Financial monetary economy
Niloofar Afkhami Rad; Taghi Ebrahimi Salari; Mehdi Behnameh; Mohammad Javad Gorjipour
Abstract
1- INTRODUCTION
The enabling factor for entering the process of globalization is the creation of a competitive enviroment. The goal is to achieve competitive power through growth, development, and improvement in the quality of life. Competitiveness is the foundation for the economic growth of ...
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1- INTRODUCTION
The enabling factor for entering the process of globalization is the creation of a competitive enviroment. The goal is to achieve competitive power through growth, development, and improvement in the quality of life. Competitiveness is the foundation for the economic growth of countries worldwide, and the real exchange rate is a good indicator for examination of a country's competitiveness in global markets. It is a variable through which we can assess the relative price of traded and non-traded goods. If there are no changes in the relative prices of other countries in the world and the real exchange rate decreases, it indicates a weakening of the international competitiveness of domestically produced goods. High fluctuations and lack of stability in real exchange rates can create an unstable environment for international trade and, as a result, reduce trade. Given the significance of the real exchange rate in influencing other macroeconomic variables and creating an uncertain environment, having knowledge of the future changes in the real exchange rate can play a crucial role in assisting monetary authorities to increase employment levels and stabilize prices.
Since many microeconomic and macroeconomic variables are influenced by the exchange rate, a proper understanding of the linear or nonlinear behavior of the exchange rate can help policymakers, firms, and traders make accurate decisions in order to effectuate desired changes.
2- THEORETICAL FRAMEWORK
The relationship between the national currency and the value of the national currency against foreign currencies is called the exchange rate. In international banking, the term "currency" refers to foreign money, sometimes including the adjective "foreign" to distinguish it from the domestic or local currency of a country. Currency is not limited to banknotes issued by central banks. It includes documents such as checks, drafts, and promissory notes that are used for international payments.
Due to resource allocation based on relative prices in the free market, efficient resource allocation occurs when relative prices are properly adjusted and serve as an indicator of the real value of resources. The exchange rate is one of the most important prices, and deviations from equilibrium can disrupt the prices of other goods and services. Generally, exchange rates are divided into several categories: 1) Nominal exchange rate, 2) Real exchange rate, 3) Effective nominal exchange rate. The nominal exchange rate is the price of one unit of a currency in terms of another currency on a specific day and at a specific time. The mention of a specific time is necessary because the exchange rate may change during different hours of the day. It is common to express the price of one unit of foreign currency in terms of domestic currency in exchange rate calculations.
Changes in the real exchange rate have a significant impact on the balance of payments and the international competitiveness of a country. Economists agree that an inappropriate level of stability for the real exchange rate leads to a decrease in national welfare. Thus, the instability of the real exchange rate from its equilibrium level leads to severe imbalances in the economy.
3- METHODOLOGY
To investigate the nonlinear behavior of the real exchange rate in Iran and in order to examine the nonlinear behavior of the real exchange rate in Iranian economy during the years 2004:04- 2018:02 two models have been applied: Self-Exciting Threshold Autoregressive (SETAR) model and Logistic Smooth Transition Autoregressive (LSTAR) model.
4- RESULTS & DISCUSSION
The possibility of threshold behavior in the real exchange rate has been confirmed by Broock, Dechert, and Scheinkman (1987) and Hansen (1999) test. Subsequently, the threshold values for the growth of the real exchange rate were calculated to be 3.84% in the first model (SETAR) and 5% in the second model (LSTAR).
In the first model, when the growth rate of the real exchange rate is below 3.84%, the growth rate of real exchange rate is minimal and classified as a regime with low growth. If the growth rate of the real exchange rate exceeds the threshold value (3.84%), its stability increases. In other words, when the growth rate of the real exchange rate is severe in Iran's economy, it is expected to be stable.
