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Do the Exchange Rates Converge Among Fragile Market Economies? New Evidence from LM and RALS-LM Unit Root Tests

Year 2024, Volume: 8 Issue: 1, 56 - 74, 28.01.2024
https://doi.org/10.25295/fsecon.1347256

Abstract

Global financial integration causes the economic consequences of economic crises, wars, or pandemics to be felt more in developing countries and triggers high exchange rate volatilities in these economies. In such an integrated financial environment, it is an interesting research domain how and why the exchange rate volatilities of countries are not affected similarly but tend to diverge from each other. This study investigates whether the exchange rate volatilities of fragile market economies converge in the stochastic convergence framework. To answer this question, we analyzed the stochastic behavior of the series using the traditional and structural break unit root tests besides RALS unit root tests, which consider the information of non-normal errors. The discussions regarding the size and power properties of test procedures in the unit root testing literature have formed a crucial part of the implications of the test results. In light of these discussions, we conclude that the stochastic convergence assumption is valid for Brazil, South Africa, India, and Hungary, whereas it is not valid for Argentina, Mexico, and Türkiye. The policy implications of our findings are that fragile market economies have different fragility levels among themselves and countries with high fragility levels show higher volatility than others.

References

  • Akyüz, Y. (2011). Capital Flows to Developing Countries in a Historical Perspective: Will the Current Boom End with a Bust?. Research Paper, 37, Geneva.
  • Akyüz, Y. (2018). External Balance Sheets of Emerging Economies: Low-Yielding Assets, High-Yielding Liabilities. PERI-Working Paper Series, 476. University of Massachusetts Amherst.
  • Andrade, R. P. & Prates, D. M. (2013). Exchange Rate Dynamics in a Peripheral Monetary Economy. Journal of Post Keynesian Economics, 35(3), 399-416.
  • Bernard, A. B. & Durlauf, S. N. (1996). Interpreting Tests of the Convergence Hypothesis. Journal of Econometrics, 71, 161-173.
  • Bonizzi, B. (2013a). Financialization in Developing and Emerging Countries: A Survey. International Journal of Political Economy, 42(4), 83-107.
  • Bonizzi, B. (2013b). Capital Flows to Emerging Markets: An Alternative Theoretical Framework. SOAS Department of Economics Working Paper Series, 186. The School of Oriental and African Studies.
  • Bonizzi, B. (2015). Capital Market Inflation in Emerging Markets: The Cases of Brazil and South Korea. PSL Quarterly Review, 68(273), 115-150.
  • Bryson, J., McKenna, B. & Mathews, H. (2021). Do Developing Economies Have an External Debt Problem? Part I: Which Economies Are Most Vulnerable?. Wells Fargo–Economics, 1-8.
  • Christiano, L. J. (1992). Searching for a Break in GNP. Journal of Business and Economic Statistics, 10(3), 237-250.
  • Drumond, C. E. & De Jesus, C. S. (2016). Monetary and Fiscal Policy Interactions in A Post Keynesian Open-Economy Model. Journal of Post Keynesian Economics, 39(2), 172-186.
  • Durlauf, S. N. & Johnson, P. A. (1995). Multiple Regimes and Cross-Country Growth Behaviour. Journal of Applied Econometrics, 10(4), 365-384.
  • Gourinchas, P. O. & Jeanne, O. (2007). Capital Flows to Developing Countries: The Allocation Puzzle. NBER Working Paper Series, 13602. National Bureau of Economic Research.
  • Harvey, J. T. (2007). Teaching Post Keynesian Exchange Rate Theory. Journal of Post Keynesian Economics, 30(2), 147-168.
  • Im, K. S. & Schmidt, P. (2008). More Efficient Estimation under Non-Normality when Higher Moments Do Not Depend on the Regressors, Using Residual-Augmented Least Squares. Journal of Econometrics, 144(1), 219-233.
  • Im, K. Lee, J. & Tieslau, M. A. (2014). More Powerful Unit Root Tests with Non-Normal Errors. R. C. Sickles & W. C. Horrace (Ed.), Festschrift in Honor of Peter Schmidt Econometric Methods and Applications. New York: Springer.
