EXCHANGE RATE VOLATILITY AND GROWTH IN EMERGING.docx

EXCHANGE RATE VOLATILITY AND GROWTH IN EMERGING.docx

《EXCHANGE RATE VOLATILITY AND GROWTH IN EMERGING.docx》由会员分享，可在线阅读，更多相关《EXCHANGE RATE VOLATILITY AND GROWTH IN EMERGING.docx（27页珍藏版）》请在冰豆网上搜索。

EXCHANGERATEVOLATILITYANDGROWTHINEMERGING

EXCHANGERATEVOLATILITYANDGROWTHINEMERGING

EUROPE

CORINAGEORGETABOAR

Abstract.ThispaperanalysestheinfluenceofNEERandREERvolatilityongrowthin

apanelofsixdevelopingEuropeancountries.Twomeasuresofvolatilityareemployed

（standarddeviationandARCH/GARCHmodels）anditsinfluenceongrowthistestedboth

throughaGLSandaGMMestimation.Moreover,giventhepropertiesofthetimeseries

used,bothpanelandindividualcointegrationaretestedusingthePedroniand,respectively,

theJohansenmethodology.

1.Introduction

Theinternationalexperiencehashighlightedtheimportanceoftheexchangeratedynamics

inacountry’seconomicevolution.Theincreaseincapitalcirculation,thereleaseofthederiva-tives,thecostsofmaintainingfixedexchangerateregimesareonlyfewoftheimportantfactors

substantiatingthechoicebetweenafixedexchangerateregimeandafloatingonecombined

withdifferentmonetarypolicystrategies.Thechoiceisevenmorediffcultfortheemerging

economieswhereimports,exportsandcapitalinflowshaveasignificantweight.Hence,signifi-cantfluctuationsoftheexchangerateleadtosignifcantfluctuationsintherealeconomy,causing

emergingeconomiestoallowonlymoderatefluctuationsofthenominalorrealexchangerate,

attitudeknownintheeconomicliteratureasfearoffloating.Accordingtosomeapproaches,

exchangeratevolatilitypromoteseconomicgrowthbymakingmonetarypolicyinstruments

flexibleenoughtosoftenasymmetricshocks（Meade,1951,Friedman,1953）.Ontheother

hand,someauthorsargueforthenegativerelationbetweenthesetwo,giventheincertitude

inducedbythevolatilityinthemacroeconomicenvironmentandtheineffcientforeignexchange

marketsindevelopingeconomies（Altaretal.,2006）.

Thereby,weintendtoindentifythedirectionandquantifytheinfluenceoftheexchange

ratevolatilityoneconomicgrowthonapanelofsixemergingeconomies:

CzechRepublic,

Latvia,Poland,Romania,TurkeyandHungary.Moreover,wewanttoestablishtheroleof

financialdevelopmentandtotesttheexistenceofarelationshipinthelong-run.Theresults

weobtainedarecongruoustothepartoftheliteraturethatarguesforthenegativeinfluence

thatexchangeratevolatilityhasongrowth.Financialdevelopmentdoesn’thaveasignificant

roleandcointegrationtestsshowtheabsenceofalong-runrelationship.

Therestofthispaperisstructuredasitfollows:

thefirstsectionconsistsofaliterature

reviewfollowedbyashortdescriptionofthedataandmethodologyused.Thefollowingsection

presentsthevolatilityestimationresultsthatareusedinordertotesttheinfluenceofthe

exchangeratevolatilityoneconomicgrowthandtoidentifyalong-runrelationshipbetweenthe

twovariables.Thelastsectionconcludesthemainfindingsoftheresearch.

ReceivedbytheeditorsAugust28,2010.AcceptedbytheeditorsDecember15,2010.

Keywords:

exchangeratevolatility,growth,emergingeconomies,panelestimation,cointegration.

JELClassification:

E42,F31,F43.

CorinaGeorgetaBoarisPhDStudentattheBarcelonaGraduateSchoolofEconomics.

Email:

corina.boar@barcelonagse.eu.Phone:

+34635721797.

Thispaperisinfinalformandnoversionofitwillbesubmittedforpublicationelsewhere.

c°2010TheReviewofFinanceandBanking

103

104CORINAGEORGETABOAR

2.LiteratureReview

Increasedcapitalmobility,increasedcostsofmaintainingafixedexchangerate,currency

crisesinemergingcountriesandtheintroductionoffinancialinnovationsarejustsomeofthe

reasonsthatmademanycountriesintransitiontodropfixedexchangeratearrangementsandto

switchtofreeorcontrolledfloating.Duetolessdevelopedcapitalmarkets,emergingcountries

aremoreexposedtoexchangeratefluctuationsbecausetheylackthetoolstoprotectagainst

currencyrisk.

TheAsianexperiencebetween1997and1998showedthatcountrieshavetochooseeither

aschemethatensurescredibility,namelyafixedexchangerate（suchas"hardpeg"）ora

floatingexchangerateregimecombinedwithdifferentmonetarypolicystrategies.In1961,

RobertMundelllaunchedtheoptimumcurrencyareastheory,accordingtowhichexchangerate

regimesaremeasuredintermsofeffciencyinhelpingtoreducethevariabilityofgrossdomestic

product.Theapplicabilityofthistheoryindevelopingcountriesishoweverquestionablesince

fiscal,financialandmonetaryinstitutionsarepoorlydevelopedandcurrencysubstitutionand

thedollarizationoftheeconomyincreasesvulnerabilitytoasuddenstopincapitalinflows.

