alireza karami; Majid Sameti; Komail Tayyebi; leila torki
Abstract
Based on the list released by the international organization for standardization (ISO) on January 1st, 2014, there are almost 250 types of currencies in the world for product/service trade and financial flows. The most obvious types of currency are the US dollar, Canadian dollar, Euro, British pound ...
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Based on the list released by the international organization for standardization (ISO) on January 1st, 2014, there are almost 250 types of currencies in the world for product/service trade and financial flows. The most obvious types of currency are the US dollar, Canadian dollar, Euro, British pound , Japanese Yen, Switzerland Frank, Chinese Yuan, etc. (Evans, 2014).
Exchange rate is determined by its supply and demand while the governments can affect it through different ways. The amount and nature of government involvement in the exchange rate markets define the exchange rate systems. In fact, the exchange rate systems are a framework for determination of the price. There are generally three groups of exchange rate systems including floating, fixed, and managed system. In the floating exchange rate system, the exchange rate is only determined by the market forces without the involvement of the government. The exchanges change continuously because the exchange supply and demand have volatility. In the managed exchange rate system, the exchange rate can be changed while the governments participate in the exchange markets to affect the exchange rates. In the fixed exchange rate system, the governments demand for stabilizing the exchange rates through participation in the market or regulating systems (Rittenberg, 2012).
Theoretical Framework
Selecting an appropriate exchange rate system is of great importance for an economy because it affects the exchange rate and other economic variables of a country (e.g. the general level of prices and production). Determination of the exchange rate system after the collapse of Bretton Woods system became more important because there was already a kind of fixed and somewhat adjustable exchange rate system in the countries. After the collapse of Bretton Woods system, the countries such as the petroleum exporting countries questioned which exchange rate system is more important for their economies. In such countries, the petroleum export was considered as a main factor affecting the exchange rate because this factor affects both export and government revenues as well as the exchange rate system in such countries. One of the important frameworks to select the exchange rate system was the exchange rate protective property. Based on this framework, each exchange rate system protecting the economy of the country against the entered shocks is appropriate for its economy (Komijani&Arabi, 2002).
Methodology
The main purpose of this study was to determine the framework exchange rate system for OPEC member countries during 1990-2015. By using the method and results of this study, the exchange rate markets and policymakers can select an appropriate system for their countries to have the minimum volatility for the exchange rate resulting in no negative effect on the economy of their country.
In this study, the models of Argy, Multiple-criteria and decision-making were used to select the proper exchange rate system in OPEC member countries.
In the first model, after explaining the Argy model and presenting six price and production functions for all fixed, floating, and managed exchange rate systems, Chow, Hausman, Breusch and Pagan, Heteroscedasticity of variance, and autocorrelation tests were performed by STATA software. Then, based on the data collected for 1990-2015, the parameters of the above six parameters were estimated by GLS method and the production and price values were calculated by Excel software. Finally, the loss function was obtained for each country and exchange rate system by calculating and adding the numerical value of production and price variance.
Results and Discussion
The results showed that the managed rate system was selected as an appropriate system for all OPEC member countries except Ecuador, Qatar, and Nigeria because the loss function value for this type of exchange rate system was less than the other exchange rate systems. The appropriate exchange rate system for all above mentioned countries was the fixed exchange rate system. As a general result in the studied period, the proper exchange rate system for OPEC member countries was the managed exchange rate system. In the second model, the analytical hierarchy model was used. so that, the factors affecting the evaluation and selection of an appropriate exchange rate system were categorized in three groups of fixed, managed, floating, and 33 sub criteria. The results obtained from by using the weight of qualitative data in Expert Choice software showed that the managed exchange rate system with the weight of 70.1% was the most appropriate exchange rate system and floating exchange rate system with the weight of 19.6 and fixed exchange rate system with the weight of 10.6 were respectively after the managed exchange rate system. In addition, in the managed exchange rate system, the export with the weight of 29.8%, general level of prices and production with the weight of 22.5, and economic efficiency with the weight of 13.3% were the most effective sub criteria for the managed exchange rate system.
