• East Asian Economic Review
• /
• v.22 no.3
• /
• pp.337-370
• /
• 2018

This paper discusses the design of monetary policy in a New Keynesian small open economy framework by introducing nominal wage rigidities and incomplete exchange rate pass-through on import prices. Three main findings are summarized. First, with the existence of an incomplete exchange rate pass-through and nominal wage rigidities, the optimal policy is to seek to minimize the output gap, the variance of domestic price and wage inflation, as well as deviations from the law of one price. Second, the CPI inflation targeting Taylor rule is welfare enhancing when there is a technological shock to the economy. The exception occurs when there is a foreign income shock, which minimizes welfare losses under the domestic inflation targeting Taylor rule. Last, two stylized Taylor rules turn out to be a bad approximation, but the modified Taylor rules that respond to the unemployment gap rather than the output gap are a closer approximation to the optimal policy.

• Journal of Distribution Science
• /
• v.14 no.12
• /
• pp.79-87
• /
• 2016

Purpose - Since 1990, the sudden stop in capital flows has caused the economic crisis. The purpose of this research is to suggest the policy measures to mitigate the risk of the sudden stop in capital flows. To this end, we examine the theoretical framework and analyze the case study for countries which are faced with the sudden stop. Also we examine the structural problems of the foreign exchange market in Korea and derive the policy implications to prevent the sudden stop. Research design, data, and methodology - The criteria of whether the sudden stop in capital flows occurs are based upon Calvo et al. (2008). In case the proxy variable for the balance of capital account decreases from the average by over twice standard deviation, we determine that the sudden stop occurs for that country. The sample period is from January 1990 to December 2008, as in Calvo (2014). The sample countries are 17 developed countries and 19 emerging market countries, which are different from those of the previous papers as Agosin and Huaita (2012), and Calvo (2014). When the exchange market pressure index(EMPI) is deviated from the average by over three times standard deviation, we determine that the foreign exchange market is unstable for that country. Results - We find that the characteristics of the sudden stop in capital flows are the bunching or contagion among countries, the rapid drop in real effective exchange rate, and the huge decrease in foreign exchange reserves. Many countries tried to increase foreign exchange reserves and regulate capital flows. Also the foreign exchange market in Korea are found to be the volatile exchange rate, the vulnerable external debt and careless management of the foreign exchange derivatives transaction risk. Conclusions - To lessen the risk in the sudden stop of capital flows, this research suggests the some useful policy measures. To enhance the foreign exchange and distribution market stability, we should improve the price mechanism of exchange rate, hold the appropriate level of foreign exchange reserves, prevent excessive inflows of foreign exchange and promote sound transactions of foreign exchange derivatives.

• East Asian Economic Review
• /
• v.18 no.3
• /
• pp.301-335
• /
• 2014

In this paper, we consider a small open economy under the New Keynesian model with unemployment of Gal$\acute{i}$ (2011a, b) to discuss the design of the monetary policy. Our findings can be summarized in three parts. First, even with the existence of unemployment, the optimal policy is to minimize variance of domestic price inflation, wage inflation, and the output gap when both domestic price and wage are sticky. Second, stabilizing unemployment rate is important in reducing the welfare loss incurred by both technology and labor supply shocks. Therefore, introducing the unemployment rate as an another argument into the Taylor-rule type interest rate rule will be welfare-enhancing. Lastly, controlling CPI inflation is the best option when the policy is not allowed to respond to unemployment rate. Once the unemployment rate is controlled, however, stabilizing power of CPI inflation-based Taylor rule is diminished.

• KDI Journal of Economic Policy
• /
• v.28 no.1
• /
• pp.193-218
• /
• 2006

This paper examines the macroeconomic structural differences of the free floating exchange rate regime and the managed float exchange rate regime focusing on the Korean economy, and compares it to the two benchmark economies, Japan and Australia. Korea's shift to the free floating exchange rate regime from the managed float exchange rate regime came after the 1997 economic crisis. Korea's exchange rate policy provides a unique opportunity to study the different behaviors or roles, if any, of managed float and free floating exchange rate regimes. Based on a simple monetary model, we find that the exchange rates of Korea are more sensitive to the economic fundamentals under the free floating regime than under the managed float regime. Impulse response analysis shows that exchange rate pass-through into domestic variables, especially inflation rate, has a bigger short-term impact under the floating regime than under the managed regime. This finding is consistent with the view that the managed (or fixed) regime provides the domestic price stability necessary for the economic growth for the developing countries.

• East Asian Economic Review
• /
• v.16 no.3
• /
• pp.273-290
• /
• 2012

While the issue of RMB (Renminbi, Chinese Yuan) revaluation became the focus of world attention in 2003, the reform of the RMB exchange rate regime in 2005 didn't fundamentally solve the RMB appreciation problem, and even in 2008 the global financial crisis made RMB appreciation face new challenges and risks. It appears that the rise in RMB value is caused by supply exceeding demand in China's foreign exchange market; however, intrinsically it is due to the asymmetry in RMB exchange rate formation mechanism. The export tax rebates policy implemented by Chinese government is one of the leading causes of the asymmetry. This study constructs a transmission model between export tax rebates and foreign exchange rates, and applies the Granger Test to validate the causality between kernel variables based on correlative data from 1994-2011, and uses the error correction method to analyze the quantified relations of kernel variables, and finally gets the contribution rate of export tax rebates to RMB appreciation.