Fromthisperspective,thekeytothemacroeconomicsuccessofanemergingeconomyisnot

theinitialchoiceoftheexchangerateregime,butratherthe"health"ofthefundamental

institutionsofthestate.Thus,institutionalreformshouldbeconsideredapriorityratherthan

thechoicebetweenafixedandafloatingexchangerateregime.

Theexchangeratehasbeenthefocusofmacroeconomicdiscussionsinemergingcountriesfor

decades.Hereimports,exportsandcapitalinflowshaveasignificantweight,sothatexchange

ratefluctuationscausesubstantialfluctuationsintherealeconomy.Underafloatingexchange

rateregimeinacountrywherebankshaveloansdenominatedinforeigncurrency,adepreciation

ofthedomesticcurrencywouldendangertheentirefinancialsystem.Hencetheoppositionof

mostdevelopingcountriestoallowfullexchangeratefluctuations,attitudeknownasfearof

floating（CalvoandReinhart,2002）.

Proponentsoffixedexchangerateregimesarguethatexchangeratestabilitypromotesgrowth

byensuringmacroeconomicstabilityandgreaterexternaltrade（Frankel,Rose,2001）.More-over,exchangerateflexibilitysupportershavehighlightedtheneedformacroeconomicflexibility

tocopewithasymmetricshocksandboostaggregatedemand（Meade,1951,Friedman1953）.

However,giventhatpeople’sexpectationsarenotstationary,exchangeratedoesnotfunction

asatoolforstabilizingasymmetricshocks,butrathertendstobecomeanindependentsource

ofvolatilitythatcanbeeliminatedthroughearlyintegrationintoamonetaryunion（Mundell,

1973a,1973b）.Exchangeratevolatilityisasourceofineffciencybecauseforeignexchangemar-ketsarecharacterizedbythepresenceofspeculativeactions.Thisleadstochangesinexchange

ratedynamicsthatdonotresultfromthefundamentals.

Analyzingtheperformanceoffloatingexchangerateregimescombinedwithinflationtar-getingversusfixedexchangerateregimes,GaliandMonacelli（2004）showedthattheprice

paidbytheadherentsofthefirstcategoryforthesimultaneousstabilizationoftheoutputgap

andinflationwasahigherexchangeratevolatility,bothinnominalandrealterms.Inclose

connectionwiththis,BleaneyandFrancisco（2008）showthatinflationtargetingreducesthe

volatilityofrealexchangerateexpectations,giventhetendencyofassociatingitwithfloating

exchangerateregimes.Takingalookattheissuefromtheoppositeangle,namelytheinflu-enceofexchangeratevolatilityoninflationperformance,thecross-countryresearchconducted

byEdwards（1993）showedthatdevelopingcountriesthathaveadoptedafixedrateregimeob-tainedbetterinflationaryperformancesthancountriesthatpracticeschemescharacterizedby

greaterflexibility.Inflationismuchlowerandlessvolatileinpegregimes.Regardinggrowth,

fewsystematicdifferencesrelatedtoexchangerateregimehavebeenfound（Ghoshetal.,1995）.

Anotherseriesofworkingpapersemphasizestheroleofastate’sfinancialdevelopmentin

assessingtheinfluenceofexchangeratevolatilityongrowth.Differencesgivenbythelevelof

developmentoccurprimarilyintheexchangeratevolatilityasanindependentvariable.Ganguly

EXCHANGERATEVOLATILITYANDGROWTH105

andBoucher（2009）arguethatthelatterishigherindevelopingcountriesthaninindustrialized

countriesduetotheactionofnumerousfactorssuchasshocksinterms-of-trade,highvolatility

ofgrossdomesticproductthereforelimitingtheabilitytodealwithfiscalandmonetaryshocks,

nominalshockswithstrongereffectsduetolackofcrediblemonetaryinstitutionsandweakfiscal

positions,exposuretosuddenstopsincapitalflows.Growthvariableenteringtheequation,

thereisanegativerelationshipbetweenproductivitygrowthandexchangeratevolatilityin

lessfinanciallydevelopedcountriesandthereisnolinkbetweenthetwoindevelopedcountries

（Aghionetal.,2006）.Incloseconnectiontotheabovementioned,Schnabl（2007a）showsthat

exchangeratestabilityexertsanegativeinfluenceongrowthindevelopingstatesbecauseit

doesn’tallowthemtoreactflexiblytorealshocksandstimulatesspeculativecapitalinflows.

Ontheotherhand,itcarriesapositiveinfluenceoneconomicgrowthasitleadstolower

transactioncostsininternationaltrade,decreasestheuncertaintyofcapitalflowsandstimulates

internationalmacroeconomicstability.

However,theresultsofempiricalanalysisoverwhelminglydependonthetimeframeandthe

sampleofcountrieschosen.Fromthisperspectivetheresultsaresometimescontradictory:

Ghoshetal.（2003）reportedtheexistenceofweaklinksbetweenexchangeratevolatilityand

growth,EdwardsandLevy-Yeyati（2003）arguethatafloatingexchangerateregimeprovidesa

fastereconomicgrowthandEichengrennandLeblang（2003）showthatthereisanegativelink

betweenexchangeratestabilityandgrowth.

3.DataandMethodology

3.1.Descriptionofthedataset.FollowingSchnabl’s（2007）model,westartedfromasample

of17statesfromwhichthosewhohaveadoptedafixedschemehavebeenremoved.Later,

undertheconstraintofdataavailability,the