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The Exchange Rate and the Interest Rate Differential in Kenya: A Monetary and Fiscal Policy Dilemma
... The analysis of exchange rate determination can be divided into two theoretical approaches, the monetary and portfolio approaches. Using evidence from previous Zambian and other African countries empirical studies (see Katusime et al 2015; Weeks, 2013;Ndung'u, 2000;Geda et al, 2001) the study employed a model that combines features of both the monetary and the portfolio models. The empirical variant of sticky price monetary model is based on Frankel's (1976) original specification in which prices are assumed relatively inflexible in the short run. ...
... Thus purchasing power parity does not hold continuously and uncovered interest rate parity prevails. However, we maintain that interest rate differentials absorb deviations from PPP (see Ndung'u, 2000;Geda et al, 2002), which is analytically equivalent to the assumption that 'PPP holds in the long run' and regressive expectation prevails. The price differential is thus replaced by the money, income and interest rate differentials (see Morely, 2007). ...
Using quantitative and qualitative analysis we find that both ‘macro fundamentals’ (income, the trade balance and interest rate differentials) and ‘market micro structure’ (order flows and Bank of Zambia's sale of dollars) to be important determinants of exchange rate in Zambia. However, the effect of both determinants is found to vary substantially in the short and long run. Expectation formation is also found to be central in this process, especially in the very short run. We explain the sudden and rapid depreciation of the Kwacha as a process of discontinuous behaviour by private agents.
Key Words: Exchange Rate Models, Macro Fundamentals, Market Microstructure, Zambia, Africa
... The study concludes that variations in the credit policies are attributable to bank efforts to maintain threatened profit margins. [22] study in Jordan examined the effect of credit risk management on financial performance found out that in spite of a large number of unpaid loans; Practices on Performance of Commercial Banks in Kenya NPL ratio has a positive effect on profitability. [14] examined efficiency versus risk in large domestic USA banks and found that profit efficiency is sensitive to credit risk and insolvency risk but not to liquidity risk or to the mix of loan products. ...
... exchange rates in Kenya does not specifically consider the issue of mean reversion and none of the existing literature adopts a fractional integration approach in relation to this question. Most of the literature focuses mainly on using cointegration approaches to investigate the relationships between exchange rates and other influencing variables.Ndung'u (2000) analyses the relationship between the real exchange differential on the one hand and the implications they have on portfolio capital flows on the other. His results indicate that the nominal exchange rate deviates from the perceived long run equilibrium by the purchasing power parity relationship and that these deviations are governed b ...
This article deals with the analysis of several nominal exchange rates in Kenya, examining, by means of fractional integration, if shocks in the series are transitory or permanent. The results support the view that most of the exchange rates are non-stationary and non-mean-reverting. This result proves to be critical in the case of the Kenya shilling US dollar rate which is found to be non-mean-reverting and so provides important insights into the 2011 exchange rate crisis in Kenya in which the Central Bank of Kenya initially delayed before taking strong policy action. Only when it took such actions did the Kenya Shilling dollar rate revert to more normal levels in late 2011. Even after 2011, however, the Kenya Shilling continued on a gradual depreciating trend with some stability achieved after 2015. Evidence of mean reversion is obtained in the cases of the Canadian dollar, the Euro and the British pound but not for the US dollar and the Chinese yuan. Thus, shocks affecting the rates against the former currencies are expected to be transitory, disappearing in the long run. Policy implications are derived at the end of the article.
... [19] focused on chaos and non-linear dynamic approaches to predicting exchange rates in Kenya. Even then, these studies including [25,26,24] and [19] did not focus on ascertaining the nature of real effective exchange rate in Kenya A number of researchers have argued that real exchange rates are crucial not only for attaining sustained general economic performance and international competitiveness, but have a strong impact on resource allocation amongst different sectors of the economy, foreign trade flows and balance of payments, employment, structure of production and consumption and external debt crisis [27,28]. ...
