On the Pass‐Through of Exchange Rate Fluctuations to the Macroeconomy: Imports in Developing and Advanced Countries

Kandil, Magda

doi:10.1002/ijfe.1499

Cited by 1 publication

(3 citation statements)

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“…Overall, a domestic currency depreciation thus reduces consumption through the cost of imports, inflationary, and wealth effects while it discourages investment through the cost of imported inputs and domestic interest rate effects. These findings are consistent with theoretical expectations and the results of Kandil (2008Kandil ( , 2015.…”

Section: Resultssupporting

confidence: 92%

“…Finally, our findings provide clear evidence that in four countries exchange rate shocks are transmitted primarily to economic activity and inflation through changes in imports. This is consistent with the nations' high import dependency (see Figure 5) and results of Kandil (2015), who examines how exchange rate fluctuations are transmitted to the real economy in developed and developing countries.…”

supporting

confidence: 82%

“…However, several studies (e.g. Ahmed et al, 2002;Kandil, 2013;An et al, 2014;Kim et al, 2015;Kandil, 2015) have examined the effect of depreciation on macroeconomic variables in both developing and developed countries. Like, the early empirical 680 JES 43,5 literature, the recent empirical literature also does not provide a consensus view of the effects of depreciation.…”

Section: Introductionmentioning

confidence: 99%

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Exchange rate fluctuations and macroeconomic performance

Yıldırım

İvrendi

2016

JES

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Purpose Recent turbulence in global financial markets implies that emerging economies are likely to soon enter a new era with greater pressure for currency depreciation and capital outflows. This will likely bring challenges, including macroeconomic instability and inflationary pressures due to potential rapid depreciation. In this context, certain key questions about emerging economies have become focal points of discussion in political and academic spheres: what are the effects of exchange rate depreciation on economic activity? Does exchange rate depreciation create inflationary pressure? Finding answers to these questions is critical for policymakers and financial market participants. As such, the purpose of this paper is to shed light on these questions and thus provides guidance on mitigating the negative impacts of shocks in four fast-growing emerging economies. Design/methodology/approach The authors use a vector autoregression model with sign restrictions to examine the dynamic effects of exchange rate movements on fundamental macroeconomic indicators for four fast-growing countries, namely, Brazil, Turkey, Russia, and South Africa. Following Berument et al. (2012a), Ncube and Ndou (2013), Bjørnland and Halvorsen (2013), and An et al. (2014), the authors adopt the sign restriction methodology to identify exchange rate shocks alongside other macroeconomic shocks (monetary policy and productivity shocks) leading to exchange rate fluctuations. Findings The results show that exchange rate depreciation typically generates a deep recession and high inflation while improving the trade balance in the four emerging economies. This indicates that depreciation has strong “stagflationary” effects, which are transmitted to the macroeconomy primarily via supply-side channels, especially through the cost of import. Furthermore, the authors find that monetary policy reacts immediately to a domestic currency depreciation in all four emerging countries. Practical implications The results imply that these countries’ monetary policies are not and cannot be neutral to exchange rate shocks. However, in these import-dependent countries, monetary tightening (i.e. rate hikes in response to an exchange rate shock) plays a limited role in mitigating the negative effects of depreciation on inflation and economic activity due to the presence of a dominant supply-side channel. In this framework, policymakers should pay greater attention to structural reforms that aim to reduce import dependency. These reforms may increase the effectiveness of domestic monetary policy in mitigating the negative effects of external shocks. Originality/value This paper provides a useful perspective for policymakers designing economic interventions to mitigate the adverse effects of exchange rate depreciation and to those who borrow or lend in domestic or international financial markets.

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Section: Resultssupporting

confidence: 92%

supporting

confidence: 82%