Heterogeneous effects of real effective exchange rates on agricultural exports

The study examined the determinants of real effective exchange rate on selected African countries, namely, Nigeria, Libya, Angola, Egypt, Gabon, Ghana, and Chad over the sample period of 1980 to 2023. The vector error correction methodology was used in the study. The results suggest the following findings; In Nigeria, variations in the real effective exchange rate responded significantly and positively to Brent crude oil prices, domestic inflation rate, external debt burden, the volume of foreign exchange reserves, and prices of primary export. It also responded negatively to foreign investment flows. Whenever the real effective exchange rate deviated from its equilibrium, 74% of its disequilibrium was restored in Nigeria. In Libya, the response of real effective exchange rate was positive and significantly related to commodity prices of primary export but responded negatively and significantly to Brent crude oil prices, foreign investment inward stock, and foreign reserve holdings. In addition, 57% of the disequilibrium in the real effective exchange rate of the Libya currency was restored to the long-term value. In Angola, it was found that the variations in the real effective exchange rate had a positive and significant response with Brent crude oil prices and foreign investment inflows. It however responded negatively with a significance balance of payments and the volume of foreign reserves. About 60% of the disequilibrium in the real effective exchange rate was restored to the long-term value in Angola. In Egypt, the real effective exchange rate responded positively with significance to Brent crude oil prices, foreign investment inflows, and prices of primary export. Additionally, it responded negatively and significantly to the domestic inflation rate and external reserve holdings. Within the period of study in Egypt, 53% of the disequilibrium in the real effective exchange rate was restored to equilibrium. In Gabon, variations in the real effective exchange rate had a positive and significant response with Brent crude oil prices, real interest rate, external debt burden, and the volume of foreign exchange reserves. Also in Gabon, the real effective exchange rate responded negatively and significantly to the inflation rate and prices of primary export. Accordingly, 82% of the disequilibrium in the real effective exchange rate was restored to equilibrium. The Ghanaian real effective exchange rate relative to the dollar responded significantly and positively to Brent crude oil prices, domestic inflation rate, foreign debt burden, and foreign investment flows while it negatively responded to the Ghanaian balance of payment position. Each time the real effective exchange rate of the Ghanaian cedi deviated from its equilibrium value, 79% of its disequilibrium was restored. In Chad, variations in the real effective exchange rate responded significantly but negatively to the domestic inflation rate while it positively and significantly responded to Brent crude oil prices, external balance position, the volume of foreign reserve holdings, and foreign direct investment inflows. Also, whenever the real effective exchange rate deviated from its equilibrium value in Chad, 65% of its disequilibrium was restored in the long run. Based on these results, policymakers should focus on addressing structural constraints, commodity price fluctuations, and improve the business environment by anchoring policies of economic stability to boost competitiveness in trade and industry. There is also the need for policymakers to consider country-specific factors when formulating exchange rates.

Recent episodes of excessive volatility in the foreign exchange market have brought to the fore the interest in studying the transmission mechanism of global uncertainty on the domestic economy. At the core is the degree of adjustment in the exchange rate as a shock absorber and the impacts of domestic policies in mitigating the spillover effects of global volatility. Using data for a sample of advanced and developing countries, the paper studies the responses of the nominal effective exchange rate, the real effective exchange rate, and price inflation to domestic and external sources of economic shifts. Subsequently, the analysis evaluates the degree of correlations between the responses of these variables to each economic shift. The objective is to study sources of movements in the real effective exchange rate and bilateral nominal exchange rates versus price inflation. The analysis then turns to evaluation of the determinants across countries of the time-series correlations between the change in the real effective exchange rate and its underlying components—nominal change and inflation—within countries over time. Cross-country regressions establish the relevance of the trend and variability of each of price inflation, the change in the nominal exchange rate, and the change in the real exchange rate on the degree of association between each pair. The evidence attests to a high pass-through from fluctuations in the nominal exchange rate to price inflation, which is more pronounced in developing countries, attesting to the need to target the real effective exchange rate as a framework for monetary policy.