... The Government of Kenya has relied on three instruments of monetary policy: Stopping unsecured credit to commercial banks, raising the cash ratio, and enhancing the sale of treasury bills to control money supply (Ndung'u, 2000). In addition, comprehensive measures were taken to improve the effectiveness of monetary control instruments (maturity of treasury bills, daily cash ratio requirements, banks' flexibility to reduce fluctuations in inter-bank interest rates, and elimination of interest paid to banks on excess of bank balances). ...
... By 1997/98, the simple average tariff had been reduced from 25.6% to 12.8% (Glenday and Ndii, 2000). The most significant shift in Kenya's trade policy regime came in May 1993 with the abolition of trade licensing requirements and, more importantly, foreign exchange controls (Ndung'u, 2000; Were, 2001). Through trade liberalisation in the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA), the region overtook the European Union as the leading destination for Kenya's exports. ...
This study discusses the evolving demand for and supply of environmental goods and services in Kenya. Kenya’s import liberalization has accelerated since the early to mid-1990s, which allowed increased access to alternative and superior goods and technologies that are not locally produced.Trade liberalization within regional blocs has facilitated Kenya’s exports of environmental goods, although exporters still face various barriers such as high tariffs, poor information on environmental goods and services markets, weak national supply capacity, high transport costs and insufficient accommodation of traditional or indigenous knowledge. Experience with Kenya also reveals that complementary measures need to be put in place for the country to truly maximize the benefits of liberalizing trade in environmental goods and services.
... to 25% over the same period. That notwithstanding, the most significant shift in trade policy regime came in May 1993 with the abolition of trade licensing requirements and more importantly, foreign exchange controls (Ndung'u, 2000 andWere et al., 2001). Foreign exchange retention schemes for exporters were introduced at a rate of 50% and later increased to 100% in February 1994 (Mwega, 2002). ...
... Musila (2002) applied cointegration methods to develop a macro model for forecasting purposes. Ndung'u (2000) examined the relationship between exchange rates and interest rate differentials in Kenya using a time-varying parameters approach. ...
This paper analyses the implicit dynamics underlying the interest rate structure in Kenya. For this purpose, we use data on four interest rates of commercial banks (deposits, savings, lending and overdraft) together with the 91-day Treasury Bill rate, for the period July 1991 to August 2010, and apply various techniques based on long-range dependence and, in particular, on fractional integration. The results indicate that all series examined are nonstationary with orders of integration equal to or higher than 1 when using parametric techniques and slightly smaller than 1 when using semiparametric methods. The analysis of various spreads suggests that lending–savings and deposits–savings are also nonstationary I(1) variables; however, the spreads vis-à-vis the Treasury Bill rate may be mean reverting if the errors are autocorrelated. The high level of dependence observed in some of these series could be the result of an incorrect interest rate policy, implying the desirability of a policy aimed at reducing interest rate volatility. Copyright © 2014 John Wiley & Sons, Ltd.
... 13 By November 1993 a policy of market-driven exchange rates had been implemented save for a few restrictions on capital flows that were removed by January 1995 (see Ndung'u 2000). ...
... Similarly, studies on other developing countries find RER to be mainly driven by productivity, terms of trade, openness, government fiscal account, current account balance and net foreign assets positions (see, Paiva,2006;Bergvall,2002, Dufrenot andYehoue,2006;Zalduendo,2006). Studies on the Kenyan economy by Ndung'u (2000Ndung'u ( & 2001 found that the changes in real interest rates differentials drive RER movements. ...
... By 1997/98, the simple average tariff had been reduced from 25.6% to 12.8% (Glenday and Ndii, 2000). The most significant shift in Kenya's trade policy regime came in May 1993 with the abolition of trade licensing requirements and, more importantly, foreign exchange controls (Ndung'u, 2000;Were, 2001). ...
... Otherwise, credit may have a negative impact on firm survival if depressed economic activity and high interest rates result in firm insolvency. For example, Ndung'u (1998) notes that after the dramatic increase in interest rates in the early 1990s in Kenya, expensive credit increased financial vulnerability of credit-dependent firms. ...
