Impacts of Exchange Rate Volatility on Macroeconomic and Financial Variables: Empirical Evidence from PVAR Modeling

In this study, Panel Vector Autoregression (PVAR) models are used to determine the impacts of exchange rate volatility on industrial production growth rate, consumer price inflation, short-term interest rates and stock returns for 10 OECD countries. The variance decompositions (VDCs) found that exchange rate volatility can be a secondary factor for the variations in immediate interest rates, implying that Uncovered Interest Rate Parity (UIP) condition should be analyzed by the inclusion of other macroeconomic variables. Impulse response functions (IRFs) expose that volatility in exchange rates can have a positive impact on the liquidity conditions in money market and an increase in real economic activity because investors have to move their money away from currency markets to money markets. The relatively lower impact of exchange rate volatility may arise from the zero bound problem, thus it is emphasized that the examination of impacts on exchange rate volatility on macroeconomics variables should be made both considering conventional and unconventional monetary policy. Although impulse response functions (IRFs) did not detect the significant impact of exchange rate volatility on inflation, VDCs obtained supporting results to exchange rate pass-through (ERPT). I suggest that the monetary policy to be developed should clarify alternative channels that exchange rate may affect inflation

Analysis of the Role of Exchange Rate Volatility in Monetary Policy Conduction in OECD Countries: Empirical Evidence from Panel-VAR Models

In this study, panel vector autoregression (PVAR) models are employed to examine the relationships between industrial production growth rate, consumer price inflation, short-term interest rates, stock returns and exchange rate volatility. More specifically, I explored the consequences of the dynamics detected by the models on monetary policy implementation for 10 OECD countries. This study indicates that factors that may cause a rise in short-term interest rates with respect to the USA can lead to volatility in exchange rates and thus macroeconomic instability. It is also implied that sustaining macroeconomic growth and decreasing inflation can result in increased export performance, which in turn provides the amount of US dollars to curb volatility in US dollar quotations. Accordingly, this study reveals that high importance should be given to both monetary and non-monetary factors in the open-economy framework to detect the possible impacts on trade and capital flows by dynamic stochastic general equilibrium (DSGE) models. Due to their exchange rate risk of economic agents, I also suggest that the economic policy makers of these countries had better create a theoretical framework including financial frictions, economic agents’ preferences and different shocks to smooth the variations in exchange rates and minimise the negative outcomes of Brexit

The Role of Interest Rates and Credits in Explaining Output Variations: Empirical Evidence from Turkey and the Euro Area

Cilj je rada analizirati učinke monetarne politike na realnu ekonomsku aktivnost u Turskoj i eurozoni istraživanjem uloge financijskih posrednika. U analizi učinaka kratkoročnih kamatnih stopa i kreditne aktivnosti koriste se strukturni vektorski modeli ispravljanja pogrešaka (SVEC modeli). Empirijski rezultati pokazuju da kratkoročne kamatne stope i obujam kredita mogu u kratkom roku utjecati na aktivnost u Turskoj, dok promjene u kratkoročnim kamatnim stopama i obujmu kredita nemaju značajan dugoročan utjecaj na realnu ekonomsku aktivnost niti u Turskoj niti u eurozoni.This study aims to analyze the effects of monetary policy on real economic activity in the cases of Turkey and the euro area by investigating the role of financial intermediaries. Structural vector error correction (SVEC) models are used to examine the effects of short-term interest rates and credit activity on output. Empirical results reveal that short-term interest rates and credits may affect Turkey’s output in the short run, whereas changes in short-term interest rate and credit volume do not have a significant long-term impact on real economic activity either in Turkey or the euro area

Preispitivanje utjecaja poskupljenja nafte na provođenje monetarne politike najvećih naftnih uvoznika