We examine whether oil prices help produce accurate forecasts of the real broad effective exchange rate of the United Arab Emirates (UAE). Using monthly data for 1994–1999, we formulate a univariate moving average (MA) and an augmented moving average (A‐MA) model to generate multi‐period forecasts of UAE real exchange rates for 2000–2019. The MA model utilises past information in real exchange rates, while the A‐MA model utilises past information in both real exchange rates and oil prices. Our results indicate that oil prices help produce accurate forecasts of UAE real exchange rates only for 2000–2009; that is, for this period, the A‐MA forecasts are unbiased, outperform the MA forecasts and are directionally accurate. As for 2009–2019, we take a non‐parametric approach and show that oil price changes accurately predict directional change in UAE real effective exchange rates.

This paper calculates the equilibrium real effective exchange rate for the Egyptian economy during the period (1974-2012). The paper reviews the evolution of Egypt’s exchange rate policy and the most significant developments of its real effective exchange rate during the same period. Using a structural vector auto-regression model identified with long-run restrictions, it evaluates the relative importance of real supply, demand and nominal shocks to the disturbances of Egypt’s real effective exchange rate. The identified shocks and their impulse responses are consistent with the theoretical priors stemming from the Mundell-Fleming model. The main contribution to the fluctuations of the real effective exchange rate, roughly 80 percent, comes from both real demand and supply shocks. The model is used to check if the real exchange rate in Egypt is misaligned during the period under investigation. It shows that the actual real effective exchange rate has deviated from the equilibrium real effective rate with various degrees during the estimation period

The main focus of this paper is to examine the impact of the real effective exchange rate on economic growth in Sierra Leone. First an analytical framework is developed to identify the determinants of the real effective exchange rate. Using quarterly data and employing recent econometric techniques, the relationship between the real effective exchange rate and economic growth is then investigated. A bivariate Granger causality test was also employed as part of the methodology to examine the causal relationship between the real exchange rate and economic growth. The empirical results suggest that the real effective exchange rate correlates positively with economic growth, with a statistically significant coefficient. The results also indicate that monetary policy is relatively more effective than fiscal policy in the long run, and evidence of the real effective exchange rate causing economic growth was profound. In addition, the results showed that terms of trade, exchange rate devaluation, investment to GDP ratio and an excessive supply of domestic credit were the main determinants of the real exchange rate in Sierra Leone.