This paper models firm survival in Kenyan manufacturing with a particular emphasis on the effect of credit on firm resilience. The paper explores how firms coped with the challenging economic environment that prevailed in the 1990s particularly the effect of the dramatic increase in interest rates. The key finding is that the burden of past loans precipitated firm failure in the 1990s but overdrafts did not seem to have had a significant impact on firm failure. Furthermore, older firms appear to have resisted better than younger ones, but there is no evidence that large firms had higher survival rates. These results are robust to different specifications, namely probit models, Cox proportional hazard models and exponential, Gompertz and Weibull parametric hazard models. The main contribution of the paper is to highlight the role of credit in explaining firm failure in a shockprone developing economy. The study shows that the key factors explaining firm survival in developed economies, namely size and age, are not necessarily the most relevant determinants of firm survival in developing economies. Methodologically, this paper is one of the few that have applied hazard analysis to firms in developing economies.
... Moreover, the differentials in adjustment speeds suggest that the foreign exchange market disequilibriums adjust quickly to one market rather than the other market. The speed of adjustment of the foreign exchange market in Ghana is relatively higher than what has been observed for Kenya (11.7% in 1997 Kenya (11.7% in , 18.4% in 1998 Ndung'u, 1997 Ndung'u, , 1998), but lower than what has been observed for Uganda (43.86%; Atingi-Ego, 2000). ...
This study examined the dynamic interrelationships among domestic price level, nominal exchange rate, terms of trade of cocoa, bank rate, domestic credit and foreign exchange reserves using the cointegration, vector error correction (VEC) and vector auto regression (VAR) approaches. The cointegration analysis confirms the presence of three economically interpretable stable long-run relationships among the relevant variables. The speeds of adjustment for the foreign exchange market, the interest market and the market for cocoa are relatively higher than the speeds of adjustment for the markets of non-tradeables and domestic credit. The determinants of domestic inflation in the short run are bank rate, foreign exchange reserves, terms of trade of cocoa and government expenditure. For the short-run depreciation of the local currency, the determinants are the domestic price level, terms of trade of cocoa and foreign exchange reserves. For terms of trade of cocoa (which proxies collusion) in the short run, the determinants are domestic credit, foreign exchange reserves, terms of trade of gold and the price of petrol. The effects of monetary and terms of trade shocks are generally transmitted to the domestic price level, terms of trade of cocoa, and nominal exchange rate. The determinants of bank rate in the short run are the domestic price level, domestic credit and foreign exchange reserves. For domestic credit in the short run, determinants are the domestic price level, nominal exchange rate, bank rate, foreign exchange reserves, government expenditure and terms of trade of gold. The determinants of foreign exchange reserves in the short run are the nominal exchange rate, terms of trade of cocoa and price of petrol. From these results it is observed that the monetary authorities could control the domestic rate of inflation by reducing the relatively high bank rate. In order to arrest the continuing depreciation of the local currency, the Bank of Ghana could sell more f
... This scenario works to attract private capital inflows, thus appreciating the exchange rate. These results are consistent with the argument that with the liberalisation of the market, high interest rates, and therefore the widening interest differential, tend to attract private capital flows, leading to exchange rate appreciation (Ndung'u 2000). ...
