Foreign Exchange rate Volatilies, Government Debt to the Banks and Current Government Spending: Wavelet Transform approach

اقتصاد پولی مالی

Article 1, Volume 27, Issue 19, June 2021, Pages 1-28   

Document Type: Original Article

DOI: 10.22067/pm.v27i19.82009

Authors

soheil roudari¹; masod homayounifar²; mostafa salimifar³

¹Ph.D. Candidate of Economics, Ferdowsi University,Mashad, Iran

²Associate Professor in Economics, Ferdowsi University,Mashad, Iran

³Professor in Economics, Ferdowsi University,Mashad, Iran

Abstract

Introduction: The banking network plays a prominent role in the financing of businesses. In recent years, due to increased government spending and disproportionate increases in government revenues, a budget deficit has been created, and due to the high dependence between the government and the banking network, in some cases increased current spending has been provided through borrowing from the banking network.
Theoretical Framework: One of the most important factors that effect on the formation of the financial crisis is the instability in other financial markets, especially the exchange rate, which affects the GDP of the country and the current expenditures of the government, and affecting the performance of the banking sector subsequently. By affecting the government budget, the exchange rate can affect the motivation of the government and government-affiliated companies to obtain loans and facilities from the banking network. Also, the increase in the exchange rate by increasing the cost of goods and services leads to a decrease in disposable income and subsequently a decrease in people's consumption. According to dependence of industrial sector to imports of intermediary goods, changes in exchange rate causes a change in the supply sector (Boschi & D' Addona, 2019). On the other hand, exchange rate volatility due to the uncertainty and increases in the cost of production has been effective on government debt to the banking system and current expenditures (Adrian & Shin,2010).
Methodology: In this study, using the wavelet transform model during the period of 1388-1397 monthly, the nominal exchange rate volatilities, government debt to the banking network, and current government expenditures are divided into three levels by using wavelet transform. In fact, wavelet transform explains the deviation from the main trend. To examine the relationship between the variables, the use of patterns such as Granjer causality is used, which provides a momentary criterion of causality test, therefore, it is unable to analyze the dynamics and reliability of variables relationship. In addition, in such methods, because the lag of variables can be used, it is possible to eliminate the immediate effects. Spectral analysis is used to solve this problem (Aguiar, et al.,2008).
Results and Discussion: In the short term, there is no significant correlation between nominal exchange rate fluctuations and current government spending fluctuations. Interestingly, there is a significant correlation between government debt to banking network fluctuations and exchange rate fluctuations. This indicates that about 17% of the fluctuations in the foreign exchange market and government debt to the banking network are consistent. Significantly, there is a relatively high correlation between government debt to banking network fluctuations  and current government spending fluctuations in the short term, and about 32.5 percent of changes and fluctuations in each have led to a change in the other one, and in fact It can show the lack of independence of the country's banking network and the dependence and attitude of the government to provide current expenses from this source. There is a positive and significant correlation between nominal exchange rate fluctuations and current government spending fluctuations in the medium term. Of course, only about 19% of the fluctuations in each are positively followed by other fluctuations. In the medium term, the movement between exchange rate fluctuations and government debt to banking network fluctuations increases compared to the short-term (0.26), and this can also indicate the delayed effects of the exchange rate. Interestingly, there is a high correlation between government debt to banking network fluctuations and current government spending fluctuations, and over a longer period the fluctuations between the two are more intense in terms of intensity and direction. The time factor plays a very important role in the correlation between government debt fluctuations and exchange rate fluctuations. The correlation between these two cases started from about 0.17 in the short term and reached 0.53 in the long run. In terms of time factor, it has shown more biger about fluctuations in current government expenditures and fluctuations in government debt to banks than the other cases. The correlation between the two fluctuations has risen from 32.5 percent in the short term to 76 percent in the long term.
Conclusions and Suggestions: government and the banking network have a close relationship with each other, and this relationship is due to the fact that many of the country's banks are state-owned be greater in the long run. In fact, this is one of the main reasons for the non-performing loans in the country's banking network, and the government has used its bargaining power to cover its current expenditures, which have been very volatile in recent years and take loans and did not pay on time. In fact, based on the results, banking network has been a tool to cover current government expenditures, and due to exchange rate fluctuations in the country and increasing government current expenditures, government debt to the banking network can increase and reduce the credit ability of the banking network and can lead to inefficient allocation of resources.

Keywords

Volatilities; Nominal Exchange Rate; Current Government Expenditures; Government Debt to the Banks; Wavelet transform

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