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We study a large currency cross-section using asset pricing methods that account for omitted-variable and measurement-error biases. First, we show that the pricing kernel includes at least three latent factors that resemble (but are not identical to) a strong U.S. "dollar" factor and two weak high Sharpe ratio "carry" and "momentum" slope factors. Evidence for an additional "value" factor is weaker. Second, using this pricing kernel, we find that only a small fraction of the over 100 nontradable candidate factors considered have a statistically significant risk premium, mostly relating to volatility, uncertainty, and liquidity conditions, rather than macro variables. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

We present evidence that several popular low-frequency measures of effective spread suffer from a volatility-induced bias and that volatility is the primary driver of the variation of these liquidity proxies. Using data for U.S. equities and major foreign exchange rates, we show that the bias arises when the effective spread is small relative to volatility. We document that the bias has become more acute over time and show that volatility-biased measures fail to replicate some well-known results in empirical finance. We conclude by providing guidance on the choice of low-frequency measures in empirical applications. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

AbstractFreezing or the danger of freezing the assets of many countries can make the run away from the US dollar an uncontrolled process. Whereas in the long term this process may be beneficial for the US and the world economy, the short- and medium-term adjustment costs can be extremely high. To ensure a soft landing the New Development Bank of BRICS countries can issue bonds that would be sold to countries, whose assets have been frozen or are afraid that they might be frozen by the West, so that they can store their foreign exchange reserves in these bonds. The Bank will invest the proceeds from the sale of these bonds in the traditional financial instruments for storing foreign exchange reserves—US and EU treasury bills and bonds denominated in the same dollars and euros. These BRICS bonds would be less prone to sanctions and thus considered safe investment. [ABSTRACT FROM AUTHOR]

Macroeconomic and aggregate financial series were shown empirically to share an unconventional form of cyclical and persistent dynamics, whose functional form was obtained from the solution of general-equilibrium models with heterogeneous firms. The econometric modeling of equations that link such series requires a new methodology, as existing parametric techniques can cause paradoxical regression results and omit predictabilities. We provide a solution to disentangle the genuine relation between variables (the parameters linking them) from the unconventional dynamics that drive them. As an application, we show that GBP-USD forward premia have no predictive power for excess returns over 1976–2015 (thus solving this forward-premium puzzle) once the unconventional dynamics of spot rates are modeled. Taking advantage of these dynamics, we uncover a trading strategy which consistently outperforms existing ones in the out-of-sample period 2015–2021, delivering almost treble their profits and yielding a Sharpe ratio of 85%. Hence, even in this heavily traded market, the efficient market hypothesis has been failing for over 45 years as persistent profit opportunities remained unexploited because of the unconventional dynamics of the spot rate. [ABSTRACT FROM AUTHOR]

We study two sources of heteroscedasticity in high-frequency financial data and estimate their contribution to overall volatility by means of a Markov switching (MS) structural VAR model. We achieve identification for all coefficients by assuming that the structural errors follow a GARCH-DCC process. Using transaction data of the EUR/USD interdealer market in 2016, we first detect three regimesof volatility. Then we show that both sources of volatility matter for the transmission of shocks, and that information is channeled to the market mostly through demand shocks. This suggests that, on the EUR/USD market, some liquidity takers (LTs) are better informed than both liquidity providers and those LTs who follow a feedback strategy. [ABSTRACT FROM AUTHOR]

Foreign investment can mitigate the foreign exchange constraint of developing countries. It can also influence the economy's international competitiveness through appreciating or depreciating exchange rates. The exchange rate impact of domestic investment is also not straightforward and depends on some critical factors. These issues of investment often pose a policy dilemma. Against this backdrop, this paper assesses the relative impacts of foreign direct investment (FDI), domestic investment (DI), and external debt on India's real effective exchange rate and the rupee/dollar real rate for the liberalized regime for trade, investment, and exchange rates. The autoregressive distributed lag bounds testing approach to cointegration, followed by its error correction representation, finds that real exchange rate variations are associated with FDI, debt, DI, and some control variables. FDI and debt depreciate real exchange rates, indicating that these have not exacerbated the economy's international competitiveness. However, DI causes real appreciation. These findings are consistent across estimations involving alternative specifications of control variables. Offsetting impacts of FDI and DI is an interesting finding. This can stabilize the exchange rates by undermining appreciating or depreciating exchange rate trends. [ABSTRACT FROM AUTHOR]