  • Kaltenbrunner, A. (2011). Currency Internationalisation and Exchange Rate Dynamics in Emerging Markets: A Post Keynesian Analysis of Brazil. PhD Thesis, London: SOAS. University of London.
  • Kaltenbrunner, A. (2015). A Post Keynesian Framework of Exchange Rate Determination: A Minskyan Approach. Journal of Post Keynesian Economics, 38(3), 426-448.
  • Kohler, K. (2019). Exchange Rate Dynamics, Balance Sheet Effects, and Capital Flows. A Minskyan Model of Emerging Market Boom-Bust Cycles. Post Keynesian Economics Society Working Paper, 1906.
  • Kohler, K. & Stockhammer, E. (2022). Flexible Exchange Rates in Emerging Markets: Shock Absorbers or Drivers of Endogenous Cycles?. Industrial and Corporate Change, 1-22.
  • Kuepper, J. & Clemon, D. (2021) What are the Fragile Five?. https://www.thebalance.com/what-are-the-fragile-five-1978880#citation-8 (10.03.2022)
  • Lee, J. & Strazicizh, M. C. (2003). Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks. The Review of Economics and Statistics, 85(4), 1082-1089.
  • Lee, J., Strazicich, M. C. & Meng, M. (2012). Two-Step LM Unit Root Tests with Trend-Breaks. Journal of Statistical and Econometric Methods, 1(2), 81-107.
  • Lumsdaine, R. L. & Papell, D. H. (1997). Multiple Trend Breaks and the Unit Root Hypothesis. The Review of Economics and Statistics, 79(2), 212-218.
  • Mehrling, P. (2013). The Inherent Hierarchy of Money. L. Taylor, A. Rezai & T. Michl (Ed.), Social Fairness and Economics: Economic Essays in the Spirit of Duncan Foley. New York: Routledge.
  • Mehrling, P. (2017). Financialization and Its Discontents. Finance and Society, 3(1), 1-10. Meng, M., Payne J. E. & Lee, J. (2013). Convergence in Per Capita Energy Use Among OECD Countries. Energy Economics, 36, 536-545.
  • Meng M., Im, K.S., Lee, J. & Tieslau, M. A. (2014). More Powerful LM Unit Root Tests with Non-normal Errors. R. C. Sickles & W. C. Horrace (Ed.), Festschrift in Honor of Peter Schmidt Econometric Methods and Applications. New York: Springer.
  • Meng M., Lee, J. & Payne, J. E. (2016). RALS-LM Unit Root Test with Trend Breaks and Non-Normal Errors: Application to The Prebisch-Singer Hypothesis. Studies in Nonlinear Dynamics & Econometrics, 21(1), 31-45.
  • Oreiro, J. L. (2005). Capital Mobility, Real Exchange Rate Appreciation, and Asset Price Bubbles in Emerging Economies: A Post Keynesian Macroeconomic Model for A Small Open Economy. Journal of Post Keynesian Economics, 28(2), 317-344.
  • Perron, P. (1989). The Great Crash, The Oil Price Shock, and the Unit Root Hypothesis. Econometrica, 57(6), 1361-1401.
  • Perron, P. & Vogelsang, T. J. (1992). Non-Stationarity and Level Shifts with an Application to Purchasing Power Parity. Journal of Business and Economic Statistics, 10(3), 301-320.
  • Prasad, E. S., Rajan, R. G. & Subramanian, A. (2007). Foreign Capital and Economic Growth. Brookings Papers on Economic Activity, 2007(1), 153-209.
  • Stiglitz, J. E. (2000). Capital Market Liberalization, Economic Growth, and Instability. World Development, 28(6), 1075-1086.
  • Terzi, A. (2006). International Financial Instability in a World of Currencies Hierarchy. L. P. Rochon & S. Rossi (Ed.), Monetary and Exchange Rate Systems. UK: Edward Elgar Publishing.
  • Toporowski, J. (1999). Monetary Policy in an Era of Capital Market Inflation. Levy Economics Institute Working Paper, 279.
  • Toporowski, J. (2002). The End of Finance: Capital Market Inflation, Financial Derivatives and Pension Fund Capitalism. London: Routledge.
  • Valdés, B. (2003). An Application of Convergence Theory to Japan's Post-WWII Economic "Miracle". The Journal of Economic Education, 34(1), 61-81.
  • Zivot, E. & Andrews, K. (1992). Further Evidence on the Great Crash, The Oil Price Shock and the Unit Root Hypothesis. Journey of Business and Economic Statistics, 10(3), 251-270.

Kırılgan Piyasa Ekonomileri Arasında Döviz Kurları Yakınsıyor mu? LM ve RALS-LM Birim Kök Testlerinden Yeni Kanıtlar

Year 2024, Volume: 8 Issue: 1, 56 - 74, 28.01.2024
https://doi.org/10.25295/fsecon.1347256