• The Journal of Asian Finance, Economics and Business
• /
• v.9 no.5
• /
• pp.285-294
• /
• 2022

Using the ARDL approach, this study examined the impact of macro factors on Vietnam's stock market in the short and long run from 2010 to 2021. The State Bank of Vietnam and the International Monetary Fund provided time series data for this study. Research results show that in the long run, money supply and exchange rate respectively affect the stock market. The money supply had a positive effect on the VN-Index, while the exchange rate showed the opposite effect. However, the study did not find a relationship between world oil price and interest rates on VN-Index in the long run. On the other hand, in the short term, there are relationships between variables; specifically, interest rates and exchange rates have a negative impact on the VN-Index, while the world oil price and the fluctuation of money supply M2 of the previous one and two months showed an impact in the same direction on this index. The differences in the regression results on the impact of exchange rate and oil price on the VN-Index compared to previous studies come from the characteristics of Vietnam's stock market, with the large capitalization of companies in the oil and gas sector, and the structure of Vietnam's economy with export heavily depends on FDI sector.

• The Journal of Asian Finance, Economics and Business
• /
• v.8 no.7
• /
• pp.393-402
• /
• 2021

This study aims to examine whether symmetric effects or asymmetric effects of exchange rates exist in determining the money demand in Indonesia. Simple-sum money and Divisia money were included in different models for comparison due to the financial developments in Indonesia. This study uses time-series data from 1996Q1 to 2019Q4 for the estimation. The nonlinear autoregressive distributed lag (NARDL) model is utilized to verify the asymmetric effects of exchange rates on money demand. The Augmented Dickey-Fuller and Phillips-Perron unit root tests were performed to verify the order of integration of the variables. The findings of this study revealed that the exchange rate is one of the most important determinants of money demand in Indonesia and the effect is asymmetric. The findings further indicated that money demand function, which incorporates Divisia monetary aggregate is parsimonious. Monetary targets such as money supply and interest rates are critical for monetary policy conduct to achieve inflation levels set by government. As the adoption of an inflation targeting framework needs to be in keeping with the flexible exchange rate system, the asymmetric effect of exchange rate changes can be used in exchange rate policy conduct to achieve financial system and price stability.

• East Asian Economic Review
• /
• v.20 no.4
• /
• pp.469-491
• /
• 2016

In this paper, we estimate the exchange rate exposure, indicating the effect of exchange rate movements on firm values, for a sample of 1,400 firms in seven East Asian countries. The exposure estimates based on various exchange rate variables, return horizons and a control variable are compared. A key result from our analysis is that the long term effect of exchange rate movements on firm values is greater than the short term effect. And we find very similar results from using other exchange rate variables such as the U.S. dollar exchange rate, etc. Second, we add exchange rate volatility as a control variable and find that the extent of exposure is not much changed. Third, we examine the changes in exposure to exchange rate volatility with an increase in return horizon. Consequently the ratio of firms with significant exposures increases with the return horizons. Interestingly, the increase of exposure with the return horizons is faster for exposure to volatility than for exposure to exchange rate itself. Taken as a whole, our findings suggest that the socalled "exposure puzzle" may be a matter of the methodology used to measure exposure.

• The Journal of Asian Finance, Economics and Business
• /
• v.8 no.12
• /
• pp.63-73
• /
• 2021

This study investigates the key determinants of exchange rate (RER) misalignment for the period 1991 to 2020. The BEER technique has been used to estimate the degree of the equilibrium exchange rate. To explore the actual exchange rate misalignment and to assess the behavior of variables that are different in different regimes of undervaluation and overvaluation, the nonlinear technique of Markov regime-switching (MSM) was applied. The mean and variance of each regime are highly significant and show that undervaluation episodes have a low mean (116.139) and more volatility (1.229) while overvaluation episodes have a high mean (126.732) with less volatility (0.871). The findings show that MSM accurately identifies exchange rate misalignment in both regimes as separate incidents of overvaluation and undervaluation. Results further depict that misalignment of the RER is affected by terms of trade, net foreign assets, interest differential, government investment, and consumption decision. Results recommend that if policymakers want to use the exchange rate as a policy tool, they must first consider the drivers of the equilibrium exchange rate. As a result, any deliberate actions to address exchange rate misalignment must focus on the underlying fundamentals that drive the exchange rate.

• The Journal of Asian Finance, Economics and Business
• /
• v.7 no.8
• /
• pp.131-141
• /
• 2020

This study is designed to investigate the impact of China exchange rate policy on its trading partners by using a country multi-dataset GVAR model. Our model includes samples of 30 countries, six from high-income, six from middle-income and eighteen from low-income countries. This study used annual time series data over the period 1992 to 2017. We constructed currency misalignment index and it provided some interesting features about the currency undervaluation and overvaluation. The results of the currency misalignment shows that China's Renminbi is structurally more undervalued over the sample period as compared to other countries, and fluctuation in major currencies effects the global trade around the world. The overall empirical results of the GVAR model indicate that RMB undervaluation affects the trade pattern and macroeconomic performance of China's trading partners. Overall, China's exchange rate undervaluation has mixed effects on trading partner's GDP, exports and imports. The devaluation of China's RMB efficiently stimulated China's exports and reduced imports. While, in some countries, this effect is reverse, the RMB undervaluation increases the GDP of partner countries and also increases their exports to China. The results confirm the strong and leading role of the Chinese Renminbi in the global trade.