F31 - Foreign ExchangeReturn

This paper examines exchange rate pass-through (ERPT) to prices in Central and Eastern European (CEE) countries, focusing on the Czech Republic, Poland, Hungary, and Romania. We employ a Structural Vector Autoregression (SVAR) model to analyse the transmission of exchange rate shocks to imported, producer, and consumer prices. Results indicate significant heterogeneity in ERPT across countries and price stages. While all countries exhibit higher pass-through for import prices, variations emerge in producer and consumer price responses. Monetary policy credibility and trade openness are found to influence ERPT dynamics. The findings highlight the importance of understanding ERPT for effective monetary policy in the region. Our results highlight the need for policymakers to consider the complex interplay between exchange rate fluctuations and domestic prices when formulating monetary policy strategies.

This paper investigates the nonlinear risk transmission from the oil and natural gas markets to the foreign exchange markets of five energy importers and one major energy exporter. We separate conditional volatility into the transitory (short-term) and permanent (long-term) parts, and then these volatilities are embedded in an elaborate robust linear quantile regression model. We find that the risk spillover effect is relatively low in Central and Eastern European countries (CEECs) probably because they pursue a managed float exchange rate regime. On the other hand, this effect is higher for Turkey and Russia, which is especially true for the effect from oil to the rouble at the highest quantile. This happens because Russia receives the largest amount of foreign currency from oil exports. The results indicate that the short-term risk spillover effect is notably stronger than the long-term one, which means that the exchange rate volatility is mainly determined by market sentiment. The rolling regression results coincide very well with the estimated quantile parameters.

The paper explores the interconnections between foreign capital flows and the exchange rate regime switching in developing countries. We formulate the exchange rate regime switching as annual time series of binary/ordered variables employing de facto classification of exchange rate arrangements and regress them on the financial account capital flows for a panel of 28 developing countries which experienced change in their exchange rate regime during the period 2000-2016. Employing probit and logit regression, we discover the FDI, portfolio flows and changes in reserve assets to precede and/or coincide with switching. Specifically, accumulation of foreign reserves increases the probability of switching from floating to peg, while their spending coincides with exits from pegged regimes; at the same time, outflows of FDI and portfolio investments tend to accompany exchange rate regime liberalization, although the evidence on that is less consistent.

This paper analyses the asymmetric behaviour of exchange rate pass-through in Turkey using a threshold VAR model. The main purpose is to examine the asymmetries in the exchange rate pass-through based on size, direction and inflationary environment of an emerging market economy with a highly depreciated domestic currency and two-digit inflation rate. Monthly exchange rate movements and monthly inflation rates were used as threshold variables. Nonlinear impulse response functions were employed to compare upper and lower regimes. According to our findings, the transmission of exchange rate shocks to domestic inflation in the upper regime is stronger than that in the lower regime. The pass-through increases with the magnitude of shocks. Besides, positive shocks have more effect on domestic prices than negative shocks, especially in the upper regime. A positive relationship between inflation and exchange rate pass-through exists. During high inflation periods, pass-through to domestic prices increases.

Motivated by the persistent rise in bilateral trade imbalance in Nigeria, this paper empirically examines whether Nigeria's four trading partners (China, India, the UK and the US) respond asymmetrically to changes in the oil price and exchange rate using a nonlinear autoregressive distributed lag model over the period from January 1999 to December 2019. Interestingly, we find that oil price increase and decrease influence Nigeria's trade balance with four trading partners asymmetrically. Further evidence indicates that oil price increases predominantly exert greater influence than decreases. Furthermore, Nigeria's trade balances with India and the UK in the long run and the US in the short run significantly respond asymmetrically to changes in exchange rate. In addition the result establishes significant evidence of the J-curve pattern in the response of Nigeria's trade balance with the UK to differences in exchange rate.