Since Jan 4th 2016, the State Bank of Vietnam (SBV) has applied the central exchange rate regime pegging VND to a basket of 8 currencies, which reflects the adaptation of macro policies in general, exchange rate policy in particular when integration context has changed. In order to propose suitable solutions to administrate exchange rate policy effectively, this article employs the VAR model, in which the relationship between exchange rate and three objectives of exchange rate policy (including prices, output and trade balance) are tested. The data used in this model is quarterly, in the period 2001q1-2017q3. Based on the results of the VAR model, a number of policy implications has been proposed, including: (i) continuing to apply currency basket pegged exchange rate regime; (ii) in stead of choosing to devaluate VND, the SBV should use other exchange rate management tools; (iii) speeding up the development of derivative exchange rate market is necessary to reduce the level of ERPT to the import price index so that helps to control inflation in Vietnam and (iv) the SBV should prioritize the exchange rate policy administration towards price stability through adopting the inflation-targeting monetary policy.
 Keywords
 Exchange rate policy, exchange rate, inflation, economic growth, trade balance
 References
 [1] Campa, J. M. and Goldberg, L. S., “Exchange rate pass-through into import prices”, The Review of Economics and Statistics, 87(4) (2005), pp. 679-690. [2] Ghosh, A. and Rajan, R. S., “Exchange rate pass-through in Korea and Thailand: Trends and determinants”, Japan and the World Economy, No. 21 (2009), pp. 55–70.[3] McCarthy, J., “Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies”, Eastern Economic Journal, No. 33(4) (2000), pp. 511-537.[4] Hahn, E., Pass-Through of External Shocks to Euro Area Inflation, European Central Bank, Working Paper No.243, 2003.[5] Ito, T. and Sato, K., “Exchange rate changes and inflation in post-crisis Asian economies: VAR analysis of the exchange rate pass-through”, Journal of Money, Credit and Banking, No 40 (2008), pp. 1407-1438.[6] Kim, K. H., “US Inflation and the Dollar Exchange Rate: A Vector Error Correction Model”, Applied Economics, 30(5), 1998, pp.613-619.[7] Beirne, J. and Bijsterbosch, M., Exchange rate pass-through in central and eastern European member states, European Central Bank, Working Paper Series, No.1120, 2009.[8] Huong, T.T.X., V.X.Vinh and N.P. Canh, “Transmission of monetary policy: A number of appropriate regression models”, Journal of Development and Integration, No. 16 (26), 2014, tr.41-46.[9] Vinh, N.T.T, “The role of different channels on trasmitting monetary policy into output and price in Vietnam”, Journal of Economics and Development, No. 214 (2015), tr.20-30.[10] Giang, L.T., Applied structural vector autoregression model to analyze monetary transmission mechanism in Vietnam, Dotoral Thesis, National Economics University, 2017.[11] Trinh, P.T.T., “Impact of foreign exchange reserves to inflation: Approaching by VAR model”, Economic Development Review, No. 26 (2015), tr.46-68.[12] Minh, V.V., Exchange rate pass-through and its implications for inflation in Vietnam, Vietnam development forum, Working paper 0902, 2009.[13] Anh, N.D.M, T.M. Anh and V.T. Thanh, “Exchange rate pass-through into inflation in Vietnam: An assessment using Vector Autogression approach”, Vietnam Economic Management Review, 2010.[14] Anh, P.T., “Applying SVAR model to analyzing exchange rate pass-through effects (ERPT) in Vietnam”, Journal of Economics and Development, No. 220 (2015), tr.48-58. [15] Anh, P.V., Choosing the exchange rate regime in order to implement the inflation targeting policy in Vietnam, Doctoral Thesis, Foreign Trade University, 2017.[16] Minh, H.D., The relationship between inflation and exchange rate in Vietnamese economy, Doctoral Thesis, Hanoi University of Science and Technology, 2014. [17] Hausmann, R., Pritchett, L. and Rodrik, D., Growth accelerations, NBER Working paper series 10566, 2004.[18] Rodrik D., “The Real Exchange Rate and Economic Growth”, Brookings Papers on Economic Activity, Vol. 2008, pp. 365-412. [19] Gluzmann, P. A., Levy – Yeyati, E. and Sturzenegger, F., “Exchange rate undervaluation and economic growth: Díaz Alejandro (1965) revisited”, Economics Letters, No 117 (2012), pp. 666–672.[20] Kappler, M., Reisen, H., Schularick, M. and Turkisch, E., “The Macroeconomic Effects of Large Exchange Rate Appreciations”, Open Econ Rev, No.24 (2012), pp.471–494.[21] Habib, M. M, Mileva, E. and Stracca, L., “The real exchange rate and economic growth: Revisiting the case using external instruments”, Journal of International Money and Finance, Accepted Manuscript, 2017. [22] Rose, A. K., “Exchange rates and the trade balance: Some evidence from developing countries”, Economics Letters, No. 34 (1990), pp.271-275, North-Holland.[23] Vural, B. M. T., “Effect of Real Exchange Rate on Trade Balance: Commodity Level Evidence from Turkish Bilateral Trade Data”, Procedia Economics and Finance, No.38(2016), pp.499 – 507.[24] Trang, L.M, Exchange rate policy to promote export of Vietnam, Doctoral Thesis, Thuong mai University, 2017. [25] Bahmani – Oskooee, M., “Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs?”, Economics Letters, No. 36 (1991), pp.403-407, North-Holland.[26] Anh, D.T.H., Impact of the real exchange rate on trade balace in the context of international economic integration, Doctoral Thesis, Banking Academy, 2012. [27] Arize, A. C., Malindretos, J. and Igwe, E. U., “A Convenient Method for the Estimation of ARDL Parameters and Test statistics: U.S.A Trade Balance and Real Effective Exchange Rate Relation”, International Review of Economics and Finance, 2017, http://dx.doi.org/10.1016/j.iref.2017.03.024.[28] Wang, C. H., Lin, C. H. and Yang. C. H. et al, “Short-run and long-run effects of exchange rate change on trade balance: Evidence from China and its trading partners”, Japan and the World Economy, No. 24 (2012), 266-273.[29] Koray, F. and McMillin, W. D., “Monetary shocks, the exchange rate, and the trade balance”, Journal of International Money and Finance, No.18 (1999), pp.925–940[30] Hang, N.T.T., D.T.Minh, T.T.Thanh, L.H.Giang and P.V.Ha, Exchange rate policy choice in the context of economic recovery, VEPR, Working Paper No, 2010.[31] Nhung, N.C. and T.T.T. Huyen, “Exchange rate pass-through into Vietnamese import prices by industries and by countries”, International Business Management, 11 (11), 2017, pp.1834-1843.