Abstract

Küresel finansal entegrasyon, ekonomik krizlerin, savaşların veya salgın hastalıkların iktisadi etkilerinin gelişmekte olan ülkelerde daha fazla hissedilmesine neden olmakta ve bu ekonomilerde yüksek kur oynaklıklarını tetiklemektedir. Böyle bir finansal ortamda, ülkelerin döviz kuru oynaklıklarının benzer şekilde etkilenmeyip birbirlerinden farklı ayrışma eğilimi sergilemeleri dikkat çeken araştırma konusunu oluşturmaktadır. Bu çalışma, kırılgan piyasa ekonomilerinin döviz kuru oynaklıklarının stokastik yakınsama yaklaşımıyla yakınsayıp yakınsamadıklarını araştırmaktadır. Bu soruyu cevaplamak için, geleneksel ve yapısal kırılmalı birim kök testlerinin yanı sıra kalıntılardaki normal dağılmama bilgisini dikkate alan RALS birim kök testleri kullanılarak serilerin stokastik davranışları analiz edilmiştir. Birim kök testi literatüründeki test prosedürlerinin boyut ve güç özelliklerine ilişkin tartışmalar, test sonuçlarının çıkarımlarının önemli bir bölümünü oluşturmuştur. Bu tartışmaların ışığında, stokastik yakınsama varsayımının Brezilya, Güney Afrika, Hindistan ve Macaristan için geçerli olduğu, Arjantin, Meksika ve Türkiye için geçerli olmadığı sonucuna varılmıştır. Elde edilen bulgulara yönelik politika çıkarımları ise, kırılgan piyasa ekonomilerinin kendi aralarında farklı kırılganlık seviyelerine sahip olduğu ve yüksek kırılganlık düzeyindeki ülkelerin diğerlerine göre daha yüksek oynaklık gösterdiği şeklindedir.

