Transcript Long term trends in nominal exchange rates

The exchange rate and its implications
National Treasury
April 2010
4/8/2016
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
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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
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3
Long term trends in nominal exchange rates
R/$
200
R/Pound
150
R/Euro
100
50
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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
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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.
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LR, X and production rises as REER depreciates.
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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.
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RER
=
NER
Pf
Pd
50
=
100
2
4
55
=
110
2
4
40
=
100
2
5
100
=
100
4
4
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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
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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
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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.
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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.
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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.
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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.
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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
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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$39 billion in 2009.
–
Purchase of reserves leaned against appreciating R/$.
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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
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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…
–
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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.
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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
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