The fiscal policy's impact on the real exchange rates is highly controversial in theory and practice but noteworthy for macroeconomic policy. This issue is more pertinent in developing countries with an active fiscal policy or wider fiscal space but is explored less. To our knowledge, the fiscal policy impact on the real exchange rate in India is not documented. Against this backdrop, this study explores this in India involving disaggregated data of government consumption and investment spending and a few related variables like trade openness, private consumption spending, and money supply for the period 1996:1–2023:1. The results corroborate long-run associations of real exchange rate and some combinations of the selected other variables. The real exchange rate dynamics estimated through the cointegrated vector autoregressive model followed by an impulse response analysis have shown that government investment spending causes a real appreciation. In contrast, government and private consumption spending exert pressure to depreciate the real exchange rate. Trade openness is another potent predictor of the real exchange rate. On the other hand, no significant impact of the money supply on the real exchange rate is noticed. The results accentuate effective fiscal allocation may be a policy tool for stabilizing the Indian rupee. The unique findings on the Indian economy may also help understand the fiscal effect of real exchange rates in other developing countries. [ABSTRACT FROM AUTHOR]

This study investigates the impact of real exchange rate misalignment on Pakistan’s economic growth across different identified threshold levels. The research makes three significant contributions to the applied macroeconomics literature. First, it employs a dynamic regression model to assess the primary factors determining the equilibrium real exchange rate (ERER). Second, it examines the asymmetric impact of real exchange rate misalignment on Pakistan’s economic growth using the nonlinear autoregressive distributed lag (NARDL) model. Third, through a threshold regression model inspired by Hansen (Hansen, Econometrica 68:575–603, 2000), it identifies the threshold values of the Pakistani rupee that can either promote or hinder economic growth. The study concludes that the Pakistani rupee experienced significant periods of both undervaluation and overvaluation between 1982 and 2022. Moreover, the analysis establishes that overvaluation impedes Pakistan's economic growth, while undervaluation stimulates it. Our findings suggest that the undervaluation of the Pakistani rupee promotes economic growth up to an estimated threshold of a 10.025% deviation from ERER is reached. In contrast, an overvalued Pakistani rupee can stimulate economic growth up to a 9.346% threshold. The study implies that Pakistan should avoid both overvaluation and undervaluation beyond these identified thresholds to sustainably enhance economic growth. Additionally, it recommends that appropriate fiscal and monetary policies be pursued to maintain the exchange rate close to the equilibrium rate. [ABSTRACT FROM AUTHOR]

Violations of no-arbitrage conditions measure the shadow cost of intermediary constraints. Intermediary asset pricing and intertemporal hedging together imply that the risk of these constraints tightening is priced. We describe a "forward CIP trading strategy" that bets on CIP violations shrinking and show that its returns help identify the price of this risk. This strategy yields the highest returns for currency pairs associated with the carry trade. The strategy's risk substantially contributes to the volatility of the stochastic discount factor, is correlated with both other near-arbitrages and intermediary wealth measures, and appears to be consistently priced across various asset classes. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

The present research paper is focused the widely debated topic related to de-dollarization. It examines the trend of de-dollarization to check if the statements that the dollar is losing its weight and is about to lose its leading position in international trade payments are substantiated. Firstly, the theoretical framework behind the dollarization is explored. Secondly, the factors believed to be the basis of the de-dollarization process have been identified and analyzed, which are related to: geopolitical processes, changes in international payments policy in some BRICS countries, changes in international trade, etc. A performed analysis of the currency turnover in international trade, based on data from official sources, was made through forecast regression, which predicts the development of the share of the dollar in international payments. A correlation matrix was also calculated, showing the correlation links between the dollar and the other leadng currencies. The hypothesis, which is confirmed by the practical research, is that the de-dollarization process is proceeding slowly and uncertainly, and will continue to develop at a low pace leading to insignificant changes in the structure of the currency composition of international payments in the short and medium term. Further research could further explore each of the factors that could lead to a real dedollarisation trend in international payments.

The nexus between the terms of trade and marginal propensity to import and the consequent policy options arising from it among economic blocs is an area that has not been given due attention in the literature. The focus of the current paper is to examine the link between the marginal propensity to import and the terms of trade in the East African Community (EAC).

The impact of exchange rate (ER) movements on the trade balance has been extensively debated in the literature, with conflicting views on the nature and magnitude of this effect. This paper investigates the relationship between ER movements and trade balance in developing economies, with a specific focus on bilateral analysis involving Pakistan. Employing the Nonlinear Autoregressive Distributed Lag (NARDL) model, our results reveal a symmetric relationship between positive and negative ER changes and the trade balance, showing significant long-term and short-term effects across the panel of developing economies. However, country-specific asymmetries are observed, especially in the cases of India and China, and are more pronounced in each bilateral analysis, whether in the short run or long run. The study findings highlight the critical importance of maintaining a stable exchange rate policy, which can provide policymakers with precise insights into the money market and the broader economy while preventing high volatility and continuous depreciation of domestic currencies. Such measures can mitigate the long-term adverse effects of ER movements on trade agreements. The study offers valuable insights for policymakers and investors in developing economies, aiding them in making informed decisions about exchange rate policies. [ABSTRACT FROM AUTHOR]