Abstract. This study takes into the account relationship between oil prices and real effective exchange rate by using different exchange rate regimes in Pakistan. In this study following (Meese & Rogoff, 1988) and (Throop,1993) Interest Rate Parity has been used to construct a model by using real effective exchange rate, Dubai crude oil price and interest rate differential from period of 1970m01 to 2014m03. Through examining the results all variables are found to be integrated of order one. The long run relationship has been examined between real effective exchange rate and Dubai crude oil price in case of all exchange rate regimes with the use of regime dummies and interaction terms except for no regime, two-tier exchange rate regime and unified exchange rate regime. Similarly between real effective exchange rate and interest rate differential long run relationship has been examined in all the exchange rate regimes. Long run and dynamic result has also been detected except for interest rate differential with the use of exogenous exchange rate regime dummies. Oil price impacting exchange rate positively in both long and short run, while interest rate differential negatively effects exchange rate in long run. Through examining the results for impact of exchange rate regime switching on exchange rate, during 1970-2000 structural shifts were causing the change in exchange rate regimes with depreciation being high during this period. Keywords. Interest rate parity, Exchange rate regime, Regime switching, Structural shift and Dubai crude oil price. JEL. E42, E43, F31.

Most developing countries rely heavily on foreign direct investment (FDI) inflows for economic growth and stability. However, political risk and the foreign exchange rate could direly affect FDI inflows as investors seek stable markets. The most recent example of political risk interactions, the exchange rate and FDI has been the trade war between the United States (US) and China, where the US increased tariffs on Chinese goods worth over $16 billion. A crucial debate is needed regarding the importance of FDI inflows in developing countries, such as South Africa. FDI is observed as a crucial component in providing resources, and it is critical in facilitating globalisation and providing financial assistance to countries in need, especially developing countries such as South Africa. This study aimed to examine the long- and short-run effects of political risk ratings and foreign exchange rate fluctuations on FDI inflows in South Africa. The literature review provided evidence of long- and short-term relationships between political risk ratings, the real effective exchange rate, and the GDP's balancing variable on the dependent FDI inflows. The study utilised both the autoregressive distributed lag (ARDL) and non-linear autoregressive distributed lag (NARDL) models to analyse quarterly data from 1995 to 2020. The Variables included in the study were political risk, the real effective exchange rate, FDI inflows and GDP. The study revealed that political risk ratings and the real effective exchange rate have long-run effects on FDI inflows. The real effective exchange rate has an asymmetric long-run effect. It was also found that FDI inflows respond more to real effective exchange depreciations than real effective exchange rate appreciations, implying that the exchange rate is an important economic factor in explaining the investment inflows. Consequently, the study recommends that policymakers deploy responsive policy measures to deal with currency fluctuations and political instability. In South Africa, the negative effect of political risk affects FDI and impacts the overall country risk ratings and the country's ability to borrow. The study also recommends that further research be employed to understand other impacts on FDI inflows and the interaction of political risk and the real effective exchange rate on other critical economic factors.

This study analyzes the dynamic relations between economic activity, tourism expenditures, and real exchange rate in 9 most visited OECD countries using annual panel data for 2005-2019. To examine the dynamic relations, we first carried out the panel unit root tests to determine the degree of the integration of the variables. And then, using the Westerlund error-correction-based panel cointegration test, we found evidence of the existence of long-run relationships among variables. Therefore, we estimated a panel VECM model to obtain evidence of the causal relationship between the variables. According to the major finding of the studies, there is unidirectional causality from the real effective exchange rate and tourism expenditures to real GDP. Also, real exchange rate granger causes tourism expenditures in the short run. Test results also provide evidence that both real effective exchange rate and tourism expenditures granger cause to real GDP in the long run. However, there is no evidence of long-run granger causality when real effective exchange rate and tourism expenditures are dependent variables. The results of the study imply that to create sustainable growth in the sample countries, they should increase the tourism sector's contribution to GDP, and the countries also should maintain their external competitiveness.