This paper investigates the impact of behavioural attention on the households' foreign currency savings as a response to the external macroeconomic shocks. The information that the households acquire via different communication channels is expected to influence their decisions regarding their savings' allocation into different currencies. This study has applied the fundamental macroeconomic models by including individuals' attention to the specific risks and search interest in specific keywords on Google in order to assess the impact of acquired information and its communication channel on the households' foreign currency savings. We employed a two-level mixed effects model including macroeconomic fundamentals and individuals' attention to the information determinants. We solved a problem of a long list of potential explanatory variables (keywords) by employing the Bayesian Model Averaging. This study assumes that households are more sensitive to the macroeconomic shocks (factors) if they search simultaneously for infor-mation on Google about these factors or specific related risks. The results emphasize the role behavioural attention during financial turmoil and economic downturn periods, especially in the environment of very low interest rates.

This paper analyses the impact of German macroeconomic news announcements and ECB meeting days on the conditional volatility of the Czech, Polish, and Hungarian Foreign Exchange markets as proxied by CZK/EUR, PLN/EUR, and HUF/EUR exchange rate returns over six years (2010-2015). A currency intervention period (11/2013-2015) in the Czech Republic is examined separately. EGARCH-type models with normal and Student's t-distributions are employed. The comprehensive analysis shows the following results. (i) The IFO index, Factory Orders increase and the PMI index from the Service Sector, the labour market data decrease conditional volatility of PLN/EUR. (ii) The IFO index and Industrial Production increase conditional volatility of HUF/EUR on the day of the announcement. (iii) Data from the labour market has a calming effect on CZK/EUR after the central bank launched currency interventions. (iv) IFO index increases and the PMI index from the Manufacturing Sector decreases conditional volatility of CZK/EUR before currency interventions were introduced (2010-11/2013).

It is observed that purchasing power parity (PPP) as one of the controversial and most interesting topics of international macroeconomics literature is tested by using different econometric methods for certain countries and/or country groups by many researchers. The validity of PPP is important in terms of being a common exchange rate used in international comparison. In this context, the validity of relative purchasing power parities in the BRICS countries (Brazil, Russia, India, China and South Africa) were analysed for the January 1993-March 2015 period. Non-linear stationarity analysis was used in the study. According to the findings of the analysis, it was concluded that all of the BRICS countries have a non-linear structure; the PPP approach was valid for Brazil and South Africa, but not valid for Russia, India and China in the relevant period.

In this survey article, we present a rich extent of literature on volatility and its propagation on financial markets via spillovers. We document how new approaches or improved existing methodologies lead to results that offer richer insights than those derived from standard econometric techniques. Moreover, the implications of the results can be related to a wide set of markets as the surveyed articles cover emerging and developed European markets as well as the United States.

This paper analyses the dynamic nexus and bidirectional spillover effect between stocks and exchange rates in seven major emerging markets and one developed market. Three types of BEKK-GARCH models were utilized in the research process - basic BEKK-GARCH, asymmetric BEKK-GARCH and asymmetric BEKK-GARCH with structural breaks. Model with breaks gave the best fitting results in six out of eight cases. VAR based volatility spillover method serves as a complementary methodology. Results showed that dynamic connection between two major asset classes behaves in accordance with the portfolio balanced approach in emerging markets, while the nexus is in line with the flow oriented theory in the US market. In addition, according to the BEKK-GARCH results, shock and volatility spillover effect is predominantly directed from exchange rate market to stock market in all countries, while in the VAR based model it is not so obvious.

This paper investigates effects of the real exchange rate and its volatility on trade balance and real GDP using a set of eighteen countries, mainly the OECD developed countries. The paper reports econometric procedures and empirical estimates for major currency-owned large economies and non-major currency- owned countries. One task, for which the elasticities of international trade and real GDP are needed, is developing exchange rate assessments. The study finds that real currency depreciation leads to improvement of trade balance in most of the examined developed countries. But the trade balances after real depreciation of currency do not follow J-curve patterns. With regard to the real exchange rate variability, the evidence is mixed. Similarly, effects of the real currency devaluation on real GDP differ across countries. Also, we observe that major currency-owned countries could have different value-and-volume-effects with non-major currency countries.

