Literature review
Mongolian economy experienced relatively high inflation rate during the last two decades.
For the central bank it is crucial to find the important factor of the inflation. Among the researches by economists pointed out the relationship between inflation and exchange rate as a important factor of the inflation.
And economists more interested in the impact of exchange rate on inflation.
Many economists explain that due to the fall in import price during the Asian crises in industrialized countries leaded the deflation in the late 1990s. Especially in 1990s deflation in US and US is resulted from decline of exchange rate depreciation and import deflation.
And some analysts have pointed out that the greater openness of the country increases the exchange rate impact on inflation.
As Goldberg and Knetter [1997] suggested analysts started to focus on pass-through of an exchange fluctuations on domestic prices.
Since then, number of researchers studied exchange rate pass through on inflation in specific industry or macroeconomic pass through of specific country or group of countries depend on their general characteristics such as Woo 1984], Feinberg [1986; 1989], and Parsley and Popper [1998].
More narrowly, Campa and Goldberg [2005] estimated exchange rate pass through in more broader context in case of OECD countries. Choudhri, Faruqee, and Hakura [2005] found in their paper exchange rate pass through to import, consumer prices and producer for non-US G7 countries. However, paper didn’t extensively concentrate on monetary and real sector.
In this paper, I employ VAR model which allows to measure pass-through from exchange rate fluctuations to inflation in an integrated way.
Influences on pass through
In acc...
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... Import share of consumption and inputs in production leads the higher pass through. Hence, countries or industries with high degree of openness tend to have greater exchange rate pass through.
4. Import structure: Pass through varies among the importing industries. Energy and raw material industries tend to have more pass through than manufactured products. (Jeevan Kumar (2007))
5. International trade barriers (tariffs and quantitative restrictions): The barriers allow the arbitrage opportunities for international trade and affect pass through to be low
6. Opportunity cost: More specifically, menu cost affects the pass through.
7. Asymmetry effect: Pass through differs depending on exchange rate appreciation or depreciation.
8. Miscellaneous factors such as income transportation costs. The higher the income and transportation cost the lower the pass through.
Just like a public company [that issues too much stock] can be punished by the public markets for diluting its share structure, a nation’s currency can suffer the same effects through inflation if the government prints too much money relative to the value of the economy. This can be co...
Economic indicators often affect and influence the value of a country's currency. The Trade Deficit, the Gross National Product (GNP), Industrial Production, the Unemployment Rate, and Business Inventories are examples of economic indicators. We will be dealing with four specific indicators: interest rate, inflation, unemployment, and employment growth, as well as Real Gross Domestic Product (GDP). Real GDP is so called because the effects of inflation and depreciation are accounted for in the figures. The state of the economy is important both on a micro and macroeconomic level.
exchange rates, etc). Aside from this quibble, the heart of the matter is to what degree
(O’Sullivan) Inflation causes each unit of currency to become weaker. In turn, this causes interest rates to rise as compared to the period before inflation. (O’Sullivan) Inflation rate is an annualized percentage change of the general price index over time, and is also the main measure of price inflation. (O’Sullivan) At the start of 2014, the inflation rate for the United States was recorded at 1.6%, but that figure has risen to 2.0% as of July 2014. (US Inflation Calc.) Over the last five years, the inflation rate of the United States has averaged right around 2%. (US Inflation Calc.) Both positive and negative fluctuations in this rate are due to increases or decreases in consumer spending, but the rate has still remained relatively stable. One factor in the stable inflation in the United States can be attributed to the lack of unnecessary growth in the supply of money by the Federal Reserve. Another factor can be attributed to fluctuations in demand for goods and services, and changes in available
... tax tariff. Based on the assumption that the company is exporting the finished goods to major developed countries such as the U.S. and the E.U. the transportation costs is high.
...mploys the VAR approach method of Lee (1992) to analyze the relation and dynamic interaction among variables. The IRF and the FEVD from the VAR model are computed in order to investigate interrelationships between money supply shocks and inflation the system.
Daniel M. Chin., Preston J. Miller. (1998). Fixed vs. floating exchange rate: A dynamic general equilibrium analysis. European Economic Review 42 (1998),
In order for international trade to work well, governments must allow the world market to determine how goods are sold, manufactured and traded for all to economically prosper. While all nations may have the capability to produce any goods or services needed by their population, it is not possible for all nations to have a comparative advantage for producing a good due to natural resources of the country or other available resources needed to produce a good or service. The example of trading among states comprising the United States is an example of how free trade works best without the interve...
