Muntazir Hussain1, Irfan Saleem1 and Usman Bashir2
This study aims to investigate the dynamics of the interest rates and exchange rates during the pandemic-induced crisis in the Chinese economy. In the study, rolling window detrended cross-correlation analysis (DCCA) was used. The DCCA coefficient was extracted based on detrended fluctuation analysis (DFA). The data used in the study are the daily data of the period from 2/1/2019 to 7/5/2021. The results obtained in the study suggest the presence of positive cross-correlation between China’s interest rate and exchange rate after the COVID-19 pandemic, and they also report the existence of weak positive cross-correlation during the initial days of the pandemic. However, the weak positive cross-correlation became stronger over time. Higher interest rates are associated with higher exchange rates after the COVID-19 pandemic. The results of the research study have policy implications in that conventional higher interest rates introduced to defend the exchange rate might fail during pandemic-induced crises.
Haryo Kuncoro1 and Fafurida Fafurida2
Whether macroeconomic fundamentals affect the exchange rate volatility in emerging markets with an inflation-targeting regime or not is highly challenging. In this paper, the impact of the current account deficits and foreign reserves on the volatility of real exchange rates. Applying threshold quantile regression models related to Indonesia over the period from 2005(7) to 2021(12), it is concluded that both variables play an important role in controlling the exchange rate instability. Both coefficients are also found to have an upward linear pattern. The asymmetric impact of current account balance holds. Claiming that a two-percent current account deficit in the GDP is the safe amount of the deficit that will not significantly affect the foreign-exchange rate is justified as such. The asymmetric behavior of the current account balance has the potential to trigger real exchange rate volatility, thereby undermining the monetary policy within the framework of the inflation targeting regime. Accordingly, the optimal stock of foreign reserves might avoid imposing dual goals of inflation targeting and exchange rate stability.