Determinants of real exchange rate movements in 15 emerging market economies

Thomas Goda,Jan Priewe

doi:10.1590/0101-31572020-3072

Abstract

ABSTRACT Previous work has established that an appreciation of the real effective exchange rate (REER) contributes to premature deindustrialization, less productive investment and dependence on commodity booms and busts in emerging markets economies (EME). From the literature, it is less clear, however, what the most important drivers for the cyclical REER movements in EME are. The aim of this study is to provide empirical evidence about the determinants of the REER movements of 15 emerging markets during the last two decades, using statistical analysis and a dynamic panel fixed effects model approach. Our analysis shows that although “commodity” and “industrial” EME are heterogeneous, REER volatility tends to be higher among the former. EME that had more stable REER fared better than those that had a depreciating or appreciating trend (with the notable exception of China). As theoretically expected, commodity prices are an important structural driver of REER movements in “commodity EME”. Moreover, the results confirm the existence of the Harrod-Balassa-Samuelson effect, and show the importance of financial inflows. Further, the interventions of central banks were partially successful to avoid more substantial appreciations (depreciations). Finally, we find that lower country risk and, at least in some periods, growing broad money in OECD countries has led to REER appreciations in our sample countries.

Highlights

Real effective exchange rates (REER) are considered as indicators for the average price competitiveness of all firms of an economy
The results indicate that the cycle of commodity prices plays a significant role for the six commodity producing countries of our sample but has no significant effect on the “industrial EME”
That is to say, increasing commodity prices lead to an appreciation of “commodity EME” currencies, whereas they have no effect on the currencies of “industrial EME”

Summary

Introduction

Real effective exchange rates (REER) are considered as indicators for the average price competitiveness of all firms of an economy. Emerging Market Economies (EME) are considered here middle-income countries which are in transition to advanced countries but still incorporate many features of developing countries. Their price – and non-price competitiveness needs to improve in order to catch-up with advanced countries. Their REER seems to be important for further development. Standard development economics and growth theories more or less ignore the role of exchange rates for development and growth. There is widespread agreement that overvalued REER hamper growth, in many cases even persistently

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