In the second model, values less than 5% are classified as a regime with low growth, while values greater than 5% are classified as a regime with high growth. The estimated coefficients for different orders in the two regimes indicate that if the growth rate of the real exchange rate is greater than 5%, this variable will exhibit stable behavior. However, at values below the threshold, due to the insignificance of the coefficients, this property will not be applicable.
5- CONCLUSIONS & SUGGESTIONS
The results demonstrated the possibility of nonlinear behavior in the growth rate of the real exchange rate. After calculating the optimal order for AR and considering other econometric requirements (Hansen test), two models, namely SETAR and LSTAR, were estimated. The threshold value was calculated to be 3.84% for the first model and 5% for the second model. In both models, it was observed that as long as the growth rate of the real exchange rate remains in a severe regime, it exhibits significant stability and is positively influenced by its past values.
yazdan gudarzi farahani; Omidali adeli
Abstract
1- INTRODUCTION
The effect of monetary policy on the exchange rate in the Dornbusch’s point of view is that unpredictable changes in the money supply play a major role in exchange rate fluctuations. In a fixed exchange rate system, keeping the country's currency stable against foreign ...
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1- INTRODUCTION
The effect of monetary policy on the exchange rate in the Dornbusch’s point of view is that unpredictable changes in the money supply play a major role in exchange rate fluctuations. In a fixed exchange rate system, keeping the country's currency stable against foreign currency stabilizes a country's currency and provides grounds for increasing the credibility of policy makers; at the same time, the floating currency system provides the basis for removing the effects of external shocks from the economy. In addition, the use of a fixed exchange rate system has reduced the uncertainty of the real sectors of the economy, and this issue can improve international trade and domestic investment. However, the use of a floating exchange rate system can lead to the independence of monetary policy in the face of shocks and can be considered as a tool to stabilize the economy in times of business cycles.
2- THEORETICAL FRAMEWORK
The theory of exchange rate overshooting was proposed for the first time by Dornbusch in 1976. If the economy is continuously exposed to unexpected monetary expansion, the exchange rate will exceed its long-term trend in the short term and return to its long-term level in the long term. The overshooting in the exchange rate is a short-term phenomenon that is formed due to the price sticky in the short term and the high adjustment speed in the financial market and the slow adjustment in the real sector of the economy. The dominant core of monetary systems is the use of a "nominal anchor". The nominal anchor is a variable that is used to achieve the goal of monetary policy, and the purpose of its authority is to adjust inflationary expectations and commit the monetary authorities to achieve the declared goals. The innovation of the present study compared to the previous studies is the use of a dynamic approach as well as the examination of the exchange rate jump in the conditions of a stable and floating exchange rate system, which has been less considered in previous studies.
3- METHODOLOGY
The purpose of this paper is to investigate the relationship between monetary policy and exchange rate overshooting in the Iranian economy. In order to test the experimental model of the research, the data of the period 1989-2020 based on the frequency of seasonal data and the generalized moment method (GMM) were used. Based on this, in the form of two stable and floating exchange systems, the rate of jump and deviation in the exchange rate has been calculated by using the Hodrick-Prescott filter and the effect of monetary policy and macro variables on the exchange rate overshooting has been calculated.
4- RESULTS & DISCUSSION
The results showed that the monetary policy leads to an overshooting in the exchange rate and creating a deviation in the exchange rate, and this issue has been more severe in the floating exchange rate system compared to the fixed exchange rate system. Also, the results showed that the production gap had a significant effect on reducing the deviation of the real exchange rate. On the other hand, based on the estimated coefficient, it was observed that the deviation of the inflation rate leads to an increasingly deviation of the real exchange rate.
5- CONCLUSIONS & SUGGESTIONS
Since the relationship between monetary policy and exchange rate is positive, with an expansionary monetary policy, the exchange rate increases, which means the value of the national currency decreases. Therefore, in order to reduce the negative effects of monetary policy on the value of the national currency, it is suggested that appropriate policies and executive tools be designed and implemented by the government so that with proper management, it can be placed on the path of economic activities in the society. There is a need for monetary policy stability, which itself requires the existence of an independent central bank.
