Turkish Economic Review

Front Matter

2024-11-10T19:54:47+00:00

Front Matter

Beware financial conditions indicators!

2024-11-10T19:55:45+00:00

This paper compares two versions of the transmission mechanism of monetary policy: the monetarist model and the widely popular Financial Conditions Index (FCI) model. The focus is on the role of interest rates and spreads as indicators of the business cycle. In the monetarist model, following a sustained upswing or downswing in the rate of growth of money, theory and evidence point to two subsequent stages for interest rates – first the liquidity effect, followed by the Fisher effect. These two movements are in opposite directions, both being effects of prior monetary growth. The first effect is typically quite brief; the latter effect usually lasts much longer. I find that the monetarist model fits the experience since March 2020 like a glove. By contrast, the FCI model generally ignores monetary growth and constructs an index consisting of a composite of rates, spreads and other financial market indicators. This index is taken as the driver for subsequent moves in asset prices, credit market developments and their impact on the real economy. To my knowledge, the FCI model is nowhere fully articulated and is only vaguely specified in mathematical terms. Based on evidence from business cycle developments since the onset of Covid for the US, the euro-area, and the UK, the FCI results are shown to be inconsistent and sometimes contradictory.

Keywords. Monetary economics; Business cycle; Interest rates; Inflation.

JEL. E19, E32, E52, G10.

Explicative determinants of real exchange rate volatility in Morocco: An econometric approach

2024-11-10T19:58:26+00:00

This paper aims to present a theoretical framework regarding the determinants of Moroccan Real Effective Exchange Rate (REER) volatility and to define the influential factors affecting it for the Moroccan economy between 1980 and 2020. This objective is primarily motivated by the recent changes adopted by Moroccan authorities towards a flexible exchange rate regime, which includes a progressive widening of the fluctuation range of the exchange rate. In this study, we used a GARCH(1,1) model and applied an Error Correction Model (ECM) with an estimation of the Autoregressive Distributed Lag (ARDL) approach. We found strong evidence that, in the long run, foreign direct investments, commercial openness, and terms of trade have a statistically significant negative impact on the volatility of the Moroccan REER, while the latter has a positive influence. Additionally, external debt, public expenditure, and the applied exchange rate regime positively affect REER volatility; in other words, they contribute to increased volatility in the foreign exchange market and the Moroccan economy. Conversely, the money supply has a negative impact, and the inflation rate has a positive effect on the studied volatility; however, these last results are not statistically significant.

Keywords. Real Effective Exchange Rate; Exchange Rate Volatility; GARCH Model; Error Correction Model; ARDL; Monetary Policy.

JEL. F31, F41, C22, C53, E52, C32.

Is American manufacturing in decline?

2024-11-10T20:01:50+00:00

There is a widespread popular view that American manufacturing is in decline. This declinist view reflects many factors. First, real GDP growth during the current business expansion has been the weakest in the post-WWII period. Second, over the decade from 2000 to 2010, manufacturing employment has declined by about 6 million. Third, persistent manufacturing trade deficits have led many observers to conclude U.S. competitiveness has eroded. This paper discusses these arguments and suggests a competing view that, instead, U.S. manufacturing is a leading growth sector and has remained strongly competitive internationally. On balance, we show that traditional domestic economic forces adequately explain recent trends in U.S. manufacturing output and employment growth. Finally, we argue that the recent reduction in the corporate income tax rate may further boost the fortunes of the U.S. manufacturing sector, although this favorable development could be offset by a more restrictive international trade regime.

Keywords. Real Effective Exchange Rate; Exchange Rate Volatility; GARCH Model; Error Correction Model; ARDL; Monetary Policy.

JEL. F31, F41, C22, C53, E52, C32.