This paper investigates the dynamic conditional correlation (DCC) between stock returns and exchange rate in four East European emerging markets. Due to persistent long memory and the presence of the asymmetric effect in all asset markets we applied DCC-FIAPARCH model. The estimated negative DCC parameters in all scrutinized countries confirmed that portfolio-balanced theory has predominance in the short run in all selected economies. DCC parameters revealed significant time-varying behaviour, especially during the major crisis periods. By embedding dummy variables in the variance equations, we came to the conclusion that global shocks affect the volatility of DCCs. Particularly, it happened during the Global Financial Crisis and European sovereign debt crisis, but the effects were not linearly equal in all countries. Complementary rolling analysis unveils how conditional volatilities of analysed assets influence DCC. The results suggested that exchange rate conditional volatility has higher influence on DCC than stock conditional volatility.

This paper investigates whether UIRP principle holds and what is predominant driving force, which influences exchange rate movement - economic fundamentals or short-term speculative behaviour. Analysis covers seven East European transition countries and empirical data comprise weekly time series ranging from first week in January 2003 to last week in December 2013. The research method is Component-GARCH in Mean Model, which decomposes temporary and permanent element of volatility. The mean and variance equations have been adjusted for the structural breaks' presence in order to improve estimated parameters. The results suggested that UIRP principle does not hold in any country. After structural breaks inclusion, we have found that the permanent effect is significant in determination of exchange rate dynamics in five countries, but it does not apply for the transition effect. However, further outliers' purification revealed that only in Serbia short-term transition component plays an important role.

This paper attempts to assess how compatible China is with respect to its dollar-based exchange rate regime. Assessment is made in terms of the real convergence criteria suggested by the optimum currency areas (OCA) theory. In light of the endogenous problem in OCA analysis and this view of convergence criteria, the relevant features of China are evaluated against economies implementing rigid dollar standard in practice, namely Hong Kong, Macau, and Panama. Findings suggest that economic conditions in China broadly conform to those prevailing in these economies which maintain strong links to the US dollar.

Growth in the intensity of the inverse relationship between the US dollar exchange rate and the Brent crude oil price has been observed over the last decade. This may be linked, among other things, to the growing role of commodities as an alternative investment instrument at times of excess liquidity and low interest rates on global markets. This analysis examines monthly data from January 1982 to September 2010. Since 2002 the direction of the relationship in the Granger causality sense has been from the dollar exchange rate to the oil price. A weakening of the dollar of 1% causes the Brent oil price to rise by 2.1%. The contrary movements in the Brent oil price and the dollar exchange rate are a factor dampening the impact of sharp fluctuations in the dollar price of oil on "non-dollar" economies, including the Czech Republic. This dampening effect was clearly visible in the period of sharp oil price growth in 2007 and 2008.

The paper presents both the theoretical account of the issue of foreign exchange risk premium and the actual estimates of the time-varying risk premium for the cases of the Czech koruna to euro and US dollar. The risk premium is modelled within a state space framework and estimated using the Kalman filtering procedure. Some financial market fundamentals are used to estimate the risk premium, and thus not only do the estimates give insight into the foreign exchange market behaviour but also into some linkages between the various segments of the financial market as a whole.

The portfolio theory and the basic ideas of Markowitz can be applied to currency investments as well as to classical asset classes as shares or bonds. The question whether currency investments can be treated as efficient asset classes is not finally answered in theory and practice. This article applies a modified historical simulation approach to shares, bonds and currencies. The questions according to the efficiency of currency investments are answered empirically from a euro-investor's point of view. The empirical analysis leads to the result that currency investments are not efficient in general. Some specific cases exist. The used data lead to the result that the Czech koruna seems to be an efficient asset class and leveraging a euro portfolio by other currencies is useful as well. But it has to be doubted if these effects will remain in the future.