References

  • Akyüz, Y. (2011). Capital Flows to Developing Countries in a Historical Perspective: Will the Current Boom End with a Bust?. Research Paper, 37, Geneva.
  • Akyüz, Y. (2018). External Balance Sheets of Emerging Economies: Low-Yielding Assets, High-Yielding Liabilities. PERI-Working Paper Series, 476. University of Massachusetts Amherst.
  • Andrade, R. P. & Prates, D. M. (2013). Exchange Rate Dynamics in a Peripheral Monetary Economy. Journal of Post Keynesian Economics, 35(3), 399-416.
  • Bernard, A. B. & Durlauf, S. N. (1996). Interpreting Tests of the Convergence Hypothesis. Journal of Econometrics, 71, 161-173.
  • Bonizzi, B. (2013a). Financialization in Developing and Emerging Countries: A Survey. International Journal of Political Economy, 42(4), 83-107.
  • Bonizzi, B. (2013b). Capital Flows to Emerging Markets: An Alternative Theoretical Framework. SOAS Department of Economics Working Paper Series, 186. The School of Oriental and African Studies.
  • Bonizzi, B. (2015). Capital Market Inflation in Emerging Markets: The Cases of Brazil and South Korea. PSL Quarterly Review, 68(273), 115-150.
  • Bryson, J., McKenna, B. & Mathews, H. (2021). Do Developing Economies Have an External Debt Problem? Part I: Which Economies Are Most Vulnerable?. Wells Fargo–Economics, 1-8.
  • Christiano, L. J. (1992). Searching for a Break in GNP. Journal of Business and Economic Statistics, 10(3), 237-250.
  • Drumond, C. E. & De Jesus, C. S. (2016). Monetary and Fiscal Policy Interactions in A Post Keynesian Open-Economy Model. Journal of Post Keynesian Economics, 39(2), 172-186.
  • Durlauf, S. N. & Johnson, P. A. (1995). Multiple Regimes and Cross-Country Growth Behaviour. Journal of Applied Econometrics, 10(4), 365-384.
  • Gourinchas, P. O. & Jeanne, O. (2007). Capital Flows to Developing Countries: The Allocation Puzzle. NBER Working Paper Series, 13602. National Bureau of Economic Research.
  • Harvey, J. T. (2007). Teaching Post Keynesian Exchange Rate Theory. Journal of Post Keynesian Economics, 30(2), 147-168.
  • Im, K. S. & Schmidt, P. (2008). More Efficient Estimation under Non-Normality when Higher Moments Do Not Depend on the Regressors, Using Residual-Augmented Least Squares. Journal of Econometrics, 144(1), 219-233.
  • Im, K. Lee, J. & Tieslau, M. A. (2014). More Powerful Unit Root Tests with Non-Normal Errors. R. C. Sickles & W. C. Horrace (Ed.), Festschrift in Honor of Peter Schmidt Econometric Methods and Applications. New York: Springer.
  • Kaltenbrunner, A. (2011). Currency Internationalisation and Exchange Rate Dynamics in Emerging Markets: A Post Keynesian Analysis of Brazil. PhD Thesis, London: SOAS. University of London.
  • Kaltenbrunner, A. (2015). A Post Keynesian Framework of Exchange Rate Determination: A Minskyan Approach. Journal of Post Keynesian Economics, 38(3), 426-448.
  • Kohler, K. (2019). Exchange Rate Dynamics, Balance Sheet Effects, and Capital Flows. A Minskyan Model of Emerging Market Boom-Bust Cycles. Post Keynesian Economics Society Working Paper, 1906.
  • Kohler, K. & Stockhammer, E. (2022). Flexible Exchange Rates in Emerging Markets: Shock Absorbers or Drivers of Endogenous Cycles?. Industrial and Corporate Change, 1-22.
  • Kuepper, J. & Clemon, D. (2021) What are the Fragile Five?. https://www.thebalance.com/what-are-the-fragile-five-1978880#citation-8 (10.03.2022)
  • Lee, J. & Strazicizh, M. C. (2003). Minimum Lagrange Multiplier Unit Root Test with Two Structural Breaks. The Review of Economics and Statistics, 85(4), 1082-1089.
  • Lee, J., Strazicich, M. C. & Meng, M. (2012). Two-Step LM Unit Root Tests with Trend-Breaks. Journal of Statistical and Econometric Methods, 1(2), 81-107.
  • Lumsdaine, R. L. & Papell, D. H. (1997). Multiple Trend Breaks and the Unit Root Hypothesis. The Review of Economics and Statistics, 79(2), 212-218.
  • Mehrling, P. (2013). The Inherent Hierarchy of Money. L. Taylor, A. Rezai & T. Michl (Ed.), Social Fairness and Economics: Economic Essays in the Spirit of Duncan Foley. New York: Routledge.
  • Mehrling, P. (2017). Financialization and Its Discontents. Finance and Society, 3(1), 1-10. Meng, M., Payne J. E. & Lee, J. (2013). Convergence in Per Capita Energy Use Among OECD Countries. Energy Economics, 36, 536-545.
  • Meng M., Im, K.S., Lee, J. & Tieslau, M. A. (2014). More Powerful LM Unit Root Tests with Non-normal Errors. R. C. Sickles & W. C. Horrace (Ed.), Festschrift in Honor of Peter Schmidt Econometric Methods and Applications. New York: Springer.
  • Meng M., Lee, J. & Payne, J. E. (2016). RALS-LM Unit Root Test with Trend Breaks and Non-Normal Errors: Application to The Prebisch-Singer Hypothesis. Studies in Nonlinear Dynamics & Econometrics, 21(1), 31-45.
  • Oreiro, J. L. (2005). Capital Mobility, Real Exchange Rate Appreciation, and Asset Price Bubbles in Emerging Economies: A Post Keynesian Macroeconomic Model for A Small Open Economy. Journal of Post Keynesian Economics, 28(2), 317-344.
  • Perron, P. (1989). The Great Crash, The Oil Price Shock, and the Unit Root Hypothesis. Econometrica, 57(6), 1361-1401.
  • Perron, P. & Vogelsang, T. J. (1992). Non-Stationarity and Level Shifts with an Application to Purchasing Power Parity. Journal of Business and Economic Statistics, 10(3), 301-320.
  • Prasad, E. S., Rajan, R. G. & Subramanian, A. (2007). Foreign Capital and Economic Growth. Brookings Papers on Economic Activity, 2007(1), 153-209.
  • Stiglitz, J. E. (2000). Capital Market Liberalization, Economic Growth, and Instability. World Development, 28(6), 1075-1086.
  • Terzi, A. (2006). International Financial Instability in a World of Currencies Hierarchy. L. P. Rochon & S. Rossi (Ed.), Monetary and Exchange Rate Systems. UK: Edward Elgar Publishing.
  • Toporowski, J. (1999). Monetary Policy in an Era of Capital Market Inflation. Levy Economics Institute Working Paper, 279.
  • Toporowski, J. (2002). The End of Finance: Capital Market Inflation, Financial Derivatives and Pension Fund Capitalism. London: Routledge.
  • Valdés, B. (2003). An Application of Convergence Theory to Japan's Post-WWII Economic "Miracle". The Journal of Economic Education, 34(1), 61-81.
  • Zivot, E. & Andrews, K. (1992). Further Evidence on the Great Crash, The Oil Price Shock and the Unit Root Hypothesis. Journey of Business and Economic Statistics, 10(3), 251-270.
There are 37 citations in total.

Details

Primary Language English
Subjects Time-Series Analysis, Monetary Policy, International Finance
Journal Section Articles
Authors

Baki Demirel 0000-0001-6704-0523

Selin Karatepe 0000-0002-1803-4925

Seyhat Bayrak Gezdim 0000-0002-6895-3313

Publication Date January 28, 2024
Published in Issue Year 2024 Volume: 8 Issue: 1

Cite

APA Demirel, B., Karatepe, S., & Bayrak Gezdim, S. (2024). Do the Exchange Rates Converge Among Fragile Market Economies? New Evidence from LM and RALS-LM Unit Root Tests. Fiscaoeconomia, 8(1), 56-74. https://doi.org/10.25295/fsecon.1347256

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