The aim of this paper is to test the impacts of oil price increases on monetary policy implementation in the largest oil importers. For that purpose, we estimate structural vector error correction (SVEC) models to show the impacts of oil price increases on industrial production, consumer prices and immediate interest rates which are the elements of Taylor rule for the four largest oil importers (the USA, the EU, China and Japan). Our results indicate that oil price increases transmit to output and inflation and lead to fluctuations in industrial production, consumer prices and immediate interest rates which in turn influence the monetary policy stance in the following periods. The basic conclusion of research is that the channels through which oil prices affect output, inflation and interest rates should be identified by the monetary policy authorities of the USA, the EU, China and Japan. We also emphasize the importance of the determination of the optimal monetary policy framework to eliminate the negative consequences of oil price increases.Cilj ovog rada je ispitati utjecaj poskupljenja nafte na provođenje monetarne politike najvećih naftnih uvoznika. U tu svrhu procjenjujemo modele strukturnog vektora ispravljanja pogrešaka (SVEC) da bi pokazali utjecaj poskupljenja nafte na industrijsku proizvodnju, potrošačke cijene i neposredne kamatne stope, elemente Taylorova pravila koji se odnose na četiri najveća naftna uvoznika (SAD, EU, Kina i Japan). Naši rezultati pokazuju da se rast cijena nafte prenosi na proizvodnju i inflaciju te dovodi do promjena u industrijskoj proizvodnji, potrošačkim cijenama i neposrednim kamatnim stopama koje pak utječu na monetarnu politiku u razdobljima koja slijede. Temeljni zaključak istraživanja je da bi vlasti monetarne politike u SAD-u, EU, Kini i Japanu trebale identificirati kanale kroz koje cijene nafte utječu na proizvodnju, inflaciju i kamatne stope. U radu se također naglašava važnost određivanja optimalnog okvira monetarne politike kako bi se uklonile negativne posljedice poskupljenja nafte

The role of asymmetry in the interplay between internal and external factors: Empirical evidence from the US, Brazil, Canada and Mexico

U ovom istraživanju ispitana je realna ekonomska aktivnost i monetarna politika SAD-a u usporedbi s vanjskotrgovinskom bilancom i valutnim tečajevima, primjenjujući modele Qual VAR i nelinearni VAR model. Ustanovili smo da međunarodno poslovanje s Brazilom, Kanadom i Meksikom ne dovodi do moguće recesije u SAD-u. Vrijednost domaće valute Brazila, Kanade i Meksika u odnosu na američki dolar ne pridonosi mogućoj recesiji na deviznom tržištu. Također smo pokazali da će kontrakcija američke ekonomije i kontrakcijska monetarna politika dovesti do aprecijacije američkog dolara vodeći do priljeva kapitala. Iako negativna stopa federalnih fondova (shadow interest rate) može imati asimetrične učinke na vanjskotrgovinsku bilancu s Kanadom i USD / CAD-om, smatramo da će vanjskotrgovinska bilanca s Meksikom i USD / MXN biti pozitivno ili negativno uvjetovana povećanjem odnosno smanjenjem stope federalnih fondova.In this study, the real economic activity and monetary policy in the US are examined in comparison with the foreign trade balance and exchange rates, using Qual VAR and nonlinear VAR models. We found that the foreign trade with Brazil, Canada and Mexico do not lead to a possible recession in the US. The value of the domestic currency of Brazil, Canada and Mexico against the US dollar does not contribute to a possible recession over the foreign exchange market. We also show that a contraction in the US economy and contractionary monetary policy will lead to the appreciation of the US dollar by leading to capital inflows. Although the shadow interest rate may have asymmetric effects on the foreign trade balance with Canada and USD/CAD, we find that the foreign trade balance with Mexico and USD/MXN will be affected positively/negatively by an increase/decrease in the shadow interest rate

The Role of Interest Rates and Credits in Explaining Output Variations: Empirical Evidence from Turkey and the Euro Area

