Impact of exchange rate volatility on macroeconomic variables

Carlson and Marco Macchiavelli Abstract: During the financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans.

Impact of exchange rate volatility on macroeconomic variables

Relationship Between Exchange Rate and Inflation in Pakistan The Relationship Between Exchange Rate and Inflation in Pakistan by Shagufta Kashif Abstract There has been a long-standing interest in studying the factors that are responsible for uneven vacillation in the stable growth of the world economies.

Lots and lots of theoretical literature and empirical evidences have addresses this issue in the past. Hike in prices of goods and services and foreign exchange are two important aspects which are deemed responsible for such potholed fluctuations in the economic growth The volatility of the nature of prices is a major source of concern in all countries since s.

Similarly, in Pakistan, the domestic price level rose from the mids. The exchange rate started depreciating continuously from the early s. Continuous devaluation of currency and inflation in the s seems to suggest a correlation between the two variables.

The studies by Rana and Dowling suggest that foreign inflation is the most influencing factor in explaining the change in local price level in nine less-developed countries of Asia during the period This study suggests that these countries cannot exercise much control over domestic inflation, however, the policies of their major trading partners through exchange rate had a significant impact on their domestic prices.

Cooper and Krugman and Taylor have also studies this relationship. This research paper will provide the empirical evidence regarding the relationships between foreign exchange reserves and inflation, focusing on the period between We will use the Ordinary Least Square model to determine the long run relationship.

Our empirical analysis does not support the results of Ahmad and Ali that a devaluation has a significant impact on inflation.

We believe that their results differ from ours because they estimate a model that is based on some fairly restrictive assumptions. For example, they believe there is a complete exchange pass-through to import prices.

This assumption is important for their results, but is not supported by recent theoretical models or empirical evidence. Introduction Does devaluation lead to an increase in prices?

This is a critical question that policy-makers in Pakistan have faced continuously over the past three decades or so, and particularly sincefollowing the adoption of a flexible exchange rate policy.

After the devaluation in and a small revaluation inthe exchange rate remained fixed at about ten rupees per dollar till the end of In Januarythe exchange rate was allowed to fluctuate, eventually, rising to a rate around eighty rupees per dollar over the next two decades.

This escalation involved a number of major devaluations in rupee value. Such devaluations received huge attention and often raised the concern that they would further contribute to already-rising inflation.

The concern about inflation is based on the popular view, which has sometimes been voiced by experts in policymaking circles, that consumer prices are notably affected by imported goods prices, which increase speedily in response to a devaluation.

Inflation is, by and large, associated with monetary expansion. The case of Pakistan is not different from other countries.

Impact of exchange rate volatility on macroeconomic variables

As a matter of fact, rise in general price level can be mapped on growth of money supply. In most of the developing economies of the world, elasticity of exchange rate is favoured on the ground that it depoliticises the problem of devaluation and creates less disruption in the economy.

In the empirical literature, the exchange rate regimes are also linked to domestic prices, trade patterns and current account balance. Another adverse impact may be that real exchange rate may remain stable but in some cases lead to anti-export predisposition.

While at the macro level the theory envisaged a clear-cut relationship between nominal exchange rate and domestic and world price levels, there are more than one ways to express the PPP equation. The recent event of currency devaluation and price inflation in Pakistan provides an exciting case to focus on the above issues.

A widespread observation is that the practice of repeated currency devaluation is the main cause of inflation in Pakistan. This would mean that the general price level in Pakistan adjusts quickly to the traded goods prices. In the light of this background, this paper aims to study this relationship of nominal exchange rate and domestic price level with each other and with other economic variables in a vigorous context of Pakistan.A major source of information for this research is the Social Security Trustees Report.

This report was published in June and uses data from as a baseline. The chapter then moves on to a discussion of the critical role of governments in choosing the appropriate combinations of monetary, fiscal, trade, investment and social policies to create an economic environment that is conducive to the attainment of food security.

Macroeconomic Default Modeling and Stress Testing∗ Dietske Simons and Ferdinand Rolwes De Nederlandsche Bank This paper applies a macroeconomic-based model for esti-. Board of Governors of the Federal Reserve System.

The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.

Preliminary versions of economic research. Did Consumers Want Less Debt? Consumer Credit Demand Versus Supply in the Wake of the Financial Crisis. looking at the data, where diverging estimates for the sign and significance of the exchange-rate-volatility and trade relation have been obtained (for a summary, see Clark and others ()).

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