Search Results (11)

Exchange rate volatility has emerged to be one of the most critical determinants of price stability for countries operating in multicurrency systems with their own currency in the basket of currencies. This study empirically examined the impact of exchange rates (official and parallel market rates) on inflation in Zimbabwe during the multicurrency system for the period 2014 to 2024, together with comparing the impacts of the official and parallel market exchange rates on inflation. Time series and monthly data were used to examine the short and long run impact of exchange rates on inflation in an ARDL estimation framework. Findings revealed a short run and long run positive relationship between both the official and parallel market exchange rates and inflation, with the parallel market exchange rate being the most significant variable. Other control variables used, such as domestic productivity, have a highly significant negative impact on inflation through the official and parallel exchange rate models in both the short and the long run. Money supply, real interest rate, trade balance, foreign prices, foreign output, stock market prices and foreign currency reserves have varied impacts through either the official or parallel market exchange rate models. Policy recommendations include a contractionary Monetary and expansionary Fiscal policy mix that will result in exchange rate appreciation and stability, productivity growth, trade surplus, growth in reserves, and ultimately low prices. The exchange rate policy recommended in this study is to shelve discard the local currency in the multicurrency system until industrial capacity utilization exceeds 50% to add the local currency to the basket of currencies and 75% for mono-local currency (de-dollarization). Full article

Target2 is the Eurozone’s cross-border payment system, which is mandatory for the settlement of euro transactions involving Eurozone central banks. It is being used to save the Eurozone from imploding. A key underlying problem is that the Eurozone does not satisfy the economic conditions for being an Optimal Currency Area, i.e., a geographical area over which a single currency and monetary policy can operate on a sustainable, long-term basis. The different business cycles in the Eurozone, combined with poor labour and capital market flexibility, mean that systematic trade surpluses and deficits will build up because inter-regional exchange rates can no longer be changed. Surplus regions need to recycle the surpluses back into deficit regions via transfers to keep the Eurozone economies in balance. But the largest surplus country—Germany—refuses to formally accept that the European Union is a ‘transfer union’. However, deficit countries, including the largest of these—Italy—are using Target2 for this purpose. Target2 has become a giant credit card for Eurozone members that import more than they export to other members, but with two differences compared with normal credit card debt: neither the debt nor the interest that accrues on the debt ever needs to be repaid. Furthermore, the size of the deficits being built up is causing citizens in deficit countries to lose confidence in their banking systems, leading them to transfer their funds to banks in surplus countries. Target2 is also being used to facilitate this capital flight. However, these are not viable long-term solutions to systemic Eurozone trade imbalances and weakening national banking systems. There are only two realistic outcomes. The first is a full fiscal and political union, with Brussels determining the levels of tax and public expenditure in each member state—which has long been the objective of Europe’s political establishment. The second outcome is that the Eurozone breaks up. Full article

We simulate the future performance of the Norwegian Government Pension Fund Global as a leading example of sovereign wealth funds intended both to preserve wealth and provide regular budget contributions. Withdrawals are limited to the fund’s expected real returns; however, deviations are allowed to fund automatic stabilizers as well as discretionary fiscal policy. It also allows smoothing to avoid abrupt changes. Except for the fiscal policy part, many endowment funds are subject to similar rules. The main findings are: (i) Even if withdrawals matching expected returns maintain the fund’s value in expectation, the fund will be depleted eventually. (ii) Because the fund is invested in foreign currency, long-run purchasing power parity introduces an element of mean reversion and hence a negative serial correlation in the rates of return, so that the fund’s value is not even preserved in expectation. (iii) The use of the fund for fiscal policy introduces a substantial risk of depletion in finite time. (iv) Smoothing raises the risk of depletion after large negative financial returns, though only modestly so. Risk reduction and withdrawal rates below expected returns are explored as remedies. Risk reduction postpones the eventual depletion but does not eliminate it. Lower withdrawal rates help sustainability more fundamentally, but bounds on fiscal policy are needed for depletion risk to be eliminated. Full article

