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International Journal of Management (IJM)
Volume 11, Issue 5, May 2020, pp. 908-919, Article ID: IJM_11_05_083
Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=11&IType=5
Journal Impact Factor (2020): 10.1471 (Calculated by GISI) www.jifactor.com
ISSN Print: 0976-6502 and ISSN Online: 0976-6510
DOI: 10.34218/IJM.11.5.2020.083
© IAEME Publication Scopus Indexed
THE MODEL OF THE IMPACT OF CHANGES IN
THE NATIONAL CURRENCY ON KEY
MACROECONOMIC INDICATORS IN THE
FACE OF UNCERTAINTY
Maryna Slatvinska
Department of Finance, Odessa National Economic University, Odessa, Ukraine
Yanina Belinska
Department of International Economics, University of the State Fiscal Service of Ukraine,
Irpin, Ukraine
Oksana Vodolazska
Department of Finance, Banking and Insurance, Oles Honchar Dnipro National University,
Dnipro, Ukraine
Halyna Nakonechna
Department of Civil-Legal Disciplines, Lesia Ukrainka Eastern European National University,
Lutsk, Ukraine
Igor Ruzhytskyi
Department of Accounting, Auditing and Taxation, Chernihiv National University of
Technology, Chernihiv, Ukraine
Tetiana Koliada
Department of Finance, University of State Fiscal Service of Ukraine, Irpin, Ukraine
ABSTRACT
The article is devoted to the study of general provisions that form the
methodological basis for the impact of changes in the national currency rate on key
macroeconomic indicators in the face of uncertainty. The authors examined
macroeconomic indicators, the dynamics of the main ones on a global scale, observed
the change in the national currency of Ukraine to the main foreign ones (Dollar,
Euro). They proposed methodological recommendations for using Hansen’s model of
the impact of changes in the national currency exchange rate on the dynamics of real
macroeconomic variables and comparing long-term effectiveness.
The Model of the Impact of Changes in the National Currency on Key Macroeconomic Indicators in
the Face of Uncertainty
http://www.iaeme.com/IJM/index.asp 909 [email protected]
Key words: GDP, GNP, NNP, Macroeconomic Indicators, National Currency,
Uncertainty
Cite this Article: Maryna Slatvinska, Yanina Belinska, Oksana Vodolazska,
Halyna Nakonechna, Igor Ruzhytskyi and Tetiana Koliada, The Model of the Impact
of Changes in the National Currency on Key Macroeconomic Indicators in the Face of
Uncertainty. International Journal of Management, 11 (5), 2020, pp. 908-919.
http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=11&IType=5
1. INTRODUCTION
States seek to reduce the uncertainty of their policies, and if the uncertainty arises from the
outside, smooth out its impact on business activity. The latter is impossible without a clear
understanding of the channels of influence of uncertainty on the economy, and research
continues to identify such channels of influence. Currently, the two main target options in the
world are the exchange rate and inflation. The use of a fixed exchange rate has been and
remains the most popular model, however, the number of countries that use it is gradually
decreasing. Inflation targeting, in turn, is the second most frequent policy option with a clear
nominal anchor, and the popularity of this regime among countries around the world is
growing steadily.
Decisions made by the national bank in the field of exchange rate regulation have an
impact on many key economic parameters. Therefore, an urgent theoretical task is to
understand the direction and mechanisms of the relationship between the exchange rate and
the level of aggregate output of the national economy.
There is still no consensus among economists about how changes in the national currency
affect long-term economic growth. From the traditional view of monetary policy, in the long
run, money is neutral; therefore, monetary policy cannot modify the long-term values of real
variables.
On the other hand, modern studies reveal a series of empirical evidence that refutes the
hypothesis of money neutrality and confirms the effect of inflation of the national currency on
the long-term dynamics of output (Alesina, 1993; Berger, 2000; Bernanke, 2000; Khan, 2001;
Kholod, 2015; Carare, 2002; De Grauwe, 2004; Dubas, 2005; Batini, 2006; Fabayo, 2006;
Fountas, 2010; Antoniuk, 2015; Ibarra, 2016; Thornton, 2016; Muminova, 2020 and others).
And although each of these works individually can be criticized, such a significant body of
research as a whole suggests that the change in the national currency exchange rate
significantly affects key macroeconomic indicators, especially in the face of uncertainty:
under certain conditions, monetary policy contributes to the accumulation of capital, increased
productivity and, ultimately, accelerated economic growth, and the erroneous actions of the
monetary authorities can restrain this growth.
