An empirical study of the behaviour of real exchange rates in the UAE

Abstract

The recent expansion in global interdependence among countries has increased the relevance of research in the behaviour of the real exchange rate. The real exchange rate as a relative price of home and foreign goods serves as a measure of competitiveness of the domestic economy. The real exchange rate also moves to maintain internal balance where the output gap is kept at zero and external balance where the current account is financed by sustainable capital flows. This paper uses data for the United Arab Emirates from 1980 to 2016 to estimate the relationship between the real exchange rate and selected fundamental determinants such as oil prices, terms of trade, and productivity differentials. We employ time series models and report results and the statistical procedure for estimation and inference. The paper further, considers factors specific to the UAE that might help explain the observed behaviour of the real exchange rate.