The paper examines the issues regarding the effects of inflation and real exchange rate on unemployment: if change in real exchange rate and inflation reduce the level of unemployment and that inflation moderates the effect of real exchange rate on unemployment in Nigeria The author employs the Generalized Method of Moments (GMM) technique which is able to control endogeneity of variables in the study. The findings show that real exchange rate depreciation and inflation have positive impact on unemployment which in turn erodes the economic growth. Besides, the positive effect of real exchange rate depreciation on unemployment was contributed by high inflation level; the marginal effect of real exchange rate depreciation on unemployment increase with the level of inflation. This signifies that the higher the rate of inflation, the more real exchange rate depreciation spurs unemployment. Based on the findings, there is a need by the economic policy makers and authorities to establish drastic measures towards curbing high inflation level to a moderate and stable level which can stimulate a certain level of real exchange rate which in turn can urge economic growth through increase in employment opportunity.

PurposeThe observed real exchange rate, measured as an effective index of real labour costs, may serve as a base for the evaluation of the Portuguese economy's competitiveness. The purpose of this paper is to evaluate the positioning of the real exchange rate, throughout time, against a benchmark that guarantees external macroeconomic equilibrium (balanced fundamental account).Design/methodology/approachThis paper uses the effective real exchange rate as an indicator of Portugal's competitive position in relation to its major trading partners (fundamental equilibrium exchange rate approach using the unit labour costs).FindingsThe authors found evidence that the real exchange rate has been persistently overvalued since the early 1990s. The evolution of this situation, which is harmful for the national economy, does not evidence the return to a path that may ensure external equilibrium for Portugal. The results show evidence of significant overvaluation of the Portuguese real exchange rate when compared to its estimated equilibrium level. In order to achieve a balanced fundamental account and considering a margin of error of 5 per cent, the real exchange rate needs to depreciate between 27.69 and 30.61 per cent.Originality/valueThe relevance of the real effective exchange rate as a macroeconomic indicator arises from its role as a measure of national competitiveness. Computed as a measure of the difference of international prices, adjusted to the same unit of measurement, it represents the relative price of goods between countries, determining where this same price may be higher or lower. According to Krugman and Obstfeld, the manipulation of the real effective exchange rate allows one country to adjust its level of competitiveness against its trading partners.