Cilj je rada analizirati učinke monetarne politike na realnu ekonomsku aktivnost u Turskoj i eurozoni istraživanjem uloge financijskih posrednika. U analizi učinaka kratkoročnih kamatnih stopa i kreditne aktivnosti koriste se strukturni vektorski modeli ispravljanja pogrešaka (SVEC modeli). Empirijski rezultati pokazuju da kratkoročne kamatne stope i obujam kredita mogu u kratkom roku utjecati na aktivnost u Turskoj, dok promjene u kratkoročnim kamatnim stopama i obujmu kredita nemaju značajan dugoročan utjecaj na realnu ekonomsku aktivnost niti u Turskoj niti u eurozoni.This study aims to analyze the effects of monetary policy on real economic activity in the cases of Turkey and the euro area by investigating the role of financial intermediaries. Structural vector error correction (SVEC) models are used to examine the effects of short-term interest rates and credit activity on output. Empirical results reveal that short-term interest rates and credits may affect Turkey’s output in the short run, whereas changes in short-term interest rate and credit volume do not have a significant long-term impact on real economic activity either in Turkey or the euro area

EXCHANGE RATES AND STOCK PRICES: HOW DO THEY INTERACT IN EASTERN EUROPE?

In this study, we estimate Structural Vector Error Correction (SVEC) models to analyze the effects of the exchange rate on stock prices and vice versa in the Czech Republic, Hungary, Poland and Turkey. Our empirical findings imply that for all cases, the fluctuations in exchange rates may have a considerable role in the variation in stock markets, while variations in stock prices may have macroeconomic consequences by leading to changes in real exchange rates. We also found that the relationship between real exchange rates and stock prices in these countries may be induced by the monetary policy decisions of the Fed and other domestic and foreign factors. Our results stress the importance of the derivation of the optimal economic policy framework to analyze the interaction between exchange rates and stock prices. In this respect, we suggest the use of Dynamic Stochastic General Equilibrium (DSGE) modelling with country-specific and global factors to determine the economic polices sustaining financial and economic stability for the Czech Republic, Hungary, Poland and Turkey

Impacts of short-term interest rates on stock returns and exchange rates: Empirical evidence from EAGLE countries

In this study, we estimate Bayesian vector autoregression (BVAR) and time-varying structural VAR (TVP-VAR) models for Brazil, Indonesia, Mexico and Turkey to analyze the impacts of short-term interest rates on stock prices and exchange rates considering the relationships between these variables. BVAR and TVP-VAR models' estimations indicate that monetary policy decisions of these countries lead to capital movements as well as capital movements may create a considerable amount of variation in exchange and stock markets both in the periods of economic stability and financial crisis. We also reveal that increases in interest rates intending to prevent capital outflows may lead to decrease in stock returns, which in turn may deteriorate the real economic activity in Indonesia, while changes in short-term interest rates in Brazil, Indonesia and Turkey cannot be used as a tool to stabilize the value of their home currencies against the USD. Our study highlights the importance of formulating an optimal monetary policy framework accompanied by macro-prudential polices, which help to reach inflation target and smooth the possible variations in exchange rates and stock prices during economic crisis conditions in Brazil, Indonesia, Mexico and Turkey

Assessing the Impacts of Economic Policy Uncertainty of the US on the Exchange Rates and Stock Returns of Korea, Mexico, Poland and Russia

This study examines the effects of the economic policy uncertainty (EPU) index of the US on the exchange rates and stock returns of Korea, Mexico, Poland, and Russia. A time-varying causality test showed that the impacts of EPU of the US on the exchange and stock market of emerging countries could be affected by regime changes. A quantile regression model suggested that the effect of the increase/decrease in the EPU of the US may affect financial variables, while it was indicated that effects of the EPU of the US on the exchange rates and stock returns are asymmetrical

Possible effects of domestic and foreign factors on monetary policy implementation in Turkey: a DSGE-VAR approach

In this paper, we attempt to explore the possible effects of technology, foreign output, price and terms of trade shocks on short-term interest rates in Turkey within a dynamic stochastic general equilibrium-vector autoregressive (DSGE-VAR) framework. In a sense, the primary aim of our paper is to analyse whether the Central Bank of the Republic of Turkey (CBRT) should consider the role of technology, foreign output, price and terms of trade shocks in its monetary policy implementation. Empirical results reveal that the above-mentioned factors have importance for the CBRT, which intends to control economy-wide interest rates in order to maintain price stability