimah ramli aand jan. At present, new members of the european union are trying to achieve this stability. Analysis of macroeconomic determinants of exchange rate volatility in india anita mirchandani. Section 3 outlines the empirical strategy and model specifications while section 4 presents the empirical results.
The effect of exchange rate volatility on international trade. The main determinants of the exchange rate sciencedirect. Volatility in the exchange rate, they argued, hurts trade, production, income, and consequently consumption. This model will determine where the exchange rate has to converge to, however, it provides very little guidance to the short term fluctuations. This follows south africaas liberalisation of its capital account in the. Autoregressive conditional heteroskedasticity and related effects have been repeatedly documented in exchange rates. This study mainly aimed at to empirically examines the impact of exchange rate volatility on.
Exchange rates, commodities and the implications of. The determinants of real exchange rate volatility in. Table 1 presents some empirical studies investigating the determinants of exchange rate volatility. Studies have revealed that economic openness, terms. Evolution of exchange rate management in zambia z ambia has experimented with several exchange rate regimes that can be divided into distinct episodes from a fixed exchange rate regime to flexible exchange rate regime. The rate of appreciation or depreciation will be approximately equal to the percentagepoint difference in the inflation rates. In this paper, we empirically investigate the relationship between exchange rate volatility and international trade, focusing on east asia. When the sample is partitioned into targeting and nontargeting countries, the exchange rate remains relevant in the reaction function of the latter group. The main focus of the paper is to test the hypothesis that economic openness decreases rand zar volatility. Forex rates, interest rates, and inflation are all correlated.
Similarly, shortland 2011 found that camel exports, price of rice, and random piracy payments are some of the determinants of somalias. The idea is that agents have a portfolio choice decision between domestic and foreign assets. Macroeconomic factors that influence exchange rate. Anita mirchandani 20 analyzed the impact of macro economic determinants of exchange rate volatility in india. Despite the widespread view that an increase in volatility will reduce the level of trade. Podivinskyb a lecturer, university of education sultan idris, tanjong malim, malaysia b senior lecturer, university of southampton, united kingdom currently, is a phd student in university of southampton, united.
In theoretical and empirical literature the impact of exchange rate volatility on the economy is a matter of a current debate. For this reason, this paper analyzes key factors contributing to euro exchange rate volatility in the new eu members. A 2004 imf study exchange rate volatility and trade flows some new evidence, by peter clark, natalia tamirisa, and shangjin wei, may 2004 notes that on average, during the 1970s, 80s and 90s the volatility of fixed exchange rates was approximately the same as that of floating rates. The determinants of exchange rate volatility in south africa.
Equilibrium in the sense of static stability periods or a clear trend is. The basis for this study is the fact that there exists exchange rate volatility in the economy of ghana as found by insah 20. Yuan and awokuse 2003 analyzed the exchange rate volatility and u. Effect of exchange rate volatility on trade in different types of products. Shortrun effective volatility of the real exchange rate for the g7 countries. Exchange rates play a vital role in a countrys level of trade, which is critical to almost every free market economy in the world. This suggests that the effects of exchange rate volatility on trade volumes remain a fundamentally empirical issue. Wei 20 estimated a panel of 63 countries and find that exchange rate volatility has a significant negative impact on bilateral trade for country pairs with large potential trade. In order to manage foreign exchange rate efficiently, macroeconomic factors of foreign exchange rate should be deeply investigated.
The control variables included in this study include gdp, gdp growth, economic openness and exchange rate. Analysis of macroeconomic determinants of exc hange rate volatility in india 179 imports becoming costlier which is a worry for india as it meets most of its oil demand via imports. Pdf on jun 30, 2018, zerrin kilicarslan and others published determinants of exchange rate volatility. Exchange rate volatility and its effect on macroeconomic. Exchange rate volatility and trade flows some new evidence. Rmb exchange rate volatility and its impact on fdi in. Review of exchange rate theories in four leading economics. Review of exchange rate theories in four leading economics textbooks paper presented at the 20th ffm conference 2016 in berlin jan priewe. Estimating the effects of exchange rate volatility on export. The impact of exchange rate volatility on stock index.