Conclusions and Suggestions
As the results of both models indicated, the proper exchange rate system for OPEC member countries was the managed exchange rate system.
Based on the important role of exchange rate system in determination of exchange rate and its effectiveness on macroeconomic variables and helping the policymakers to better select the exchange rate system, considering the managed floating exchange rate system is suggested.
Mehdi Yazdani; Seyed Komail Tayebi; Nafiseh Yazdani
Abstract
Economists believe that except the commitment of central bank about price stability, this institution should consider some arrangements for financial stability in macro level of economic. However, financial stability leads to smoothly and uniformly performance in different parts of financial system such ...
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Economists believe that except the commitment of central bank about price stability, this institution should consider some arrangements for financial stability in macro level of economic. However, financial stability leads to smoothly and uniformly performance in different parts of financial system such as financial institutions, markets and system of financial pay off (Cihak, 2007; Oosterloo and De Haan, 2004).
Moreover, the major parts of economic literatute have emphasized on central bank independence rather than price stability. Available studies discus that in addition to the price stability, the dependence of central bank leads to financial stability, so that regulatory and supervisory independence are necessary to achieve and maintain stability in financial sector of economic (Klomp and De Haan, 2009; Meade and Crowe, 2007; Cukierman, 2008).
This study tries to evaluate the relation between the dependence of central bank and some indices of financial stability using a dynamic panel data model during 1980-2012 in selected emerging market countries (namely are Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, Philippine, Russia, South Africa, Thailand, Turkey and Iran). In the paper, different types of financial instability indices have been used which have been divided in three categories. The first category is as banking system indices (including change in ratio of bank liabilities to GDP, change in ratio of bank liquid reserves to bank assets, change in ratio of bank capital to assets, change in domestic credit provided by banking sector (% of GDP) and change in domestic credit to private sector (% of GDP)), the second is as risk and return indices (including change in real interest rate, change in interest rate spread and change in risk premium on lending) and the third is monetary authorities indices (including change of money and quasi money (M2) to GDP and change in net foreign assets to GDP).
The macroeconiomic control variables are the inflation rate, the economic growth rate, the change in exchange rate and the shocks of term on trade. Moreover gross domestic product per capita to mesure the differences in development level of countries, the budget deficit as an influent variable on central bank independence, the financial liberalization since of its role on risk of financial instutions and the insurance of deposits have been includeed to model. Also to consider the effect of globalization on financial instability, this variable has been added to model which may have positive or negative sign dependent on quality of golobalization phenomenon. Finally the net financial flows as a represenetive variable for international capital flows phenomena (including bonanza, sudden stop and capital flight) has been added to model which can consider the vulnerability of financial sytem to this outcomes.
The estimated results show that the dependence variable of central bank including political, economic and overall dependence variables, lead to decrease the financial instability in selected emerging market countries. Moreover, for other control variables, the theoretical expectations have been confirmed where the relationship between economic growth and financial instability is negative and the movements in term of trade, exchang rate and inflation lead to financial instability. Also the coefficient of budeget deficit shows that there is a direct link between rasie in budget deficit and financial instability via its effects on regularity of central bank. According to results, the insurance of deposit is a way which policy makers can control financial istability. Finally the effects of globalization on financial istability is positive which the phenomenon can arise some difficulties for emertging market economies.
As a policy implication for Iranian economy based on estimated results of model: i) the independence of central bank is critical for Iranian economy to stabilize the dynamic financial system, ii) the regular and sytematinc fiscal policies are necessitate for financial stability in Iranian econmy, iii) introducing new financial instruments and derivates such as deposit insurance are vital for financial stability in Islamic Banking and finally, iiii) as a buffering element for unfavorable effects of globalization on financial instability, the independence of central bank is determinant too.