EXCHANGE RATE FLUCTUATIONS AND ECONOMIC ACTIVITY IN DEVELOPING COUNTRIES: THEORY AND EVIDENCE

This paper examines the effects of exchange rate fluctuations on real output growth and price inflation in a sample of twenty-two developing countries. The analysis introduces a theoretical rational expectation model that decomposes movements in the exchange rate into anticipated and unanticipated components. The model demonstrates the effects of demand and supply channels on the output and price responses to changes in the exchange rate. In general, exchange rate depreciation, both anticipated and unanticipated, decreases real output growth and increases price inflation. The evidence confirms concerns about the negative effects of currency depreciation on economic performance in developing countries.Exchange Rate, Output Growth, Price Inflation, Supply vs. Demand Shifts

Substitution between Money and Near Monies in Switzerland

This paper investigates the substitutability between money and near-money assets during the period 1976 to 1996 in Switzerland. Financial developments have made a variety of instruments available to store wealth and conduct economic transactions. These developments have generated a near money component in households\u27 and businesses\u27 portfolio balances. It is important to evaluate the effect of near-money on money demand and the effectiveness of monetary policy. Towards this goal, five monetary assets: currency and demand deposits at commercial banks, demand deposits with the postal system, deposits on transaction accounts with banks, savings deposits and time deposits are considered. We evaluate the degree of substitutability among these assets using the Morishima elasticity. Results show that various monetary assets substitute for one another. Consistent with a high degree of diversification, the Morishima elasticity is significantly larger when adjustment takes place in the price of a relatively broader monetary asset as compared with a narrower one. Targeting a broad monetary aggregate captures a variety of assets that contribute to liquidity and aggregate demand, enhancing the effectiveness of monetary policy. Nonetheless, high elasticity of substitution between monetary assets has made it increasingly difficult to target money demand via changes in the interest rate. As a result, in 1999 the Swiss National Bank abandoned monetary targeting in favor of an expected inflation target

The Interaction between Globalization and Financial Development: New Evidence from Panel Co-integration and Causality Analysis

The paper studies the impact of globalization on financial development in a sample of 32 developed and developing economies over the period 1989-2012. Indicators of financial development include three banking indicators (private sector credit, domestic credit, and liquid liabilities) and three indicators of stock market development (value traded, turnover ratio and stock market capitalization), all relevant to GDP. Two panel estimation methodologies are under consideration: panel co-integration and panel VAR. The findings reveal that financial development affects economic growth and globalization positively. Globalization helps mobilize economic growth, but does not help financial development as it helps increase access to external financing. Quality institutions do not impact financial development although the latter increases incentives for better quality institutions in support of sustainable growth

The Drivers of Economic Growth in China and India: Globalization or Financial Development?

Using annual data from 1970-2013 for China and India, this study examines the impact of globalization and financial development on economic growth by endogenizing capital and inflation and drawing comparisons between the two fastest growing emerging market economies. In the long-run, co-integration test results indicate that financial development increases economic growth in China and India. The results also reveal that globalization accelerates economic growth in India but, surprisingly, impairs economic growth in China as it increases competition for exports. The results furthermore disclose that acceleration in capitalization and inflation, as a proxy for aggregate demand, are positively linked to economic growth in China and India. Causality test results indicate that both financial development and economic growth are interdependent. In contrast, causality runs from higher economic growth to increased globalization in India, while the results do not support long-term causality between globalization and economic growth in China

ON THE DESIGN AND EFFECTS OF MONETARY POLICY IN THE MIDDLE EAST

In trying to evaluate the autonomy of central banks in the Middle East, the paper examines the determinants and implications of monetary policy across a sample of countries in the region: Algeria, Egypt, Jordan, Kuwait, Morocco, Saudi Arabia, Syria and Tunisia. Monetary policy is often established as a tool to facilitate government objectives. However, some of the announced objectives – price stability, economic growth, and full employment – may be contradictory. The governments may then set the reaction function for the monetary authority to devote more attention to specific objectives that they judge to be more urgent for economic performance. Models that attempt to identify the reaction function for the monetary authority differentiate between two types of policies: rules or accommodative policies versus discretion or stabilizing policies. An accommodative policy provides a regular supply of credit to an expanding economy. A stabilizing policy, in contrast, varies the money supply to counter shocks that may deviate the economy from its objectives. The present paper seeks to shed some light on the design of monetary policy across countries that have kept a sufficient data record for empirical investigation. The empirical investigation proceeds in two steps. The first step seeks to identify the reaction function for the design of monetary policy. The second step seeks to evaluate the varying effects of monetary policy in the light of variations in the policy design. Specifically, empirical models are estimated to identify the effects of growth in money supply on real output growth and price inflation.Monetary policy, Economic growth, Middle-East countries

On the effects of monetary policy shocks in developing countries

Using annual data for a sample of developing countries, the time-series evidence indicates the allocation of monetary policy shocks, both expansionary and contractionary, between price inflation and output growth. Subsequently, cross-country regressions evaluate factors that underlie the difference in these allocations and their implications. The real effects of monetary shocks increase as the elasticity of aggregate demand increases with respect to monetary shocks. Nonetheless, capacity constraints hamper the output adjustment to monetary shocks and increase price inflation. Across countries, trend output growth increases with the output response to monetary shocks. Consistent with the stabilizing function of monetary policy, the variability of output growth decreases in the face of monetary fluctuations across countries. In contrast, monetary fluctuations increase the trend and variability of price inflation across countries