Pdf the determinants of exchange rate volatility in. My work further takes into account the arch effects of the volatility of the exchange rate. They found that real exchange rate risk has insignificant effects in most sectors, although agricultural trade volumes appear highly responsive to real exchange rate volatility. For now, we will take expected future exchange rates as given.
Rational speculators and exchange rate volatility i. If the exchange rate begins to move extreme, the governments will intervene in order to maintain it within the boundaries. Effects of exchange rate volatility on export volume and. The naira exchange rate depreciation and volatility is among the vast macroeconomic maladjustments which have unfolded in the nigerian economy in the recent past. Having obtained the volatility of exchange rate through the garch 1,1 techniques, the ecm was used to examine. Determinants of stock market volatility and risk premia. One of the key factors determining the outcome of this analysis will be the behaviour of traded manufactured goods prices following both exchange rate and commodity price changes. We apply quantile regression in some of its new formulations to analyze exchange rate volatility.
This study has been conducted to investigate whether uncertainty or fluctuations in exchange rate affect. The results they obtained provide evidence that real exchange rate volatility has a negative effect on real exports. We estimated the effect of this exchange rate volatility on export quantity and price with autoregressive dis. Juraj stanck cergeeiy january 2006 abstract exchange rate stability is not only a criterion for joining the emu but also a fundamental property of stable economic development. Analysis of macroeconomic determinants of exchange rate. Influence of interest rates determinants on the performance of commercial banks in kenya. Thirdly, studies by hau 2002 and calderon 2004 attempt to nd the sources of exchange rate volatility in south africa1. Structural factors affecting exchange rate volatility. We discuss the implications of the long and short run determinants of exchange rate volatility and the volatility growthnexus. According to englama et al 2010, a volatile exchange rate makes international trade and investments more difficult because it increases exchange rate risk. Following literature, we identified the potential determinants of real exchange rate as lag of real exchange rate, real interest rate, inflation rate. The naira exchange rate depreciation and volatility is among the vast macroeconomic maladjustments which have unfolded in the nigerian economy in the. Exchange rate volatility tends to increase the risk and the uncertainty of external transactions and predisposes a country to exchange rate related risks jin, 2008.
Figure 2 shows the different degrees of exchange rate volatility for several subgroups of coun3 3 9 ecb. To ascertain the effect of money supply on exchange rate volatility of the kenyan shilling against world major currencies. Determinants of exchange rate risks in the automotive industry. On the other hand, recent theoretical developments suggest that there are situations in which the volatility of exchange rates could be expected to have either negative or positive effects on trade volume. The presumption that trade is adversely affected by exchange rate volatility depends on a number of specific assumptions and does not necessarily hold in all cases, especially in a general equilibrium setting where other variables change along with exchange rates. Effects of exchange rate fluctuations and financial. As a result, the volatility in exchange rate movements may influence the volume and the price of traded commodities. A literature survey advantage of the forward markets. This research is concerning on the determinants of foreign exchange rate. This pdf is a selection from an outofprint volume from the national bureau of economic research volume title. A new approach to exchange rate volatility forecasting. The study examined the impact of exchange rate volatility on export in nigeria between 1985 and 2016. A country with a relatively low inflation rate will have an appreciating currency an increasing nominal exchange rate value of its currency. Especially, the impact of exchange rate volatility on export and import activity investigated separately leads also to dissimilar conclusions among countries studied.
The results suggest that the openness has a negative e. The study found a positive relationship between interest rate, inflation, gdp and fdi over exchange rate. Garch method based on daily returns and arma realized volatility forecasts based on intraday, 30 min, returns. Ajao and igbekoyi 20 estimate and test the determinants of real exchange rate volatility in nigeria for the period 19812008 using the ecm technique.
