Research
The role of economic development for the effect of oil market shocks on oil-exporting countries. Evidence from the interacted panel VAR model
Marek A. Dąbrowski, Monika Papież, Michał Rubaszek, Sławomir Śmiech, 2022. The role of economic development for the effect of oil market shocks on oil-exporting countries. Evidence from the interacted panel VAR model. Energy Economics, 110 (106017), https://doi.org/10.1016/j.eneco.2022.106017
This paper examines whether the effects of oil market shocks on economic activity and exchange rates in oil-exporting countries depend on the stage of economic development or the scale of oil exports. Within the framework of block-exogenous Interacted Panel Vector Autoregression (IPVAR), we show that both oil price and oil price uncertainty shocks affect the economies of oil-exporting countries. The responses of domestic variables to oil market shocks are heterogeneous across countries and the scale of these responses depend on the level of economic development. In general, the reaction of emerging market economies is more prominent than that of advanced economies. The combined contribution of oil market shocks to exchange rate volatility is inversely associated with the stage of economic development, but no such relation is observed for industrial production. The results obtained are robust to conditioning the responses on the scale of oil exports, restricting the sample to the non-covid pandemic period, and using the alternative measure for oil price uncertainty.
Appendix A. Full results from sensitivity analyses
A novel approach to the estimation of an actively managed component of foreign exchange reserves
Marek A. Dąbrowski, 2021. A novel approach to the estimation of an actively managed component of foreign exchange reserves. Economic Modelling, 96, 63-95, https://doi.org/10.1016/j.econmod.2020.12.019
This paper offers a novel approach to the estimation of an active component of reserves making use of a time-varying coefficient model estimated with Bayesian techniques. The approach substantially extends the time and country coverage of estimates beyond that available under the existing approach. We find that the estimates of an active component for 20 countries over 1995-2017 period are highly correlated with those obtained from the existing approach. The new estimates are cross-checked against the available data on FX market interventions in Argentina, Chile, the Czech Republic, Mexico, Russia and Turkey. We demonstrate that these estimates are a better proxy of FX interventions than simple changes in reserves and are at least as good as the estimates from the existing approach. Our novel approach contributes to a better understanding of changes in FX reserves in many countries, including large reserve holders for which the relevant data are hardly available.
Sources of real exchange rate variability in Central and Eastern European countries: Evidence from structural Bayesian MSH-VAR models.
Marek A. Dąbrowski, Łukasz Kwiatkowski, Justyna Wróblewska, 2020. Central European Journal of Economic Modelling and Econometrics, 12 (4),
369-412
This paper investigates the relative importance of cost, demand, financial and monetary shocks in driving real exchange rates in four CEE countries over 2000-2018. A two-country New Keynesian open economy model is used as a theoretical framework. In the empirical part, a Bayesian SVAR model with Markov switching heteroscedasticity is employed. The structural shocks are identified on the basis of volatility changes and named with reference to the sign restrictions derived from the economic model. Main findings are fourfold. First, real and financial shocks have similar contributions to real exchange variability, whereas that of monetary shocks is small. Second, financial shocks amplify exchange rate fluctuations stemming from real shocks. Third, even though the exchange rate gaps change over time, they remain quite similar across CEE countries except for Slovakia. Fourth, Slovakia introduced the euro at the time of a relatively large real overvaluation, which subsided after a lengthy adjustment process.
Classifying de facto exchange rate regimes of financially open and closed economies: A statistical approach
Marek A. Dąbrowski, Monika Papież, Sławomir Śmiech, 2020. Journal of International Trade & Economic Development, 29 (7), 821-849, https://doi.org/10.1080/09638199.2020.1748692
This paper offers a new de facto exchange rate regime classification that draws on the strengths of three popular classifications. Its two hallmarks are the careful treatment of a nexus between an exchange rate regime and financial openness and the use of formal statistical tools (the trimmed k-means and k-nearest neighbour methods). It is demonstrated that our strategy minimises the impact of differences between market-determined and official exchange rates on the ‘fix’ and ‘float’ categories. Moreover, it is more suited to assess empirical relevance of the Mundellian trilemma and ‘irreconcilable duo’ hypotheses. Using comparative analysis we find that the degree of agreement between classifications is moderate: the null of no association is strongly rejected, but its strength ranges from low to moderate. Moreover, it is shown that our classification is the most strongly associated with each of the other classifications and as such can be considered (closest to) a centre of a space of alternative classifications. Finally, we demonstrate that unlike other classifications, ours lends more support to the Mundellian trilemma than to the ‘irreconcilable duo’ hypothesis. Overall, our classification cannot be considered a variant of any other de facto classification. It is a genuinely new classification.
Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries
Marek A. Dąbrowski, Justyna Wróblewska, 2020. International Economics, 162, 34-49, https://doi.org/10.1016/j.inteco.2020.03.002
We examine the insulating property of flexible exchange rates in CEE economies considering that they have adopted different regimes. We estimate a set of Bayesian structural VAR models with common serial correlations using data spanning 1998q1-2015q4. We derive the long-term identifying restrictions from a macroeconomic model. We find that irrespective of the exchange rate regime, real shocks primarily drive output. However, its reactions to these shocks are substantially stronger under less flexible regimes, whereas the responses to nominal shocks are similar. Hence, the insulating property of flexible regimes can reduce the costs from economic shocks.
Monetary independence of Central and Eastern European economies with flexible exchange rate regimes
Marek A. Dąbrowski, Monika Papież, Sławomir Śmiech, 2019. Eastern European Economics, 57 (4), 295-316, https://doi.org/10.1080/00128775.2019.1610897
According to the macroeconomic trilemma, the floating exchange rate regime provides room for monetary independence. The paper examines whether this is the case in CEE economies. The ARDL bounds tests are used. A level relationship between domestic and euro interest rates is found in all CEE countries, although evidence for Hungary is weak. It is demonstrated that the crude monetary independence indices do not capture the relevant relationship adequately. It is concluded that the Czech Republic and Poland will be able to retain monetary independence when the ECB embarks on the tightening its monetary policy, but not Hungary or Romania.
Recent working papers
Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications
Marek A. Dąbrowski, Dimas Mukhlas Widiantoro, 2022. MPRA Paper No. 112963, https://mpra.ub.uni-muenchen.de/112963/
The paper examines the effectiveness of macroprudential policy in Indonesia and policy reactions to economic developments. Using the structural vector autoregression and data on the regulatory LTV ratio, we investigate the policy effectiveness in controlling credit growth and real property prices along with the effects on economic activity. We find that the LTV-based policy in Indonesia is effective in taming credit growth in the medium run. It, however, is not the case with real property prices whose response to policy changes is counterintuitive and resembles the price puzzle found in the studies on monetary policy. Moreover, our results lend moderate support to the effect of LTV policy on economic activity, especially in the non-Covid-19 sample. We also show that the LTV policy in Indonesia is conducted in an active and circumspective way. In a series of robustness checks, we demonstrate that the results hold when the ordering of variables is changed, alternative proxies for macroprudential policy, output gap, and financial conditions are employed, or the sample is limited to the non-Covid-19 period.
Does the interest parity puzzle hold for Central and Eastern European economies?
Marek A. Dąbrowski, Jakub Janus, 2021. MPRA Paper No. 107558, https://mpra.ub.uni-muenchen.de/107558/
This paper examines the uncovered interest parity (or forward premium) puzzle in four Central and Eastern European countries — Czechia, Hungary, Poland, and Romania — as well as their aggregates from 1999 to 2019. Because the interest parity is a foundation of open-macroeconomy analyses, with important implications for policymaking, especially central banking, more systematic evidence on interest parities in the CEE economies is needed. In this study, we not only address this need but also add to a broader discussion on the UIP puzzle after the global financial crisis. The UIP is verified vis-à-vis three major currencies: the euro, the U.S. dollar, and the Swiss franc. We start by providing a full set of baseline forward premium regressions for which we examine possible structural breaks and perform a decomposition of deviations from the UIP. Next, we explore augmented UIP models and introduce various factors which potentially account for the UIP puzzle, such as the realized volatility of the exchange rate, a volatility model of the excess returns, and international risk and business cycle measures. The study shows that the choice of the reference currency matters for the outcome of the interest parity tests in the CEE economies. The puzzle prevails for the EUR and the CHF but not for the USD, a regularity that has not been documented in previous studies. Second, we find that structural breaks in the time series used to test the UIP are not an essential reason for the general failure of the parity in the region. Third, we demonstrate that even though the risk-based measures largely improve the baseline testing regression, both from statistical and economic points of view, they do not alter the overall outcomes of our empirical models. Additionally, we show that the exchange rate peg of the Czech koruna to the euro from 2013 to 2017 had a significant impact on the UIP. A detailed case study on Poland, using granular survey data, indicates that the directly measured exchange rate expectations do not seem to be informed by the UIP relationship. Employing data on option-implied risk reversals, we reveal that the limited resilience of CEE economies to rare disasters may plausibly explain deviations from the UIP.
Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications
Marek A. Dąbrowski, Monika Papież, Sławomir Śmiech, 2021. MPRA Paper No. 107133, https://mpra.ub.uni-muenchen.de/107133/
This paper raises the question of whether the exchange rate regime matters for output volatility. Using the two de facto exchange rate regime classifications, it is demonstrated that the answer to this question is conditional ‘yes’. The key finding is that the exchange rate regime modifies the importance of determinants of output volatility rather than impacts it directly. This point is explained within a macroeconomic model of an open economy and is corroborated with empirical evidence for 48 advanced and emerging market economies. It is found that under the pegged regime the trade openness contributes to a reduction in output volatility, whereas the financial development has an opposite effect. Moreover, bigger economies experience lower output volatility irrespective of the exchange rate regime, albeit the beneficial size effect is stronger under floating regimes. The results do not depend on the classification employed to identify de facto pegs and floats.