This study offers unique insights into the threshold-based influence of currency devaluation (CD) on external debt sustainability (EDS) in designated Sub-Saharan African (SSA) countries. The absence of evidence from this viewpoint, particularly in SSA, inspires this new assessment. On this premise, the study utilizes two innovative estimation procedures: smooth transition regression (STR) and multiple thresholds nonlinear ARDL (MTNARDL) to estimate the sign-based and magnitude-based asymmetric influence of CD on EDS. The outcomes indicate that first, an average CD threshold of 21.1% is consistent with EDS in the designated nations; second, a small CD significantly reduces the external debt–GDP ratio and improves sustainability, while a very high CD largely worsens the EDS problem; third, in the CD regime, devaluation has more detrimental effects on external debt burden; fourth, exceedingly large changes in exchange rate (whether positive or negative) essentially affect the countries’ EDS negatively; and fifth, the adverse effect of large depreciation on EDS is greater than that of large appreciation. The study recommends, amongst others, that heavily indebted countries with sizeable external debt denominated in foreign currency should, as a matter of urgency, avoid excessive and escalated large percentages of devaluation or exchange rate depreciation. [ABSTRACT FROM AUTHOR]

This study investigates the influence of exchange rate fluctuations on the informal economy within the BRICS countries from 2010 to 2019. Employing linear and nonlinear analytical methods, this research utilizes linear autoregressive distributed lag (ARDL) models to analyze the relationship between exchange rate variations and the shadow economy in each BRICS nation. The study consistently reveals significant evidence of the impact of exchange rate fluctuations on the informal economy across both short-term and long-term timeframes. Moreover, employing a nonlinear ARDL model uncovers distinct and uneven effects of exchange rate volatility among the BRICS nations, emphasizing the varied characteristics of currency fluctuations in the clandestine economy. The findings underscore the need for BRICS member states to develop and implement tailored fiscal strategies to mitigate the risks associated with exchange rate volatility. Recognizing these dynamics is crucial for policymakers and stakeholders to effectively address the unequal ramifications of the informal sector within each country. Considering these findings, policymakers must devise economic policies that account for the diverse attributes of each nation’s informal economy. Implementing measures to reduce and manage the impacts of exchange rate fluctuations can foster stability and resilience within the informal sector, ultimately contributing to broader economic development objectives. This study contributes to the existing literature by employing linear and nonlinear methodologies to explore the relationship between currency exchange rates and the informal economy within the BRICS context. The identification of varied impacts across nations underscores the importance of tailored policy responses to address the unique challenges of exchange rate volatility on informal economic activities. [ABSTRACT FROM AUTHOR]

This paper globally analyzes the bivariate relation between large current account imbalances and the real exchange rate over different degrees of nominal exchange rate variability. Employing both linear and nonlinear panel estimation procedures, we typically find an inverse long-run link between large imbalances and the real exchange rate at lower nominal exchange rate rigidity levels. This is in contrast to the often non-existent or positive comovement that materializes under lower nominal exchange rate variation. Our results thus suggest that greater nominal exchange rate adjustment can induce a stabilizing "current account"-"real exchange rate" relation. Meanwhile, current account adjustment speeds up with more flexible nominal exchange rates. Along the cross-section, the most salient findings are i) the striking positive relation between current account persistence and real exchange rate persistence based on country-specific estimates and ii) the inverse correlation between persistence in either the current account or real exchange rate and nominal exchange rate volatility. [ABSTRACT FROM AUTHOR]

This article introduces a rational expectations model that explains exchange rate dynamics and the predictability of forecast errors using private (aggregated via order flow) and public (probabilities of a binary event) information. We test the model for the periods leading up to the presidential impeachment vote in Brazil, the Brexit Referendum, and Donald Trump's election in 2016. Proxies of the physical probabilities of these events reveal that they are a crucial source of pricing information for the BRL, GBP, and MXN currency pairs with the US dollar. They also explain forecast errors. The information content of order flow changes before and after an actual regime change resolves uncertainty. [ABSTRACT FROM AUTHOR]

This article provides an overview of the macroeconomic challenges facing the 10 countries in the Association of Southeast Asian Nations (ASEAN). It discusses various macroeconomic indicators and the importance of achieving high levels of economic growth. The article also explores ASEAN's participation in Regional Value Chains (RVCs) and Global Value Chains (GVCs), particularly in the automotive and electronics industries. It examines the adoption of inflation targeting frameworks by ASEAN countries and evaluates their macroeconomic performance. The text further analyzes the fiscal sustainability of Indonesia, Malaysia, and Thailand, providing policy recommendations to enhance revenue collection and reduce subsidies. It also discusses the challenges faced by Vietnam's economy and suggests policy measures to overcome them. The article touches on economic issues in Cambodia and Laos, including technology spillovers, Central Bank Digital Currency (CBDC) implementation, and financial system reform. The perspectives presented offer insights into these countries' economic situations and potential policy measures. [Extracted from the article]

