Effect of China’s New Trade Settlement Policy on the Value of Dollar

While swap agreements greatly relieves two trading nations of the shortage of international liquidity, they have several implications for the countries issuing an international currency. Such agreements, by lowering the demand for an international currency, lower its relative price and, thereby, change the balance of payments and the real income of the nation issuing the currency. Since, the U.S. dollar dominates all other international currencies in trade settlement and in reserve composition of sovereign states, such swap agreements are expected to affect U.S. dollar’s exchange rate, and, thereby, the U.S. balance of payments and real income. This study, therefore, attempts to evaluate the impact of China’s swap agreements with Indonesia on U.S. dollar’s exchange rate with Indonesian rupiah, which has never been done before. In this study, we have developed a model in which the exchange rate of the U.S. dollar is a function of a number of variables, such as, the natural logs of the U.S. real GDP, Indonesian real GDP, U.S. money supply, and Indonesian money supply plus one-period lagged value of the dependent variable and a swap dummy. Our study found that China’s swap agreement with Indonesia has no effect on the exchange rate (value) of U.S. dollar. One explanation of this finding can be the amount of swap agreement being relatively too small compared to the volume of Indonesia’s annual trade volume to influence the value of the dollar. Also, the swap amount is meant to settle bilateral trade over several years rather than one year, which makes the swap amount a much smaller percentage of Indonesia’s annual trade volume making the swap agreement ineffective in changing the exchange rate (relative value) of U.S. dollar with respect to rupiah

US Fiscal Stimulus and Value of Dollar

Our study examines the impact of government stimulus spending on the US dollar’s exchange rate. We apply the VECM model on US data from 1980 to 2020 with US dollar’s exchange rate as the dependent variable and the quantity of domestic money supply, amount of domestic government purchases, quantity of money supplied by the foreign country (China), and the foreign country’s output as independent variables. Our study finds that, while the long-run impact of US fiscal stimulus spending on the dollar’s exchange rate is negative, it has no effect in the short run. Also, the coefficient associated with the errorcorrection term, ECT, is negative but insignificant at 5% significance level, which implies that any shortterm fluctuation in the US dollar’s exchange rate will not be adjusted toward its long-run value

Testing the Power of Exchange Rate to Equalize Prices

Although already been tested numerous times thus far, researchers are still fascinated by the purchasing power parity (PPP) hypothesis due to its implication for international trade and financial flows, which stipulates that the exchange rate between any two currencies changes to equalize the price levels (purchasing power) in the two countries. This hypothesis has been tested by mainly testing the stationarity of the real exchange rate between any two currencies of interest. But we use a different approach. Our model is based on the long-term relationship between the official exchange rate and the relative inflation rates between two countries. According to our model, the validity of the PPP hypothesis is based on the non-rejection of the null hypotheses that the intercept term in the regression of the official exchange rate on the relative inflation rate is equal to zero and that the coefficient associated with the relative inflation rate is equal to one. We applied our test on a panel data from five BRICS countries. Our results rejected both null hypotheses at 5% significance level. Thus our findings invalidate the PPP hypothesis

Effect of Federal Funds Rate on CPI and PPI

One of the crucial jobs of central banks is to rein in inflation as it creates uncertainty in the economy and in private investment and ultimately negatively impacts the economy. If the source of inflation is positive demand shock, then raising the federal funds rate target is the right way to rein in inflation. If the source of inflation is negative supply shock, then raising the federal funds rate target will make things worse. In this study, the impact of FFR (federal funds rate) on CPI (consumer price index) and producer price index (PPI) is examined. Findings indicate that raising the federal funds rate will have a negative impact on both CPI and PPI with a 2-period lag. The possible explanation of this finding is that raising federal funds rate lowers aggregate demand, lowers the price level and thereby the CPI. And when CPI falls, it lowers per-unit profit, prompting producers to cut supply, which in turn lowers the demand for producer goods and services, and thereby lowers PPI

Can US Fiscal Stimulus Negatively Affect US Balance of Trade?

In an attempt to take the U.S. economy out of recession or to stimulate a sluggish economy, US presidents, democrats and republicans alike, have used an expansionary fiscal policy. While an expansionary fiscal policy raises the GDP, it also raises a nation’s import due to increased income brought about by the expansionary fiscal policy. If the increase in a nation’s import exceeds that in export, it negatively impacts the nation’s balance of trade. So, our study examines the impact of US government stimulus spending on the nation’s balance of trade. We use a general equilibrium framework and apply the VECM model on US data from 1980 to 2020. Our study finds that, while the long-run impact of US fiscal stimulus spending on US balance of trade is positive and significant, the short-run impact is negative. We also found that any short term fluctuation in US balance of trade is adjusted to its long-run equilibrium level