Meanwhile, economic and mathematical models that fully disclose the mechanism of
operation of all channels of the impact of inflation on the long-term dynamics of output are
absent.
2. THEORETICAL ASPECT
The mechanism of the relationship between the real exchange rate and output is quite
complicated. On the one hand, it is generally accepted that an actual weakening of the
currency leads to an increase in the value of imported goods relative to goods produced
domestically, which, in turn, causes import substitution and an increase in domestic output.
On the other hand, several empirical and theoretical works show (Berger,
Maryna Slatvinska, Yanina Belinska, Oksana Vodolazska, Halyna Nakonechna, Igor Ruzhytskyi and
Tetiana Koliada
http://www.iaeme.com/IJM/index.asp 910 [email protected]
2000; Anca, 2011; Eggoh, 2014; Grekou, 2018; Boiko V., 2019; Boubellouta, 2019; Dzwigoł,
2019; Prokopenko, 2019) that both real and nominal devaluations of the national currency can
harm the dynamics of national output. This may occur as a result of the following factors: an
increase in the cost of imported intermediate products; reduction in real consumer income due
to higher import prices; increase the value of liabilities denominated in foreign currency;
increasing uncertainty in the foreign exchange market and the international trade sector.
Besides, exchange rate fluctuations in any direction give rise to costs associated with the
possible need to review contracts denominated in national currency. Thus, in the economies of
different countries, the relationship between the exchange rate and key macroeconomic
indicators, depending on various factors, can be both positive and negative.
2.1. Key Macroeconomic Indicators
Market movement is necessarily associated with the release of new data, so the market
movement is quite realistic to predict if you track a clear relationship between macroeconomic
indicators of the economy and other information.
To correctly and clearly plan a deal in the markets, you need to know and understand the
current state of the global economy, based on the above indicators, as well as any of the
specific macroeconomic indicators that can affect the future course of events.
Values of macroeconomic indicators:
Predicted Value (FRC). The value is based on the opinion of analysts and is also a guideline
for the market, and as the output of real data approaches, it is systematically adjusted.
Actual value (ACT). The official published amount.
Corrected value (PRV). This is the adjusted value of the indicator for the previous period.
Market participants, having the values of the predicted indicators, can already plan the
further movement of the market, and after the release of official data, they immediately
compare the values and take action by analyzing the situation.
Macroeconomic indicators are summary indicators of volumes of consumption,
production, expenses, incomes, the welfare of the population, exports, imports, economic
growth, etc.
Key macroeconomic indicators:
1. Gross National Product (GNP)
2. Net National Product (NNP).
3. Gross Domestic Product (GDP).
4. Unemployment rate
5. Inflation rate.
6. The state budget.
7. The rate of economic growth.
The most "indicative" of them are the first three. The main macroeconomic indicator for
studying the production and consumption of a national product is a gross domestic product.
GDP – the value of all final goods and services produced in a country for a certain period
(usually a year), production factors owned by citizens and foreigners. There are three methods
for calculating GDP:
the Income Method, calculated by the formula:
The Model of the Impact of Changes in the National Currency on Key Macroeconomic Indicators in
the Face of Uncertainty
http://www.iaeme.com/IJM/index.asp 911 [email protected]
(1)
where TNI – Total National Income; T – Sales Taxes; D – Depreciation; F – Net Foreign
Factor Income.
the Expenditure Method, calculated by the formula:
(2)
where C – Household spending on goods and services; I – Capital Investment spending; G
– Government spending; X – Exports of Goods and Services; M – Imports of Goods and
Services.
by Output (Value Added), calculated by the formula:
– (3)
where VOGS – the gross value of output resulting from domestic economic activity; IC –
intermediate consumption.
It is the most direct but also the least efficient method as it measures the output of all
economic sectors.
Nominal GDP – is a gross domestic product, calculated in real (current) prices of a certain
period.
The nominal GDP is greatly influenced by the inflationary process: it rises with rising
prices. To get rid of inflationary effects real GDP (gross domestic product at constant prices)
is calculated, i.e. in base-year prices.
Real GDP can be obtained by dividing the nominal by the price index (deflator). When the
price index is less than one, the upward adjustment of GDP is called inflation. With a price
index of more than one, a downward adjustment is called deflation. The ratio of nominal GDP
to real is called a deflator. It characterizes the change in the general price level and shows
how much GDP has increased solely due to price increases.