Economists have long taken the view that economic fundamentals determine exchange rates. Nevertheless, in the early 1970s, after the collapse of fixed exchange rate regimes of the Bretton Woods system, excess volatility, nonlinear and disorderly movements in exchange rates became mysteries that traditional exchange rate theory cannot explain. Recent scholar concluded “no definitive evidence that economic variable can forecast exchange rate for currencies of nations with similar inflation rates" which is known as “the disconnect puzzle” from Meese and Rogoff’s studies (1983). Thus, this essay aims to explain why is it apparently so difficult to forecast exchange rate movements, and to provide evidence from the relevant literature and the reference of three popular fundamentals-based models, including Monetary Model and Mundell-Fleming Model.
There are many factors that affect the economy, inflation is one of them. Basically inflation is risingin priceof general goods and services above a period.As we see value of money is not valuable for the next years due to inflation. Today every country has facing inflationary condition in their economy.GDP deflator is a basictool that tells the price level of final goods and services domestically produced in an economy.GDP is stand for gross domestic product final value of goods and services, Furthermore GDP deflator shows that how much a change in the base year's GDP relies upon changes in the price level. . Inflation in contrast, how speedy the average prices intensity is increases or changes above the period so the inflation rate define the annual percentage rate changes in the level of price is as measure by GDP deflator more over GDP deflator has a advantage on consumer price index because it isn’t only based on a fixed basket of goods and services. It’s a most effective inflation tool to identify the changes in consumer consumption and newly produced goods and service are reflected by this deflator. Consumer price index (CPI) is also measure the adjusting the economic data it can also be eliminate the effects of inflation, through dividing a nominal quantity by price index to state the real quantity in term.
Interest Rates: When inflation is high, the value of money goes down leading to the reduction in purchasing power. Increase in inflation also causes rates to increase, so the cost of the good changes and people will have to use more money for the same services and goods.
The “Four Way Equivalence Model” is a relationship between interest rates and inflation rates keeping in view the foreign exchange rates and also the changes that are expected to take place in spot rates. It gives the idea that how these things are interconnected and how increase in one factor would affect the other one and vice versa.
There is one thing that differentiates the international business with the domestic business where it uses more than one currency in the commercial transaction. For example, if a company from British purchases some goods from a company from US, the international transaction will require for exchanging pounds and U.S. dollars which involve the foreign exchange market. In the foreign exchange market, any country that wish to do business with foreign country, the country need to convert their domestic currency into the foreign currency that they are wish to cooperate with through foreign exchange.
The first of these exchange rates, nominal, is the number of units of a given currency that can purchase a unit of a given foreign currency (INSERT CITATION). When using this rate, countries are able to value of their own currency relative to one-another when trading in the foreign exchange market. This principle, however, is not exclusive to trading currencies. Similar to the nominal exchange rate, the real exchange rate uses goods and services in place of currency. As a result, it is defined as the amount of goods or services that can be traded in one country for a good or service in another country. Using this rate, countries are able to gauge the competitiveness of their goods and services in trading with any given country, making it a key factor for countries trading in the global economy.
Daily in the USA about 38 million banknotes of various face value for total amount about 541 million dollars are issued (Facts about USA money).Dollars involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off of competitors of the USA in foreign markets. At the same time import to the USA owing to effect of a rise in prices restrains. Thus, for the USA changes in the exchange rate of dollar anyway bring benefits and advantages.Reduction of leading positions of the USA in world economy is assisted by the international role of dollar which remains the main reserve and settlement means in world monetary system. Foreign currency reserves of the central banks of other countries for 61% consist of dollars, nearly 2/3 calculations in world trade are carried out in dollars; the dollar serves as a measure of value of many important goods (for example: oil) in the world market; in dollars 3/4 international bank crediting is made (Aleksandr Popov). Changes in the exchange rate of dollar involve deep consequences both for the USA, and for other countries. Increase of its course relatively reduces the volume of export revenue in dollars, quite often involves more considerable, than change of an exchange rate, falling of the world prices, especially on raw materials. On the contrary, decrease in a dollar rate serves as the powerful tool promoting growth of the American export and a pushing off...