This paper examines the exchange rate pass-through to import, producer and consumer prices in South Africa using monthly data covering the period 2000M1 to 2009M5. The study uses innovation accounting tools (impulse response and variance decomposition) within the framework of an unrestricted VAR to examine the degree of pass-through as well as the relative importance of a number of variables in explaining changes in domestic prices. The key findings suggest that after 1 per cent shock to nominal effective exchange rate, the level of CPI increases by 0.125 per cent, giving a pass-through elasticity of 13 per cent. However, the pass-through elasticity of producer price is 20 per cent after 24 months suggesting that favourable shocks to producer price inflation can have considerable moderating effect on CPI inflation.

The article analyses the process of nominal convergence of the new EU member states (NMS) with particular attention paid to some applied and theoretical aspects, which may have impact on the process of the euro adoption. Chapter two addresses selected theoretical and methodological issues connected with the International Comparison Project (ICP). It discusses determinants and influences affecting price level convergence and some issues that have set off new trends, such as the globalization or process of the on-going European integration. This chapter also presents a brief summary of the main trends of price convergence observed by focusing on changes of comparative price levels (CPL) for various disaggregated items of GDP. It also deals with potential issues and problems arising in this context. Chapter three is aimed at an empirical verification of price convergence and at a search for main driving factors using data for the NMS and the old EU member states over 11 years (1995-2006). There are some differences in results depending on the applied econometric method. The most important determinants of price level are GDP and population, the openness and public finance's indicators are not significant. The last section summarises the main findings.

In this paper we discuss the estimation and methodology of the real equilibrium exchange rate partial equilibrium models and analyse to what extent the resulting estimates are applicable for setting the central parity prior to ERM II entry in the New EU Member States. Given the uncertainty surrounding the estimates, we argue that they are informative in the sign rather than the size of the misalignment of the exchange rate, but may still serve as useful consistency checks for the decision on the setting of the central parity. We argue that policy makers should consider the estimates in their decision-making only if the real exchange rate is substantially misaligned.

Computed fundamental real exchange rates in four new EU members point to difficulties in jointly entering the ERM II soon after the EU entry. Three currencies out of the four were overvalued prior to EU entry. Computations suggest that it is unlikely that the Czech, Hungarian and Polish economies will maintain low inflation during 2004 - 2010 and at the same time keep their currencies within the ERM II easily. Moreover, the experience of Greece, Portugal and Spain - viewed through fundamental real exchange rate goggles - indicates more stable real exchange rate paths and smaller currency misalignments prior to euro adoption than can be expected from the newcomers in the forthcoming years. If the newcomers sail too fast towards the euro, their sailing may not be as smooth as that of the front runners.

The article presents an empirically tested assessment of the Bank of Slovenia (BS), national central bank, adjustment policy to surges in capital flows during the last decade. Exchange rate appreciation, undeveloped banking sector, immoderate money market oscillation, unstable economic trends (all phenomena that can also be found in other transition countries) are just some of the detrimental effects that can be provoked by surges in capital flows if the national economy is faced with some fundamental sectoral deficiencies. Empirical results indicated that BS quite successfully mitigated listed effects of excessive foreign currency inflows during the last decade. With the suitable combination of direct and indirect adjustment methods, BS succeeded in preventing, still vulnerable Slovenian economy from a major form of financial crisis and stronger nominal tolar appreciation (this was not the case in some other countries like Hungary, Poland, Czech Republic, Croatia) although there was some real appreciation.

The paper studies the compliance of the CZK - EUR exchange rate with the uncovered parity of returns on assets denominated in the two named currencies. A comparison with the same property for the euro-dollar rate is made. An uncovered total return parity (UTRP) formula is derived from the equilibrium in a portfolio optimization model with liquidity constraints. It is shown that the uncovered parity of total returns, and not of short-term money market rates, is a natural outcome of stochastic equilibrium asset pricing models that generalize the International Consumption-based Capital Asset Pricing Model. Accordingly, the traditional uncovered interest rate parity should be replaced by UTRP in empirical analysis. UTRP tests for the CZK/EUR and the USD/EMU currency pairs are conducted using yields of long-term government bond yields. UTRP typically holds, although the time horizons and measures of exchange rate movements, for which it becomes visible, may vary.