This paper provides an extensive survey of the literature on exchange rate volatility and trade, examining both the theory that underlies the work in this area and the results of empirical studies published since 1988. The effects of exchange rate volatility on aseanchina. Volatility spillovers and determinants of contagion. This paper therefore, investigates the determinants of real exchange rate volatility in nigeria from 1981 through 2008. Theories of exchange rate determination international. The sample period is from august 2, 2011 to december 1, 2011. The study examines the determinants of real exchange rate in the recent years in nigeria over the period of 1970 to 2006 using the nigerian time series data. The tarch model is employed to model the volatility of exchange rates. The purpose of this paper is to highlight the main determinants of the exchange rate from a monetary perspective. Exchange rate stability is not only a criterion for joining the economic monetary union emu but also a fundamental property of stable economic development. Diebold 1988, for example, finds strong arch effects in all the seven nominal exchange rates examined. One notable determinant of nominal exchange rate movements is the lagged real exchange rate, which arises from adjustment to real exchange rate disequilibrium. Gm effect of exchange rate changes usd 253 8 400 1102 45 operating cash flow m 8166 10605 12630 10058 11978 usa % of operating cash flow 3.
Inflation targeting and exchange rate volatility in. Wu and guo 2003 2004 study speculation and trading in the steady state of an infinite horizon model. The exchange rate and economic fundamentals the earliest model of the exchange rate, the monetary model, assumes that the current ex. Undoubtedly, the key factor for the exchange rate determination is the expectation of the future exchange rate which is assumed exogenous. Foreign exchange rates, in fact, are one of the most important determinants of a countrys relative level of economic health, ranking just after interest rates and inflation.
These papers used olg models where exogenous shocks are discrete and agents have a finite set of belief states. With this, a discussion of exchange spending in rate volatility as endogenous is possible. Increases in interest rates cause a countrys currency to appreciate because higher interest rates provide higher rates to lenders, thereby attracting more foreign capital, which causes a rise in exchange rates. The study found a positive relationship between interest rate, inflation, gdp and fdi over. The determinants of the real exchange rate in zambia.
Interest rate, balance of trade, inflation, fdi and gd were considered as independent over the exchange rate as dependent variable. The stock market plays an imperative role in the growth and development of a country. Determinants of exchange rate volatility in south africa. From one point of view, theoretical papers, such that of obstfeld and rogoff 1998, argue that exchange rate volatility is costly to the domestic economy. Introduction this paper examines factors affecting exchange rate volatility, with an emphasis on structural features of the foreign exchange regime, drawing on information from the survey on foreign exchange market organization. The effects of exchange rate volatility on exports. In the end of 2008 when the three main equity indices exhibit their highest volatilities, each exchange rate volatility. Pdf the foreign exchange market in india has undergone substantial changes over last decade. Monetary and portfolio approaches this is an asset pricing view of the exchange rate.
Having obtained the volatility of exchange rate through the garch 1,1 techniques, the ecm was used to examine the various determinants of exchange rate volatility in nigeria, while the cointegration analysis reveals. It is imperative by the excessive volatility of indian. Volatility of the real exchange rates is high but not as high as of the nominal ones. When the exchange rate is officially fixed, essentially the same monetary influences that determine the exchange rate affect the level of official settlements corresponding to the balance of payments surplus or deficit.
Atanda2 the adoption of the international monetary fund imf structural adjustment programme sap in 1986 resulted in the transition from fixed exchange rate regime to floating exchange rate regime in nigeria. To achieve our objective, this paper consists of the following sections. He noted that a garch 1,1 model explained real exchange rate volatility in ghana. Having obtained the volatility of exchange rate through the garch 1,1 techniques, the ecm was used to examine the various determinants of exchange rate volatility in nigeria, while the cointegration. Exchange rate volatility and trade flowssome new evidence. Adewuyi and akpokodje 20 showed that exchange rate uncertainty has more significant negative effects in the noncfa.
Given this set up, the dixitpindyck analysis proceeds as follows. Changes in interest rate affect currency value and dollar exchange rate. Specific content for the schematic asset price model of the exchange rate is provided in sec. The determinants of real exchange rate volatility in nigeria. The switch to flexible exchange rate system re sulted in significant increase in real exchange rate vola tility see 2930 31. Exchange rate volatility and its implications for fdi inflow.
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