Abstract
This paper aims to investigate the determinants of real exchange rate in Jordan, four determinants were chosen which are; governmental expenditures, foreign reserves, workers' remittances receipts and term of trade. Time series quarterly data were collected for the period of 2000-2017. The unit root tests and Johansen's coingetration were performed to find that there is a long relationship among the variables of this study. Then VECM was tested to find a long-run causality running the determinants to RER equilibrium which can be reached within 3 quarters. Also, it can be endorsed that government expenditures can negatively affect RER in significance, both in short-run and long-run dynamics. However, three other variables of the study have positive and lower association with RER. The results imply an opportunity to enhance the real exchange rate through monitoring the governmental spending, and setting a policy to encourage the migrants to increase their remittances they send home. The foreign reserves are necessary to stabilize RER. However, TOT is also affected by RER, when exchange rate rises it suggests lowering the prices of the domestic goods and services, however, it may not affect the prices of the exported commodities. Therefore, there were possibilities for several corrective policy actions to reduce the misalignment in real exchange rate. Thus it is suggested that the capital government spending should concentrate more on capital expenditures, and to follow the track of trade liberalization in tendency to depreciate RER. Also, workers' remittances should be encouraged to promote economic development through increasing the opportunity for household investments.
Highlights
One of the major factors that affect a country's relative level of economic growth is the real exchange rate (RER)
RER plays a critical role in international trade among countries; it is a key element in any open economy, keeping in mind the fluctuation in RER is natural according to the volatility in the macroeconomic variables
In this paper four macroeconomic variables are investigated to capture their effect of RER which are; government expenditures, foreign reserves, workers' remittances receipts and terms of trade (TOT)
Summary
One of the major factors that affect a country's relative level of economic growth is the real exchange rate (RER). RER plays a critical role in international trade among countries; it is a key element in any open economy, keeping in mind the fluctuation in RER is natural according to the volatility in the macroeconomic variables. RER is a vital factor in attaining the objectives of monetary policy. Several papers were conducted on developed and developing countries to examine the association between RER and the economic fundamentals. The RER volatility in developing countries is found to be more than in developed ones. Developing countries may need to choose fixed exchange regime or a flexible one that may provide the economy with sustainable level of RER. ; it is one of the topics that are considered debatable worldwide
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