(4)
Consider a numeric example: if nominal GDP is 50,000 UAH, and real GDP is 15,000
UAH, then the GDP deflator will be 333 (GDP deflator = 50,000 UAH 15,000 UAH * 100 =
333.33).
Maryna Slatvinska, Yanina Belinska, Oksana Vodolazska, Halyna Nakonechna, Igor Ruzhytskyi and
Tetiana Koliada
http://www.iaeme.com/IJM/index.asp 912 [email protected]
The World Bank annually calculates the rating of World GDP (nominal) per capita (Fig. 1).
Figure 1 World nominal GDP per capita in 2019 (using data [1])
Ukraine and Suriname are the leaders in the change in the rating of World GDP (nominal)
per capita, increasing its rank by seven positions (in 2019) (Fig. 2).
Figure 2 Change in nominal world GDP per capita in 2019 against 2018 (using data [1])
List of countries by a nominal value of the gross domestic product in dollar terms,
calculated using the market exchange rate or established by the authorities. This indicator is
actual and does not take into account the difference in prices for similar goods and services in
different countries. Since prices in developed countries are higher than in developing
The Model of the Impact of Changes in the National Currency on Key Macroeconomic Indicators in
the Face of Uncertainty
http://www.iaeme.com/IJM/index.asp 913 [email protected]
countries, the nominal GDP of developed countries is somewhat overstated, and the nominal
GDP of developing countries is somewhat underestimated. A more objective indicator is GDP
at purchasing power parity (PPP), which takes into account the difference in cost of living in
different countries. PPP GDP more accurately determines the quality of life for citizens within
their countries, without actual (nominal) comparisons based on a single indicator.
Due to the shortcomings indicated above, the IMF in 2020 refused to calculate the
nominal GDP of countries [2].
2.2. The Change in the National Currency against Foreign Currencies (USD,
EUR)
The dynamics of the value of currencies of developed countries in recent years indicates an
increase in volatility (sensitivity) of exchange rates. At the same time, the more critical the
role of the currency in the world economy, the more noticeable fluctuations in its exchange
rate. The most significant change in value is observed among the currencies of leading
developed countries. The study of the Ukrainian hryvnia exchange rate against the main
foreign ones (dollar, euro) shows a tendency to its constant devaluation (Fig. 3). A study of
the Ukrainian hryvnia exchange rate against the main foreign ones (dollar, euro) shows a
tendency to its constant devaluation (Fig. 1), and this happens spasmodically – a paid
decrease, then a sharp drop, again a smooth decrease and back a sharp decline. First of all, this
is due to global and domestic economic crises. So after the COVID 19 pandemic, again, the
hryvnia will face a decline in foreign currencies, but not in such a sharp jump, because
pandemic has more impact on the EU and the USA.
Figure 3 UAH to USD and EUR exchange rate from 2013 to 2019
The forecast shows a further fall in UAH to USD more intensive, to EUR less; this
confirms March 2020 – 0.036 (USD), 0.034 (EUR).
y = 0.0003x2 - 0.0154x + 0.2347
R² = 0.8962
y = 0.0003x2 - 0.0147x + 0.1908
R² = 0.9261
0
0.05
0.1
0.15
0.2
0.25
UAH to dollar UAH to euro
Polynominal (UAH to USD) Polynominal (UAH to EUR)
Maryna Slatvinska, Yanina Belinska, Oksana Vodolazska, Halyna Nakonechna, Igor Ruzhytskyi and
Tetiana Koliada
http://www.iaeme.com/IJM/index.asp 914 [email protected]
Depending on the nature of the action, there are three groups of factors that affect the
exchange rate (Fig. 4).
Figure 4 Groups of factors influencing the exchange rate
The exchange rate affects international economic relations (Table 1). First, it allows
producers in the country to compare the cost of production of goods with world market prices.
Thus, it is one of the benchmarks in the implementation of foreign economic relations, allows
you to predict the financial results of economic activity. Secondly, the level of the exchange
rate directly affects the economic condition of the country, which is manifested in particular
in the state of its balance of payments. Finally, thirdly, the exchange rate affects the
redistribution of world gross domestic product between countries.