Cambodia is one of the first two countries that adopted a retail central bank digital currency (CBDC) in October 2020. The design of the CBDC, called the Bakong, is a bit unique. We find a few design flaws that could potentially damage the central bank and then the Cambodian economy as a whole. We show some key statistics from our own survey in 2022 to support our arguments. The Bakong is offered in two currencies, the Khmer Riel (KHR) and the US dollar (USD), as Cambodia has been highly dollarized. We discuss theoretical predictions for the CBDC based on three kinds of substitutes: paper money, bank deposits, and foreign currencies. The third one is specific to the Bakong. Unlike a typical local currency CBDC, the USD Bakong may substitute for the KHR more. Moreover, it has been announced that the retail Bakong is legally not a liability of the central bank, but from the viewpoint of the underlying technology and economics, it is a central bank liability. [ABSTRACT FROM AUTHOR]

This study analyzes the effect of monetary policy, which are proxied by weighted average cost of funding (WACF) and Borsa Istanbul repurchase interest rate (REPO), on the returns of the main financial assets of monetary policy in Türkiye. Using daily data between January 4, 2011 and August 31, 2023, the study applies novel nonlinear time-series methods, such as wavelet coherence (WC) and quantile-on-quantile regression (QQ) as baseline methods and quantile regression (QR) for robustness. The findings demonstrate that (i) monetary policy has a stronger effect on financial asset returns at middle and higher frequencies across different periods; (ii) monetary policy has mainly declines (increases) effect on financial asset returns at lower and middle (higher) quantiles; (iii) the robustness of the outcomes is confirmed. Thus, the outcomes show that monetary policy has a significant effect on financial asset returns, and the effects vary across times, across frequencies, quantiles, and financial assets.

The foreign reserves sufficiency is important to maintain macroeconomic stability. The main objective of this paper is to model the behaviour of the central bank in accumulating the foreign reserves in the case of Indonesia. Unlike the previous empirical studies, this paper disaggregates the components of foreign reserves into foreign currency, securities, gold, and special drawing rights. This paper relies on the Almost Ideal Demand System combined with the Error Correction Model. The estimation result for monthly data over the period 2010(1)-2020(12) reveals that the own-price coefficients are negative and statistically significant which is consistent with the standard theory of demand. While the foreign currency-securities pairwise is substitutive, the foreign currency-gold and the foreign currency-special drawing rights pairwise are complementary or even independent. However, the wealth effect is inelastic except for securities reserves. These results imply that the central bank of Indonesia can re-balance its reserves. The securities holding which have the highest proportion of foreign reserve scan be switched to foreign currency, gold, and/or special drawing rights. The rebalancing measures would remain having an optimal level of foreign reserves holding in terms of its opportunity cost. Therefore, the monetary authority can conduct a further macroeconomic stabilisation without substantially losing the returns.

We use the Twitter application programming interface to construct a novel indicator capturing the varying perceptions of geopolitical risk related to the war in Ukraine. We show that the Twitter variable is a statistically significant determinant of the EUR/PLN exchange rate following the invasion. We estimate that the war in Ukraine was responsible for an increase in the EUR/PLN exchange rate of about 5.0% in the first 2 weeks following its breakout and that the weakening of PLN contributed to an increase of headline inflation in Poland by about 0.33 percentage points. Our findings suggest that monetary policy autonomy can be substantially constrained due to conflicts in nearby countries. Therefore, they provide an argument for Poland in seeking Eurozone membership as a way to contain the impact of geopolitical factors on exchange rate volatility, which is likely to remain at play in the longer run.

This study investigates the asymmetric effects of exchange rate volatility on Turkish-German commodity trade using annual time-series data from 1980 to 2022. We analyze 90 industries exporting from Turkey to Germany and 114 industries importing from Germany to Turkey. The empirical results of the nonlinear ARDL model show that the volatility of the real lira-euro exchange rate had short-run asymmetric effects on trade flows for 60 (86) Turkish export (import) industries, which persisted for 46 (52) Turkish export (import) industries in the long-run. The industry-specific results show that an increase (a decrease) in lira-euro volatility increases Turkish exports (imports) to (from) Germany mostly for both small and large industries. The study suggests that export and import sectors that benefit from lira-euro volatility may consider expanding their production and trade activities, while sectors adversely affected by volatility may need to explore alternative strategies. This study highlights the importance of considering exchange rate volatility's asymmetric effects on trade between Turkey and Germany, emphasizing the varying implications across specific industries. The findings contribute valuable insights for policymakers and industry stakeholders in understanding how exchange rate fluctuations impact bilateral trade dynamics. [ABSTRACT FROM AUTHOR]