The paper investigates some of the key factors that have influenced exchange rate movements since the foreign exchange market was liberalized in 1994. The paper adopts a general empirical specification of the exchange rate equation involving the interest rate and price differentials, as well as current account balance and net external flows to explain the exchange rate movements. In general, the empirical results indicate that increases in interest rates differential, has tended to attract, though insignificantly, private capital flows, leading to exchange rate appreciation. Deteriorations in current account, and reductions in net capital flows, on the other hand, are associated with depreciation of exchange rate. A rise in the price differential (widening gap between domestic and foreign prices) leads to exchange rate depreciation. Subject to the usual limitations of any econometric enquiry, the above results offer the following tentative conclusions. The insignificant impact of interest rate differential on attracting capital flows points to the need for government to address some structural bottlenecks. For instance, infrastructure services such road network and utilities (electricity and water supply) require improvement. Hence the current policy of lowering interest rates is therefore in line with maintaining a relatively depreciated currency. This implies that a demand for low interest rate regime must lead to a relatively weak Malawi kwacha internationally. On the other hand, changes in the current account balance have a bearing on the exchange rate market. Thus policies that influence exports and imports of goods and services also determine exchange rate movements. Likewise, prospects concerning donor funding influence the direction of market forces in determining the exchange rate movements. Therefore, government’s credibility regarding the use of external public funds and implementation of related reforms is important in as far as stability of the foreig
This study seek to analyse the interplay between economic growth, fiscal policy, exchange rate and interest rate in Nigeria using a dis aggregate estimation to capture the various direction of causality and consociation. The paper employ time series data where three model were estimated. The report from the first model shows that the behaviour of interest rate and exchange rate does not seems to stimulate private consumption. This therefore gives a connotation that the aggregate demand by Nigerians and foreigners for domestic goods exceeds aggregate supply in Nigerian goods which has actually fuel the ongoing exchange rate saga over the years. The second model developed an export demand equation with the intension of examining the interplay between import, export and non-oil export. From the first estimation, the report establishes that the negative behaviour between the ratios of non-oil export to aggregate import gives a unidirectional impression such that the quantum of import to export in Nigeria is imbalance thereby leading to trade deficit. The last model tend to examine the extent to which economic growth, fiscal policy proxy with aggregate government expenditure and interest rate react to real exchange rate in Nigeria. The report shows that The lagged linear value of the real Interest Rate does not statistically influence the linear value of the real Exchange Rate. This implies that the de-trended value of the interest rate won't statistically influence the exchange rate level in the Nigerian context.
Economist have always considered capital as the central element of the process of economic development, the study aimed to establish the effects of capital control liberalization on monetary policy in Kenya. The Economists view that foreign investment benefits developing economies by increasing the availability of capital still holds, based on this view, the capital deficient countries heavily resort to for- eign financing as the primary source to achieve rapid economic growth and through their positive im- pact over productivity and the general economic wellbeing of the host country. Kenyan economy has accumulated a large external debt and are now facing serious debt servicing problems. The growth ex- perience of East Africa has received worldwide attention this is because Africa is seen as a new center for growth and can be an investment destination for other regions. This study is motivated on the as- sumption that this discussions ignored the experiences of developing countries in their early phase of industrialization. In addition there is a lack of proper attention on the analysis of the issue of capital inflows in the context of neo-liberal economic reforms and financial deregulation. Large swings in capital flows into and out of emerging markets can potentially lead to excessive volatility in asset pric- ing and supply of credit in the economy. In order to lessen the impact of capital flows on financial in- stability, a number of studies and policy makers have proposed the use of capital controls. This paper considers the benefit of re-introducing capital controls as a potential instrument of monetary policy in Kenya. This paper reviews the Kenyan experience with large capital inflows over the past 15 years (June 2000-June 2015). The findings revealed that capital inflow had positive effect on monetary policy in Kenya.
The overall goal of the Government of Kenya is to promote and improve the
health status of all Kenyans by making health services more effective, accessible,
and affordable. To address problems in the health sector, and to make healthcare
accessible and affordable, the government, in the early year after independence,
instituted and implemented various healthcare reforms, among them setting
up of health insurance through the National Hospital Insurance Fund (NHIF).
However, the focus of NHIF has been mainly on formal sector employees. This
has left out those in the informal sector, those in agriculture, and pastoralists.