The reform of RMB exchange rate formation mechanism has been advanced constantly and RMB exchange rate flexibility also has been enhanced orderly since July 2015, when China adopted a managed, floating exchange rate regime with reference to a basket of currencies instead of fixed exchange rate regime being pegged to the US dollar. In August 2015, China once again carried out the reform aiming at improving the central parity rate mechanism of RMB exchange rate against US dollar. Since then, the two-way volatility of RMB exchange rate has been normalized. As the price of home currency in the international market, the exchange rate can produce price and wealth effects along with its fluctuations, thereby resulting in distributional effect. On the one hand, owing to differentiated trade goods produced and consumed between rural and urban residents, the RMB exchange rate changes play a role in trade structure, industrial structure, employment structure and economic growth, and further in urban-rural income distribution pattern, by affecting import and export trade. On the other hand, the RMB exchange rate changes can affect types & amount of currencies that are possessed by urban-rural residents, and then have an important effect on cross-border capital investment. Especially with the internationalization of the RMB and the two-way opening-up of the financial market, the marketization of RMB exchange rate will be further heightened, thus it is no doubt that the effect of RMB exchange rate changes on income distribution will be strengthened.As an important aspect of unequal income distribution, urban-rural income gap has always been a major concern of all circles in China. Under the dual urban and rural economic background, this paper theoretically depicts micro mechanism concerning the effect of RMB exchange rate changes on urban-rural income gap. Then it applies panel threshold regression model proposed by Hansen(1999) with provincial data during the period of 1994 to 2016 and endogenous grouping to empirically investigate asymmetric and regional heterogeneous features of the effect of RMB exchange rate changes on urban-rural income gap in 28 Chinese provinces. Our results show that the effect of real effective RMB exchange rate changes on urban-rural income gap is not fixed, but depends on changes in regional per capita income and the degree of trade openness, thereby being featured by asymmetry and regional heterogeneity. Specifically speaking, the appreciation (depreciation) of real effective RMB exchange rate can reduce (expand) the urban-rural income gap in the provinces with low income level & low trade openness as well as middle income level & high trade openness, but will expand (reduce)the urban-rural income gap in the provinces with high income level and high trade openness. However, the changes in the real effective RMB exchange rate do not have an obvious effect on the urban-rural income gap in the provinces with middle and high income levels and low trade openness.Based on the conclusions of this paper, we can get the following enlightenment. Firstly, when formulating policies narrowing down the urban-rural income gap, Chinese governments should look upon the distribution effect of exchange rate changes and take different measures in different regions, to respond to the shock of exchange rate changes to urban-rural income gap. Secondly, to narrow down relative labor productivity gap between urban and rural areas is one of the important directions to alleviate income gap. Thirdly, in the process of expanding financial opening-up and trade openness, local governments should pay attention to the improvement of rural financial development and trade environment, and change the situation that rural areas cannot or will not enjoy the dividends of financial opening-up and trade openness to a greater extent, thereby providing conditions for narrowing down urban-rural income gap.The contributions of this paper are as follows:firstly, the existing literature investigates urban-rural income gap mainly from the perspectives of macroeconomic development, policy differences and historical legacy, while this paper focuses on exchange rate changes, which would enrich the previous research; secondly, we utilize the panel threshold approach and further explore the regional heterogeneous feature of the effect of RMB exchange rate changes on urban-rural income gap through endogenous grouping according to the threshold value, which is helpful to examine the income distribution effect resulting from real exchange rate changes more comprehensively & objectively; thirdly, the theoretical and empirical analysis of this paper helps us to understand the intrinsic mechanism and external manifestation of the effect of RMB exchange rate changes on urban-rural income gap, and then provides some enlightenment for governments to make relevant policies to reduce urban-rural income gap.

PurposeThis study aims to investigate the contingent roles real effective exchange rates (REERs) play in mediating the effects of oil revenue on the agriculture sector value-added in 25 major and minor oil-exporting (MIOEC) countries during the period of 1975–2014.Design/methodology/approachThe panel autoregressive distributed lag (ARDL) estimator proposed by Pesaran et al. (1999) was relied upon to achieve the objectives of the study. This estimator involves a pool of small cross-sectional units over a long-time span that covers for 25 oil-exporting countries over 39 years (1975–2014).FindingsThis paper reveals the following findings. Firstly, oil revenue has a direct negative effect on agricultural value-added in the short- and long-term. This finding holds for full sample and subsamples of major oil-exporting (MAOEC) and MIOEC countries. Further assessment reveals that the magnitude of the impact is larger for MAOEC than that of the MIOEC. Secondly, the finding for the long-run effect shows that the contingent effect of real exchange rate on the nexus between oil revenue and agricultural value-added is negative and statistically significant at the conventional level for the full sample. This suggests that, in the long-run, the appreciation in real exchange rates exacerbate the negative marginal effects of oil revenue on agricultural value-added in all oil-exporting countries. However, when sub-samples of MAOEC and MIOEC are considered, the contingent effect disappeared (become insignificant) in MAOEC while it is positive and statistically significant in MIOEC. Thus, in the long-run, the appreciation in real exchange rates diminishes the negative marginal effects of oil revenue on agricultural value-added in MIOEC. While oil revenue has a direct negative effect, its effect is also moderated by the variations in REERs in MIOEC in the long-run. Finally, in the short-run, fluctuations in the real exchange rate do not matter for the nexus of oil revenue and agriculture sector in these countries whether minor or MAOEC countries.Originality/valueThis study contributes to the debate in the empirical literature on the Dutch disease effect and “oil curse”. Using the appropriate panel ARDL empirical framework, it provides evidence on how exchange rate variations in the oil-exporting countries influence the nature of the effects of the oil revenue on agricultural sectors in the long-run but not in the short-run. Contingent effects of REERs only appear to exist in MIOEC in the long-run.