Many commodity-exporting countries saw their revenues plummet and experienced fiscal deficits during the pandemic. The economic rebound will restore resource exports/revenues and a new round of debate will be initiated on revenues utilization. Countries will decide either to internalize revenues or capitalize them with investments abroad. Our autoregressive distributed lag (ARDL) models provide evidence of the benefits Norway enjoys since it has not internalized revenues. The currency rate, long-term bond yields, and GDP growth are insulated from prices volatility. Furthermore, the country can absorb currency appreciations/devaluations and long-term credit rate hikes through government expenditure. However, monetary steering is favored in the long term (absorbs yield increases), while in the short run it can allow for speculative activities by credit investors. Countries should not internalize resource revenues to avoid experiencing decreased competitiveness and economic growth and increased credit rates. However, the temptation will be high enough since deficits and support packages cost a lot. This study also includes years of low prices. Thus, our research reveals the extent and limitations of diligent revenue management from a country considered as a role model. Full article

The purpose of this study is to examine the monetary policy transmission mechanisms in seven South Asian Association for Regional Cooperation (SAARC) countries to discover the viability of the convergence of the SAARC into a monetary and economic union based on common monetary channels. By employing optimal currency area theory, we used the restricted VAR analysis on the annual data from 1978 to 2017. We find that the money channel response provides proof for the presence of an exchange rate and credit channels. Furthermore, the real sector also responds to changes in fiscal and monetary shocks through the exchange rate and credit channels over short-run to long-run time horizons. This implies that the SAARC is a good candidate due to common exchange rate and credit channels. The function of the variance decomposition and the impulse for forming a monetary and economic union is that they share a coincidental pattern of dynamic reactions of inflation and growth to exogenous shocks. If the SAARC monetary and economic union is created, it will reap overall economic benefits inside and outside of Asia just like the European Union (EU). Full article

This paper examines the relationship between fiscal and external balances in MENA oil versus non-oil countries in the context of the twin deficits hypothesis (TDH) using Panel Vector Autoregression- Generalized Methods of Moments PVAR GMM estimation, Granger Causality and IRFs. The essence of this analysis is to assess the vulnerability of fiscal and external balances to oil price dynamics and regional geopolitics in the region. Results show that a twin-deficit problem exists in MENA oil-rich countries only while the problem does not exist in non-oil ones. This affirms the hypothesis that oil dependence results in high fiscal vulnerability to geopolitical shocks that automatically transmits to external balances. While a TDH isn’t proven to exist in non-oil countries, fiscal and external balances problems result from longstanding structural factors. A high reliance on tourism revenues and remittances as main sources of foreign currency receipts (together with poor tax administration and enlarged current spending bills) makes those countries more vulnerable to domestic and external shocks; reflected in both growing fiscal and current account deficits. A large imports sector and relatively poor exporting capacity also contribute to weakening external accounts. The main policy recommendations for MENA oil-rich countries rely in the importance of strengthening the non-oil sector in order to diversify domestic sources of revenues. Adopting flexible exchange rates is recommended to decrease the vulnerability of the external shocks to oil price dynamics. For non-oil MENA regions, fiscal consolidation, reforming current spending and strengthening tax administrations are crucial to improve fiscal performance. Export-led growth strategies and inclusive growth policies would also contribute to improving external accounts in the examined economies. Full article

Monetary historians argue that two types of currencies were circulating in the middle ages of Europe. The first was the standard historical form of money made up of gold and silver coins, and the second was a set of small pieces of copper and other metallic substances used mainly in towns and townships for local trade as currency. Jetton and tokens are monetized objects that are not official currencies; they were of lower quality of the inferior metallic object, which were used for day-to-day transaction needs. The drive for local monetary decentralization is pointed to build up fiscal autonomy and responsible local monetary institutions. This paper reasons that the monetary regime of the Renaissance was a real and genuine trimetallic currency regime. Full article