The government plans to transform the current NHIF to a National Social
Health Insurance Fund (NSHIF) as a way of ensuring equity and access to
health services by the poor and those in the informal sector, who have been left
out for the forty years that the NHIF has been in existence. In view of the
proposed transformation, this paper aims to lead policy makers and programme
planners through the process of evaluating the usefulness and feasibility of a
social health insurance system. The paper offers insight into the process of a
successful implementation of such as scheme by addressing the foreseen obstacles
and issues of desirability and feasibility in assessing the appropriateness of social
health insurance. It also addresses the likely impact on the economy, the health
sector and the various stakeholders, after introduction of the insurance scheme.
The paper reviews the experiences of other countries and draws lessons from
those experiences. The paper finds that most of the conditions for setting up a
social health insurance in Kenya are not yet in place and a lot needs to be done
to meet these conditions. In addition, there are likely to be both positive and
negative impacts on various stakeholders. The paper recommends that the
decision to introduce universal health insurance be premised on a careful and
thorough assessment of all the issues being raised, and implementation based
on clearly outlined stages.
This article models firm survival in Kenyan manufacturing with a particular emphasis on the effect of credit on firm resilience. The article explores how firms coped with the challenging economic environment that prevailed in the 1990s particularly the effect of the dramatic increase in interest rates. The key finding is that the burden of loans precipitated firm failure in the 1990s but overdrafts did not seem to have had a significant impact on firm failure. Furthermore, older firms appear to have resisted better than younger ones, but there is no evidence that large firms had higher survival rates. These results are robust to different specifications, namely probit models, Cox proportional hazard models and exponential, Gompertz and Weibull parametric hazard models. The main contribution of the article is to highlight the role of responsible lending as credit may lead some categories of firms to failure in shock-prone developing economies. The study also shows that the key factors explaining firm survival in developed economies, namely size and age, are not necessarily the most relevant determinants of firm survival in developing economies. Methodologically, this article is one of the few that have applied hazard analysis to firms in developing economies.
The role of reputation in developing economies' credit markets has so far been thought to be limited to informal lending. However, when credit trade takes place in a context of weak or unreliable formal contract enforcement institutions, even formal credit uses reputation as a contract enforcement mechanism. Using survey data on the Kenyan manufacturing sector, Kenya appears to have a weak legal system which does not command confidence of the business community. In this environment, econometric evidence shows that reputation is an important factor determining whether or not entrepreneurs use bank credit to fund start-up capital. Moreover, the origin of funds used to start a firm determines the initial size of the business. Firms using bank credit are the biggest and those relying on funds from family members and friends are the smallest. Given that initial size is a central determinant of a firm's future performance, where initial size is positively correlated with future size, we conclude that reputation not only allows access to bank funding of start-ups but also, and most importantly, it determines a firm's growth pattern.
Since 1990, capital has flowed from industrial countries to developing regions like Latin America and parts of Asia. Most countries welcome reentry into international capital markets. However, capital inflows often are associated with inflationary pressures, a real exchange rate appreciation, a deterioration in the current account, and a boom in bank lending. This paper briefly examines how these inflows have altered the macroeconomic environment in a number of Asian and Latin American countries, and discusses the pros and cons of the policy options.
We collect data from 29 separate papers estimating the equilibrium level and possible undervaluation of the Chinese currency, the renminbi. These papers yield a total of 97 individual observations on misalignment, which we analyse with the help of meta-analysis. We find that the vast majority of observations point to renminbi undervaluation in recent years and that the undervaluation is more pronounced when the US dollar exchange rate is used instead of the real effective exchange rate. We find several characteristics of papers and authors that clearly seem to influence the reported misalignments. For example, when the author is affiliated with an investment bank, the reported misalignment is smaller. Using time-series techniques also results in lower estimates of undervaluation. On the other hand, refereed journals seemingly are inclined to publish papers that report larger misalignments. Results caution against trusting too much in any one study concerning renminbi undervaluation.
