Abstract

Commodity booms generally induce real exchange rate appreciation in commodity rich economies and make other tradable sectors less competitive. This “Dutch disease” phenomenon has been blamed for leading to structures of production with low diversification and undermining sustainable growth. In this paper, we explore whether capital controls can mitigate the transmission of commodity price changes to the real exchange rate and shield manufactured exports. Examining a panel of 37 commodity-abundant countries over the period 1980–2020, we find that a steeper commodity currency appreciation indeed has a more detrimental impact on manufactured exports. Restrictions oncapital flows tend to reduce real appreciation pressures and the severity of the Dutch disease. Counter cyclical capital controls seem to help foster economic diversification in commodity-dependent developing countries.

Abstract

This paper develops a time-varying coefficients risk adjusted uncovered equity parity (TV-RUEP) model by incorporating nonparametric estimation on time-varying coefficients into a parametric RUEP structure. The empirical work exploits monthly data of exchange rate and stock market return between the U.S. versus four Asian emerging markets: Malaysia, Singapore, South Korea, and Thailand, and versus two developed countries: Japan and the U.K., from January 1990 to April 2021. We find time variations in the coefficients and interpret the evolution of (1) the degree of market integration, (2) investors’ portfolio reallocation behavior, and (3) the validity and deviation of uncovered equity parity condition. In particular, the effects of the equity return differentials on exchange rate movement are divided when Asian emerging markets and developed economies are considered separately, depending on the direction of capital flows. Besides, we analyze the evolution of market integration associated with impacts of financial crises. Furthermore, we find evidence on predicting that UEP theory consistently holds in US-UK case. 

Abstract

We employ the GARCH-MIDAS model to distinguish the short-term and long-term volatility components of Canadian exchange rate, then investigate the consequences of structural oil shocks on the long-term volatility of the exchange rate, from a perspective of the demand and supply sources of oil price fluctuation. We consider three Canadian nominal effective exchange rate indexes as proxies of exchange rate, and exploit the dataset of Baumeister and Hamilton (2019) that estimates four structural oil shocks - oil supply shock, economic activity shock, oil-specific consumption demand shock, and oil inventory demand shock. Empirically, the volatilities of exchange rate react heterogeneously to structural oil shocks; in general, exchange rate volatilities are positively affected by oil supply shock, economic activity shock, and oil-specific consumption demand shock, while oil inventory demand shock does not predict exchange rate volatility. We find robust results when considering two explanatory variables - a structural oil shock as well as the realized volatility. Based on subsample periods, we find divided responses of exchange rate volatility to certain structural oil shocks before vis-à-vis after the oil crash in July 2008.