Companies Identified as Having the Greatest Returns to Capital in Emerging Markets During a Worldwide Pandemic

The COVID-19 pandemic of the year 2020 resulted in high unemployment, business closings, property loss and decimation of individual wealth, disruption of global supply chains, and illness and deaths everywhere, but most intensely in countries classified as emerging markets. However, during this year, cash flow from investors in established markets to emerging markets has been of immense magnitude. While many companies, in emerging markets, reported very high risk-adjusted rates of return, many others reported so low rates during this period. This study aims to establish a unique profile of risk-return characteristics of the companies in emerging markets that have constantly reported the highest risk-adjusted returns to total capital during the pandemic. The statistical results of our study suggest that such unique profile can be used as a tool to forecast which companies, in such markets and during such disturbances in the future, will maintain high returns to capital providing an invaluable tool for investors, investment counselors and financial researchers tasked to determine firm’s intrinsic value in such an environment

A Financial Analysis of Domestic Firms With Highest Returns to Capital During the Worldwide Pandemic

This study analyzes the financial profile and risk-performance characteristics for the group of firms reporting the highest returns to total capital in the Value Line database during the worldwide pandemic. It compares the firms with a group selected randomly from the same industries to investigate if the firms reporting high returns to capital in such unusual economic environment have a unique risk-performance profile. This study tests if the group with the highest returns has a unique financial profile, and can the findings be validated without bias. If the answer is “yes,” then it would imply the financial profile may be used as a tool to predict if a particular company will maintain extraordinary performance in periods with similar market disturbances. As this study uses a new tool to analyze the financial characteristics of companies, it is a significant addition to the growing body of knowledge. Moreover, the tool used can also be applied by financial researchers, investors, and investment advisors/counselors in determining firm’s inherent values in such a unique environment

Does a J-Curve Effect Exist in Nepal-India Trade?

Nepal is facing a persistent negative trade balance with India. One of the ways a nation can improve its trade balance is by imposing or raising tariffs on its import. An import tariff raises the price of imports, lowers its domestic demand, and ultimately lowers its import, which leads to an improvement in the country’s trade balance in the long run. However, consumers take time to change their habit or find a substitute in response to a price rise, a tariff led price increase of imports only increases the import bills, thereby, worsens the nation’s trade balance in the short run. Thus, the short-run deterioration and the long-run improvement of trade balance following the imposition of an import tariff produce a J-curve phenomenon. This study tests the presence of a J-curve effect, if any, on Nepal-India trade. Our study defines BOT as a dependent variable and measures it as Nepal’s export to India minus Nepal’s import from India. Our independent variables include RRGDP (ratio of real GDP) measured as Nepal’s real GDP divided by India’s real GDP, and RP (relative price) measured as the ratio of Nepal’s consumer price index to India’s consumer price index. We estimate an unrestricted vector autoregressive model (VAR). The coefficient of the variable

Testing the Marshall-Lerner Condition and the J-curve Effect on U.S. –China Trade

We estimate a VECM regressing the ratio of U.S. export to U.S. import from china on U.S. real GDP,China’s real GDP, and RREX (dollar-yuan real exchange rate). The real exchange rate variable is found to be negative but insignificant, failing to satisfy the Marshall-Lerner condition and implying that the dollar’s depreciation will have no effect on the U.S. trade balance with China in the long run. The variable

Evaluating a trade policy using a revealed preference approach.

The traditional theory of international trade suggests that, in perfectly competitive markets, international trade always increases welfare. The theory of second best suggests that, in the presence of multiple distortions, a reduction in a distortion may actually reduce the welfare. With the welfare consequences of trade reform still being debated, there have been very sparse empirical studies to test these results. Moreover, the empirical studies done so far on this issue are mostly based on ex-ante approach, which looks for a set of policy prescriptions, which yield welfare improvement. Ju and Krishna's model built upon that of Dixit and Norman has shown that Ohyama's conditions under the assumption of many consumers and small country case are sufficient to ensure that a trade reform is a Pareto improvement. However, their model has not yet been tested empirically. This study, therefore, attempts to develop an empirical method to test Ohyama's and others' revealed preference approach, which looks for some indicator to determine if welfare has risen due to a trade reform. This study also applies the empirical method to test welfare effect of a trade reform. The study chose U.S.A. and Mexico for observation and considers the signing of NAFTA by the two countries as a form of trade reform. It then applies two empirical approaches: linear regression model approach and intervention model approach to test the hypothesis that U.S. welfare has increased due to liberalization of its trade with Mexico under the NAFTA agreement. The test results from both the linear regression model and the intervention model confirm the hypothesis that U.S. welfare has increased due to the liberalization of its trade with Mexico