In the context of an empirical model, the authors examine the impact of capital flows, among other fundamentals, on long-term exchange rates in Chile. The real exchange rate and its fundamentals were found to be cointegrated during 1960-92. This cointegration allows a reinterpretation of uni-equatorial estimates of the equilibrium real exchange rate (ERER) to be consistent with long-run forward-looking behavioral models. It also permits the estimation of an error-correction model capable of disentangling short-run from long-run shocks in observed movements of the ERER. The nonstationary nature of the fundamentals allows one to decompose innovations into permanent and transitory components - to get an empirical measure of the sustainability of the fundamental with which the ERER is determined. In general, the estimate of the cointegration of the ERER and its corresponding dynamic error-correction specification corroborates the theoretical model and produces fairly consistent results. The derived ERER index and the corresponding real exchange rate misalignment (for given sustainable values of the fundamentals) successfully reproduce the salient episodes in Chile's recent macroeconomic history. Capital flows are disaggregated into four components: 1) short-term capital flows; 2) long-term capital flows; 3) portfolio investment; and 4) foreign direct investment. As expected from economic theory, short-term capital flows and portfolio investment were found to have no effect on the ERER (although they can affect the real exchange rate in the short run). But long-term capital inflows and foreign direct investment have a significant appreciating effect on the ERER. To the extent that the recent inflow of capital to Chile is dominated by long-term capital flows that are judged to be sustainable, an important part of the ensuing appreciation of the real exchange rate is consistent with equilibrium behavior - reducing the need for counterbalancing exchange rate on macroeconomic policies.
Cross-border flows of capital respond to differences in expected real yield. With perfect capital mobility these differentials reflect variation in asset risk profiles. The authors price these risks, using a two-country two-bond equilibrium asset pricing model, to identify the forces driving cross-border flows. Demonstrates using trend-cycle decompositions that periods of heavy capital inflows are linked to the appreciation of the real exchange rate. Domestic interest rates account for a large proportion of the forecast error variance of the real exchange rate. However, while the foreign real interest rate accounts for approximately 50% of the forecast error variance of the domestic real interest rate it accounts for less than 20% of the forecast error variance of the real exchange rate. Concludes that for countries without developed domestic financial markets 'doing nothing' in response to a surge in capital flow may be less problematic than sterilised intervention.
The growing integration of capital markets has strengthened incentives for greater international coordination of economic and financial policies. Structural changes in these financial markets, however, may have undermined the effectiveness of monetary and fiscal policy and complicated market access by developing countries. These are among the findings of this study of capital flows in the 1970s and the 1980s.
This paper describes the current episode of capital inflows to several Asian economies, summarizing the principal facts, the impact of the inflows, and policy options.25 The discussion also covers, when relevant, the similar experiences of Latin American countries, with an emphasis on the policy priorities that could ensure the persistence and sustainability of these flows, as far as possible. The analysis draws heavily on previous work by Calvo, Leiderman, and Reinhart (1993, 1994, and forthcoming, 1995), who used data for ten Latin American countries and eight Asian countries, as well as other recent studies undertaken in the IMF. The first part of this section describes the main characteristics and macroeconomic consequences of capital inflows to the Asian region. The second part discusses the role of external factors in the present inflows episode, as well as the likely factors that will determine the sustainability of these capital inflows. Finally, the relative merits of various policy responses to the surge in capital inflows are discussed.
Rudiger Dornbusch's articles on exchange rates and open economy macroeconomics are among the most frequently cited in the field of international economics. Collected for the first time in Exchange Rates and Inflation, twenty-two of these articles, written between 1973 and 1987, are gathered in four parts covering exchange rate theory, special topics in exchange rate economics, equilibrium real exchange rates, and inflation and stabilization. Each part includes an introduction that discusses the essays and places them in context.
The macroeconomic effects of a variety of exogenous and policy-induced real disturbances are examined under the assumption that the authorities target the level of the real exchange rate. We first discuss the implications--particularly for inflation and the current account--of targeting the rate at an "overdepreciated" level, and then examine the dynamic response of both output and inflation to a number of shocks. Further applications of the model to fiscal explanations of inflation, high-inflation plateaus, and money-based stabilization programs are also considered.