Table 1 Dependence of prices on changes in exchange rates
Impact of exchange rate changes on Falling national
currency
Growing national
currency
prices of national goods in the world market reduces increases
trade in national goods in the world market increases export /
reduces import
reduces export /
increases import
prices of national securities and assets decreases increases
the inflow of capital from abroad increases capital
inflows
reduces capital
inflows
the outflow of capital abroad reduces capital
outflows
increases capital
outflows
The impact of exchange rate changes on the value and volume of export-import
operations, capital migration, is quite significant. In the short run, exports and imports are
weak in response to the changing exchange rate. The change in import volumes will depend
on the price elasticity of demand for imports as a whole, on the share of imports of products
FACTORS INFLUENCING THE EXCHANGE RATE
long-term factors of
influence
medium-term
factors of influence
short-term factors of
influence
include indicators of economic growth, the volume
of money in circulation, the solvency of the
country and confidence in the national currency in
domestic and foreign markets, the amount of
domestic and foreign debt, and so on.
the difference in inflation rates in countries, the
state of the balance of payments, the state budget
deficit, etc.
speculative currency transactions, the formation of
inflation expectations, frequent changes of
government, lobbying in the highest echelons of
power of the interests of certain political and
economic structures, the level of development of
other sectors of the financial market, and others.
The Model of the Impact of Changes in the National Currency on Key Macroeconomic Indicators in
the Face of Uncertainty
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in total consumption and on the price elasticity of supply formed by domestic producers. As
for the impact of the exchange rate on exports, the following factors should be identified.
First, the cost and physical volumes of commodities will be affected by the elasticity of
demand on the world market for these products. Secondly, the level of monopoly power that
the national exporter has in the world market, which directly affects the elasticity of supply to
the world market of these products. Third, the share of domestic consumption, i.e. the
dependence of the local market on sales in foreign markets and, finally, the price elasticity of
supply of products for export.
The change in the exchange rate affects the public finance system, primarily the state
budget. Thus, as a result of changes in the exchange rate, the volumes of foreign trade
turnover will change, and, accordingly, the volumes of required payments (taxes and fees)
that fall into the state budget. First of all, this applies to the amount of customs duty, proceeds
from the sale of export and import licenses. Relevant changes will take place in the system of
public expenditures, as the cost of public procurement of imported goods, the cost of
servicing the country's external debt, etc. may change. All this forces the country's central
bank to carry out appropriate interventions in the foreign exchange market, take measures to
regulate the convertible national currency, and so on.
3. METHODOLOGY
The methodology for estimating the relationship between inflation and macroeconomic
indicators is based on the approach used by Hansen (Hansen, 2000) – a general method for
estimating threshold regressions. Threshold regression refers to a model that assumes that
there are two (or more) ways for regressors to act on a dependent variable. The threshold level
is also unknown and is estimated during econometric modeling. The model looks like this:
(5)
where – the explained variable; – the vector of explanatory variables, the effect of
which on the explained variable depends on the mode; – threshold variable responsible for
the current mode; – threshold level; – indicator function equal to unity if the inequality
indicated in brackets is true and equal to zero otherwise; – the vector of control variables,
the effect of which does not depend on the current mode.
For the calculation, we will use the annual data for the period from 1980 to 2018 for 170
countries taken from the International Monetary Fund database (World Economic Outlook
dataset) [3].
The adjusted GDP growth rate will be accounted for as a dependent variable and
calculated on a five-year moving average. The smoothing was carried out to neutralize short-
term cyclical fluctuations in GDP and to analyze the long-term effects of inflation on
indicators. Let’s evaluated the model parameters.
–
(6)
where – the vector of control variables. As control variables, the share of investments in
GDP and the population growth rate were used.
Maryna Slatvinska, Yanina Belinska, Oksana Vodolazska, Halyna Nakonechna, Igor Ruzhytskyi and
Tetiana Koliada
http://www.iaeme.com/IJM/index.asp 916 [email protected]
– random model errors;
– country effects;
– the inflation rate in annual terms, smoothed over a five-year moving average;
– a variable characterizing the excess of the inflation threshold: = 1 for > π*
and = 0 for ≤ π*;
π* – the threshold inflation rate. It is assumed that when inflation exceeds the threshold
level, there is an impact of structural changes due to the impact of inflation on output. The
parameter π* will also be evaluated during simulation.
Thus, the model becomes nonlinear and will be estimated using the nonlinear least squares
method, namely: the values of π * will be sequentially sorted in increments of one percent.
