Article History
KeywordsAsymmetric preferences Foreign exchange market Intervention Emerging markets Exchange rate volatility Optimal reaction function GMM.
JEL Classification:E58; E61; F31; G15.Policymakers in emerging market economies intervene in currency markets to counter appreciation or depreciation pressure, while also responding to the degree of exchange rate volatility. This paper investigates whether the asymmetric response in terms of foreign exchange intervention depends on the degree of exchange rate volatility. Specifically, we estimate whether the response by policymakers to currency market conditions differs in above or below threshold levels of volatility. We use dynamic threshold panel analysis presented within an asymmetric policy reaction function to investigate the role of exchange rate volatility in foreign exchange intervention. We estimate the model using Generalized Method of Moments (GMM) with monthly data for 23 emerging market economies from 2000 to 2016. We find that the asymmetric aversion to appreciation only holds under below-threshold volatility scenarios, and that the majority of the time, policymakers are simply leaning against exchange rate movements to ensure stable exchange rate conditions. The results confirm that exchange rate volatility impacts the response of policymakers to exchange rate conditions. Contribution/Originality: This study assesses how exchange rate volatility impacts foreign exchange policy decisions in emerging and developing economies. We provide evidence that prior literature, which did not consider volatility, missed an important policy concern for central banks in these economies when analyzing the existence of asymmetric preference in foreign exchange intervention.
This paper empirically investigates whether there are asymmetries in the responses of US government tax revenue and expenditure to debt levels and economic conditions over the business cycle. State of the art regime switching regression models, including Threshold Regression and Markov Switching, are investigated. Both sides of the government budget show asymmetries, but the asymmetries for tax revenue show greater statistical significance. The results show that both tax revenue and expenditure respond to high debt levels, with the asymmetry in this response showing that fiscal authorities take weaker action in response to debt during poor economic times. In addition, the asymmetric response to economic conditions for both sides of the budget shows that stronger countercyclical policy is taken during poor economic times.Keywords: asymmetric fiscal policy, fiscal policy sustainability, cyclicality, government expenditure, tax revenue Recently a distinct but related body of work has investigated whether the effect of fiscal policy shocks vary over the business cycle. For example, Auerbach and Gorodnichenko (2012) focus on the size of spending multipliers in 1 It is useful to note that both implementation and legislative lags for fiscal policy are considerably longer than for moneraty policy. Hence, we expect a larger degree of persistance in government spending and tax revenues.
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