Tanzania is well placed to receive a significant increase in aid inflows in coming years. Despite the potential for the additional aid inflows to raise income levels in the country, increasing them may bring about structural changes in the economy that may be unwelcome. One such change is an appreciation of the real exchange rate that leads to a contraction of traditional export sectors and a loss of export competitiveness. This paper employs a reduced-form equilibrium real exchange rate approach to explain movements in Tanzania's real effective exchange in recent decades. Particular attention is paid to the relationship between aid inflows and the real effective exchange rate. The authors find that the long-run behavior of the real effective exchange rate is influenced by terms of trade movements, the government's trade liberalization efforts, and aid inflows. Positive terms-of-trade movements are associated with an appreciation, periods of improving trade liberalization are associated with a depreciation, and increases in aid inflows are associated with a depreciation in the real effective exchange rate. Although the last result is non-standard, it is not empirically unique and does have theoretical underpinnings. A detailed analysis of this relationship over the last decade shows that the Bank of Tanzania's response to aid inflows is likely the main reason for the finding.

In this chapter, a comparative and rigorous analysis of how changes in the Real Effective Exchange Rate (REER) affect three macroeconomic variables which include Gross Domestic Product (GDP) growth, agricultural exports, and Foreign Direct Investment (FDI) in Pakistan, India, and China is made. The states mentioned above, although geographically close to each other and of importance to the global economy as a block, are quite different in terms of institutional frameworks, exchange-hate regimes, structural composition and policy autonomy, thus, creating quite different transmission mechanisms of REER. The country is typified by endemic structural weaknesses in its three main forms, a small export base, overdependence on imported energy as well as insufficient fiscal cushions, that increase its susceptibility to REER misalignments. Empirical studies show that REER overvaluation reduces long-term growth in GDP by reducing the competitiveness of exports but gains on depreciation are often immediately offset by imported inflation that often exceeds 20 per cent in crisis. Agricultural exports which make up close to a quarter of GDP and half of the labour force are acutely sensitive to real appreciation; a 1 per cent appreciation of the REER will reduce the volumes of exports by 0.6-0.9 per cent with the effect lasting more than two years due to asymmetric adjustment processes. Moreover, REER volatility discourages FDI inflows that stand at a modest US$ 23 billion a year on average because investors face increased macroeconomic uncertainty especially in capital intensive industries, thus putting at risk strategic programmes like the China-Pakistan Economic Corridor (CPEC). By contrast, China takes advantage of its institutional strength, vast foreign -exchange holdings (above US 3 trillion), and a state -based economic system to transform the REER into a policy instrument. The people bank of China plays a crucial role in the changes of the exchange rates to maintain the export-led growth without destabilizing inflation and moderate depreciation to help boost the industrial production in the coastal provinces and protect the agricultural sector with subsidies and strategic reserves. The shift of China towards high-value agricultural exports and the use of currency swap agreements as a part of the Belt and Road Initiative is an additional step of China to shelter its external sector against REER volatility. As a result, China becomes the leading destination of FDI in the developing economies where it receives more than US180 billion every year as it takes the exchange-rate policy and integrates it with infrastructure construction and technology modernization to create a virtuous cycle of competitiveness and integration. India holds an intermediate position, which is typified by an exchange rate regime that is market driven. Dominating regime structure, democratic form of governance and dualistic economy. Although, the Balassa-Samuelson effect has led to the loss of cost competitiveness in labor-intensive production, and hampered the program of Make in India, the moderate depreciation has a positive effect on agriculture output by increasing rural incomes. Exporting agricultural products, however, is vulnerable to the fluctuations of the currency (Increasing by 0.7 per cent of exports of rice with a single per cent appreciation of the REER), and farmers who are not hedged are especially vulnerable; value-added processing is slowly making agricultural products more resilient in that regard. The inflows of foreign direct investment (FDI) of about US 60-80 billion a year are bifurcated market seeking investment in services is relatively insensitive to the fluctuations in exchange rate, and export-platform FDI is deterred by exchange-rate volatility. The larger domestic marketplace as well as the diversification of energy inherent in India gives it some cushion against imported inflation.