Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Pensions crisis wikipedia , lookup
Economic growth wikipedia , lookup
Nominal rigidity wikipedia , lookup
Transformation in economics wikipedia , lookup
Foreign-exchange reserves wikipedia , lookup
Inflation targeting wikipedia , lookup
Okishio's theorem wikipedia , lookup
Monetary policy wikipedia , lookup
Exchange rate wikipedia , lookup
The exchange rate and its implications National Treasury April 2010 5/23/2017 1 Recent movements Index 2008=100, domestic currency per US dollar 170 Australia New Zealand 150 South Africa Brazil 130 110 90 70 8 8 -0 -0 y h r c ua ar n M Ja 5/23/2017 08 M ay J -0 y l u 8 S 8 b m te ep -0 er N em ov 9 8 r-0 be a nu a J 09 -0 ry M ch r a 09 09 ay M J r-0 be em uly 9 pt e S 2 Long run nominal and real effective exchange rates 250 Nominal effective exchange rate 200 Index 2000=100 Real effective exchange rate 150 100 50 0 5/23/2017 3 Long term trends in nominal exchange rates R/$ 200 R/Pound 150 R/Euro 100 50 5/23/2017 0 Ja n1 8 Ja n0 6 Ja n0 4 Ja n0 2 Ja n0 0 Ja n0 8 Ja n9 6 Ja n9 4 Ja n9 2 n9 Ja n9 0 0 Ja index (1999=100) 250 4 Trend against other emerging market currencies… 250 200 R/Renminbi Spikes occur during severe international financial contagion. R/Rupee 150 Total nominal declines 100 Renminbi -34% Dollar -20% Euro -35% 50 5/23/2017 n-1 0 Ja n-0 8 Ja n-0 6 Ja n-0 4 Ja n-0 2 Ja n-0 0 Ja n-9 8 Ja n-9 6 Ja n-9 4 Ja n-9 2 Ja n-9 0 0 Ja index(1999=100) Rand has sustained depreciation over the long term against both EM and developed currencies. R/Brazillian Real 5 Exchange rate movements and manufacturing production 30% Real Effective exchange rate Manufacturing production (RHS) Percentage change (y-o-y) 20% Nominal Effective exchange rate 10% 0% -10% -20% -30% Periods of severe international financial crisis correspond with slower growth in mnf production. SR exchange rate movements not correlated with major increases or decreases in production. 5/23/2017 LR, X and production rises as REER depreciates. 6 Defining the exchange rate Real exchange rate = nominal exchange rate (foreign prices/domestic prices) RER = NER (Pf/Pd) So… a depreciation shown as a rise in the NER (R/$ or R7 to R8) Question is what happens to the RER? A rise in Pf also raises the RER. A rise in Pd lowers (appreciates) the RER. 5/23/2017 RER = NER Pf Pd 50 = 100 2 4 55 = 110 2 4 40 = 100 2 5 100 = 100 4 4 7 What happens when the exchange rate depreciates? Shock Immediate effect Second round effect Nominal exchange rate ↑↓ Real exchange rate ↑ Exports ↑ Real exchange rate Import prices ↑ Imports ↓ Exports Domestic prices ↑ Third round effect Net effects Real wages ↑ Domestic prices ↑ Interest rates ↑ Interest rates , payments, debt stock ↑ CAD GDP Investment Debt stock in rand ↑ Reversal of relative prices? If Pd > Pf, then RER appreciates Employment If ULCs > import prices, then X fall Consumption Relative rates of return in Ts and NTs 5/23/2017 Deflation… Prices rise Consumption falls NTs fall Ts rise Wages respond to loss of income Interest rates rise again Income from X > Income from NTs and higher debt costs 9 Evidence for SA 1) Does export & import competing production permanently increase? 2) Speeds of adjustment of prices and production? 3) What happens to aggregate economic growth? Higher level? Faster rate? 4) Does saving and investment rise? Depreciation events followed by rise in exports, but no ST impact on total production… 1% = 0.1% export gain. Domestic price adjustments fully reflect % depreciation within 1 year. Growth pick ups initially for about one calendar year, then it is lower for the next 2-3 years Investment accelerates initially in response to the higher export growth but moderates as growth slows down. 5/23/2017 10 Macroeconomics of real depreciation • • Idea is to lower total consumption… – And increase saving & investment. – Lowers trade deficit and CAD (as imports fall) – Higher I = more sustainable growth in traded goods production – Higher I = more productivity growth – Higher I also means less demand on non-traded goods & lower overall inflation – Higher I generates RER depreciation. How to lower consumption? – Increase saving by firms, households and/or government… resulting in lower debt levels, higher fiscal surpluses. – Someone has to consume less to achieve higher S. 5/23/2017 11 Why inflation matters… RER = NER (Pf/Pd) Domestic prices… Increase relative to Pf is home country appreciation Decrease relative to Pf is home country depreciation Foreign prices… Increase relative to Pd is home country depreciation Decrease relative to Pd is home country appreciation Argument for depreciation and higher inflation… 1. 2. Relative prices argument… some prices go up (imported goods) and some will go up less rapidly (domestic goods). Inflation supports depreciation argument… higher inflation increases growth and generates more depreciation. 5/23/2017 But neither argument works… 1. 2. 3. 4. See the equation… rise in Pd = appreciation And, rise in Pf generates import parity pricing & wage demands Higher inflation means need another larger depreciation to re-lower domestic price level relative to foreign. Higher interest rates have larger negative effect on the economy than depreciation has positive on tradeables. 12 The role of productivity Productivity growth means more is created with less inputs at a constant price and constant profit… But can hold profit constant And we can lower prices. RER = NER (Pf/Pd) Higher productivity growth enables lower price inflation and results in real depreciation Why is China’s real exchange rate so low? 1. Consumption low relative to income growth = high IS 2. Surplus labour that is mobile = low labour costs & high productivity 3. Inflation target prevents erosion of Pf/Pd 4. NER recently pegged to the US dollar 5/23/2017 13 The managed float • IT suggests floating… enables greater flexibility for the CB to sustain economic growth, with less volatility of growth. • Floating allows the exchange rate to adjust to external shocks… – Food and oil price shock… pegged or fixed rate = more volatile interest rate and more volatile GDP. – Global financial crisis… 70% of the economy less volatile, while 30% more volatile as exchange rate ‘cushions’ non-tradeables. • Escape/explanation clause provides CB flexibility to address external and/or supply shocks to inflation, again without major changes to interest rates. • Forward book ‘closed’ to reverse net negative fx position and build reserves in 2001… – Net deficit of –US$25 billion reversed to +US$39 billion in 2009. – Purchase of reserves leaned against appreciating R/$. 5/23/2017 Rand volatility Interest rate volatility GDP Employment 1980s 0.042 0.63 1.5 1.2 1990s 0.021 0.43 1.4 -1.6 2000s 0.042 0.34 3.2 6.7 14 Risks of depreciation • Once-off gains to competitiveness not followed up by sustained investment and productivity gains • Higher export prices exacerbates dutch disease effects and no export diversification • Higher inflation in wake of depreciation follows Latin and Southern European approaches… – 5/23/2017 runaway inflation necessitates further depreciations & greater use of fiscal expansion to increase GDP growth. • To create a real depreciation of 10, the nominal exchange rate needs to depreciate by 10 per cent, then by higher rates after that. • Inflation explodes from this continuous depreciation, almost doubles from the baseline. • While exports benefit, consumption and investment decline. 15 Achieving real depreciation Macroeconomic policy Microeconomic policy • Increase S and I • Incentivise productivity growth with IP • More counter-cyclical fiscal policy • • More active fx accumulation • More consistent achievement of lower inflation Lower costs & raise productivity of inputs (labour, transport, other networks) to raise efficiency and capacity utilisation • Strengthen competition with CP and by reducing licensing & other barriers to entry to network and other sectors • More active communication on the exchange rate 5/23/2017 16