For each value in the model with fixed effects, equation (5) and the corresponding sum of the
residual squares was calculated. The model for which the value of the sum of squares of
deductions was the minimum is considered the best. To take into account the specifics of each
country for each of the objects in the sample and to avoid bias in the estimates of the
coefficients due to ignoring these features in the simulation, the use of a model with fixed
effects is the best option. Fixed effects allow us to take into account those features of
countries that do not change or change very slowly over time: cultural variables, the quality of
institutions, education and quality of knowledge, the initial level of welfare, and so on. The
inclusion of fixed effects eliminates the need to take into account in the vector of control
variables those factors that do not change over time, such as a macroeconomic indicator such
as GDP per capita in the initial period of time.
Using this equation specification, the coefficient characterizes the effect of low (below
the threshold level) inflation on growth, and the coefficient characterizes the effect of high
inflation.
4. RESULTS AND DISCUSSION
The results of estimating the regression equation using a model with fixed effects, models
with random effects, and simple complete regression without taking into account the effects
of the country (pooled Ordinary Least Squares) by the described method are presented in
Table 2. We did not take into account reliable standard errors in parentheses coefficients, as
we show the effect of the model for estimating the flow of inflation on macroeconomic
indicators on one parameter.
The control variables included in the model are statistically significant and have signs
corresponding to economic theory: an increase in population growth rates and the share of
investments in gross domestic product positively affects the rate of economic growth.
The first way to test the stability of the results was to evaluate the same equation using
other methods: simple pooled regression and models with random effects. The evaluation
results are also presented in the table. It is easy to see that the estimates of the coefficients
practically do not change, regardless of the specification used.
The Model of the Impact of Changes in the National Currency on Key Macroeconomic Indicators in
the Face of Uncertainty
http://www.iaeme.com/IJM/index.asp 917 [email protected]
Table 2 The results of evaluating models of the impact of inflation on economic growth (dependent
Variable: Smoother Real GDP Growth)
Regressor Model 1 Model 2 Model 3
Assessment method Fixed
Effects
Random
Effects
Ordinary
Least
Squares
Inflation below threshold 0,04 0,04 0,05
Inflation above threshold – 0,02 – 0,014 – 0,009
Share of investment in GDP 0,13 0,13 0,11
Population growth rate 0,43 0,45 0,48
Constant – 0,01 – 0,01 – 0,005
Country effects Yes Yes No
Inflation threshold 8% 8% 8%
R2 0,37 — 0,18
R2-within 0,11 — —
P-value of the test for the absence of
individual effects 0,00 0,00 —
P-value of the Houseman test — 0,00 —
Number of observations 5228 5228 5228
The results of the test for the absence of special effects in the model indicate the
justification for using models that take into account country effects. And the results of the
Houseman test for comparing models with random and fixed effects speak in favour of the
latter. Therefore, although the inflation rate below the threshold value is significant at five per
cent or ten per cent significance levels in models with random effects and the usual full
regression, it should be concluded that it still does not affect the long-term dynamics of
output, since in the model with fixed effects it remains insignificant.
5. CONCLUSION
A marked increase in economic uncertainty as a result of the effects of the crisis in recent
years has a significant impact on the development of the economy. Different stages of
development of society are accompanied by a different level of economic uncertainty, which
decreases during periods of economic growth and increases sharply during recessions. As the
modern economy develops, there is a need to reexamine the problems of its forecasting and
the impact of various factors on it.
Currently, due to the intensification of globalization processes, there is doubt about the
legality of using data from prior periods in substantiating current decisions and forecasting the
economies of individual countries and regions, and methods that make it possible to build
forecasts of macroeconomic development based on the conditions of the current state begin to
play a significant role. A modern approach to forecasting macroeconomic development,
taking into account uncertainty and risk factors, is to use stochastic models of economic
growth, involving the modelling of random variables. As part of the analysis of the proposed
model of the effects of changes in the national currency exchange rate on the leading
macroeconomic indicators (using the example of GDP), it is shown that an alternative
mechanism for influencing economic growth is its effect on exchange rate fluctuations. The
direct impact of the weakening of the national currency can cause both an increase in output
and its decrease.
Maryna Slatvinska, Yanina Belinska, Oksana Vodolazska, Halyna Nakonechna, Igor Ruzhytskyi and
Tetiana Koliada
http://www.iaeme.com/IJM/index.asp 918 [email protected]
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