In this paper the short- and long-run movements of the Japanese yen–U.S. dollar exchange rate are modeled for the recent floating period. The modern general-to-specific approach is used as our econometric framework. In contrast to some other exchange rate studies, we attempt to interpret multiple cointegrating vectors using economic theory. Amongst our findings are sensible and significant long-run relationships and dynamic equations which describe the motion of the two exchange rates and which satisfy a battery of diagnostic tests. Our models are shown to produce good in-sample forecasting performance and also an out-of-sample forecasting performance which dominates a random walk.J. Japan. Int. Econ.,March 1998,12(1), pp. 75–102. Department of Economics, University of Strathclyde, Curran Building, 100 Cathedral Street, Glasgow G4 0LN, United Kingdom.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers C53, F31, F47.
Capital inflows to some developing countries have increased sharply in recent years. Impelled by better economic prospects
in those countries, lower international interest rates, and a slowdown of economic activity in the capital-exporting countries,
the inflows have furnished financing much needed to increase the use of existing capacity and to stimulate investment. But
capital inflows can bring with them their own problems. Typical macroeconomic repercussions have been appreciation of the
real exchange rate, expansion of nontradables at the expense of tradables, larger trade deficits, and, in regimes with a fixed
exchange rate, higher inflation and an accumulation of foreign reserves.
Should government intervene to limit some of these side effects—and if so, how? The question is especially pressing in the
wake of the Mexican crisis of December 1994. This article looks for answers in the experience of four Latin American and five
East Asian countries between 1986 and 1993, examining the effects of the capital inflows on the economy and comparing the
different ways in which these countries responded to the problem of “too much” capital.
After being excluded from world capital markets during the debt crisis, many developing countries have experienced large capital
inflows during the past five years. The challenges that these inflows pose for domestic policy in recipient countries have
generated a substantial literature. This article presents an overview of that literature, describing the characteristics of
the new inflows, analyzing the policy issues they raise, assessing their causes and likely sustainability, and evaluating
potential policy responses. The desirable policy response is tied to characteristics of the flows themselves as well as to
the characteristics of the recipient economy.
The paper assesses whether the exchange rate is affected by monetary policy and whether these effects are permanent or transitory. The paper takes the position that the exchange rate regime determines the flexibility of monetary policy.
The paper investigates the relationships between domestic and foreign price levels and the exchange rate and other macro-variables. The real exchange rate is estimated as a cointegrating vector that spans the variables in a purchasing power parity relation. An exchange rate pass-through equation is estimated, and it is seen that the rate of inflation is affected largely by the pass-through effects from exchange rate changes and the world rate of inflation.
Although the real exchange rate-real interest rate (RERI) relationship is central to most open economy macroeconomic models, empirical support for the relationship is generally found to be rather weak. In this paper we re-investigate the RERI relationship using bilateral US real exchange rate data spanning the period 1978-2007. Instead of testing one particular model, we build on Campbell and Shiller [1987. Cointegration tests of present-value models. Journal of Political Economy 95, 1062-1088] to propose a metric of the economic significance of the relationship. Our empirical results provide robust evidence that the RERI link is economically significant and that the real interest rate differential is a reasonable approximation of the expected rate of depreciation over longer horizons.
Recent development cooperation with Guinea-Bissau, focusing on good governance, statebuilding and conflict prevention, did not contribute to democratization nor to the stabilization of volatile political, military and economic structures. The portrayal of Guinea- Bissau as a failed “narco-state”, as well as Western aid meant to stabilize this state, are both based on dubious concepts. Certainly, the impact of drug trafficking could endanger democratization and state-building if continued unchecked. However, the most pressing need is not state-building facilitated by external aid that is poorly rooted in the social and political fabric of the country. Rather, it is grassroots nation-building that is a pre-condition for the creation of viable state institutions.
Private capital flows to SSA: An overview of trends and determinants
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Capital Controls Exchange Rates and Monetary Policy in the World Economy
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The new wave of capital inflows: Push or pull?
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The econometrics of stochastic volatility
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Foundations of International Macroeconomics
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