Global investors’ investment in local currency bonds, especially Korea Treasury Bonds, has increased significantly since the mid-2000s, and their influence on bonds and financial markets has grown consistently. In this paper, we investigate global investor’s priority of decision factors in investing in Korea Treasury Bonds by distributing a pairwise comparative survey to experts and analyzing the results using the analytical hierarchy process technique. For analysis, we created model frames with experts in the field of investment based on literature analysis, selected survey participants by considering their institution of their employment, work experience and region, and obtained responses. We find that investors with short-term investment propensities are more sensitive to international and domestic factors and less to risk factors, and more heavily influenced by U.S. dollar funding conditions. On the other hand, investors with long-term investment tendencies are found to be more sensitive to international and risk factors as opposed to domestic factors, and influenced by: global policy rate decisions and fiscal soundness, sovereign credit rating, possible global economic recession, and geographical risks. Our findings not only contribute to enhancing investors’ understanding of the Korean bond market by discussing consensus among investors, but also provide policy implications for Korean government policymakers who need stable and sustained funding. Full article

Following De Grauwe (2016), this research advances the idea according to which economies that are part of a monetary union issue debt in a medium of exchange they cannot control: financial markets develop the capacity to impose default on such economies. We are interested in how previous research analyzed the notion that, when economies are autonomous and they employ the exchange rate as a vehicle to handle asymmetric shocks, they confront comparable constraints on the performance of exchange rate strategies. When a monetary union is affected by significant asymmetric shocks, the member economies have to deal with tough adjustment issues. Empirical and secondary data are used to back the assertion that, in a monetary union, economies that are affected by long-lasting asymmetric demand shocks demand wage elasticity and labor flexibility to rectify for them, and if the latter generate substantial budget deficits, financial markets tend to intensify the consequences of the asymmetric shocks, boosting the demand for severe regulation of wages and labor flexibility. Our article makes conceptual and methodological contributions to the view that member economies of a monetary union are exposed to varying market reactions, generating more volatility in the business cycle: an economy undergoing a recession and a rise in the budget deficit might be affected by wide-ranging transactions of its government bonds, causing a liquidity crisis and superior interest rates, and possibly coercing the government of that economy to adopt budgetary austerity measures, thus intensifying the recession. Full article

After reviewing the main determinants of the current Eurozone crisis, this paper discusses the feasibility of introducing fiscal currencies as a way to restore fiscal space in peripheral countries, such as Greece, which have so far adopted austerity measures in order to abide by their commitments with Eurozone institutions and the IMF. We show that the introduction of fiscal currencies would speed up the recovery, without violating the rules of Eurozone Treaties. At the same time, these processes could help the transition of the euro from its current status of single currency to a status of “common clearing currency” along the lines proposed by Keynes at Bretton Woods as a system of international settlements. Eurozone countries could therefore move from “Plan B” aimed at addressing member state domestic problems, to a “Plan A” of a better European monetary system. Full article

In response to the financial crisis of 2008, the Federal Reserve radically increased the monetary base. Banks responded by increasing excess reserves rather than increasing bank loans, and the public responded with a substantial flight to liquidity in the form of currency and demand deposits. As a result, the money-supply multipliers substantially decreased, so that the actual money supply measures grew more moderately than the base. The sustained multiplier-collapse spawned reexamination of monetary versus fiscal theories of price-level determination. This paper, however, presents decompositions of the money-multiplier collapse into changes in the currency-to-deposit ratios, and changes in the reserve-to-deposit ratio. By doing so, possible near-term increases in the multipliers are simulated so that the possibility of either full or partial restoration to their pre-crisis levels is assessed. Policy possibilities for controlling the money supply over various horizons follow. This analysis illustrates the Federal Reserve’s exit dilemma that results from its financial-crisis policy. Full article