Real Exchange Rate Changes Research Articles

Dollar’s Rials Injected into Iran’s Economy

Nowadays awareness about monetary conditions is really important for economic agents. Monetary conditions index is a significant indicator in regards of central bank’s monetary policies so that it shows the expansion and contraction of monetary policies. In order to investigate the Dollar’s Rials injected into Iran economy we have applied the MCI. Actually change in real interest rate and real exchange rate to the base year are considered while positive changes in MCI indicate a contraction monetary policy and negative changes indicate an expansion monetary policy. According to our findings, application of monetary policy in Iran is severely affected by changes in foreign exchange incomes as a result of increase in oil price. Therefore, the government’s expenditures should be adjusted based on inflation and stagnation gap. Considering the lack of real data, in this study it is tried to calculate the monetary conditions index for Iran’s economy using annual time series data and Johansen-Juselius convergence method over the period 2008-1987. In fact the expansion and contraction monetary policy implemented by central bank are separated and results show that the government’s monetary policy was contractile in the years 1987, 1989, 1991, 1992, 1995, 1999, 2000, 2003, 2005. It means that there was no Dollar’s Rials injection into economy. About the other years monetary policy was expansionary and Dollar’s Rials has been injected into economy for twenty years.

Real exchange rate (RER) as a policy tool for industrial diversification and growth in Africa

ABSTRACTAppropriate exchange rate (ER) policies in some Asian and Latin American countries have led to improvement in industrial diversification and growth. The growth ‘miracle’ of the Asian countries centres on the effective use of ER and trade policies, specifically the adoption of depreciation of real exchange rate (RER). However, the case of Africa is different, as the continent is yet to adopt an appropriate ER policy that enhances industrial diversification and growth. Examining the effectiveness of the RER as a policy tool for industrial diversification and growth in 36 African countries, this study applied a dynamic generalised method of moments (GMM) estimation technique to determine how changes in RER affects the growth composition of the three main productive sectors – primary, secondary, and tertiary and their response rates. Our findings suggest that the primary sector leads to appreciation of the RER, while the secondary and tertiary lead to depreciation of the RER. This result has serious policy implication for the Africa continent that has relied so much on the production of primary commodities. Rather than pursue the policy of ER depreciation which affects the primary and secondary sectors, policy shift in favour of the tertiary sector should be highly encouraged.

RMB Exchange Rate and Urban-rural Income Gap

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.

Nonlinear effects of exchange rate changes on the South African bilateral trade balance

ABSTRACTIn testing for the J-curve, previous studies have shown that the trade balance model is better fitted using cointegration and error correction mechanisms. These mechanisms are able to incorporate the short-term deterioration and the long-term improvement of the trade balance – the definition of the J-curve. However, the drawback of the established cointegration and error correction frameworks is that they assume symmetry in the equilibrium adjustment process. Incidentally, studies which have used the linear frameworks have found little support for the J-curve. Since the adjustment process could be nonlinear, a fresh investigation of the J-curve using nonlinear approaches could provide competing evidence. This paper retested the J-curve by using quarterly data for South Africa and her key trade partners (China, Germany, India, Japan, the UK and the USA) and found the linear specification to support the J-curve phenomenon in only two cases (India and the USA) under relaxed conditions. In contrast, the nonlinear specification supported the J-curve phenomenon in all cases at no cost of serial correlation and functional misspecification. We also found the real exchange rate changes to have significant nonlinear effects on the South African trade balance.

The exchange rate susceptibility of European core industries, 1995–2010

AbstractThis study investigates reactions to real exchange rate changes in the German, French and UK automobile and mechanical engineering sectors using monthly data from 1995 to 2010. Our findings indicate that EUR/US$ appreciations hamper exports, but do not necessarily imply an aggravated business climate or export order‐book assessment. This does not apply to the GBP/US$ and corresponding time series for the UK. First and foremost, our fixed coefficient and time‐varying parameter VAR model estimates confirm the extraordinary role of the German key sectors, while currency union membership seems to play a minor role at best. Overall, the exchange rate susceptibility is less profound than claimed by lobbies and held as popular belief.

Concentración Económica y Comercio Internacional. La Condición Marshall-Lerner en la Argentina (1993-2013)

El presente artículo estudia los efectos de la concentración económica en la pérdida de sensibilidad de la balanza comercial a las variaciones del tipo de cambio real (TCR). Para esto se analizan los flujos comerciales de la Argentina (1993-2013), con el doble objetivo de, por un lado, identificar el cumplimiento de la condición Marshall-Lerner (CML) y, por otro, determinar la influencia de la concentración económica sobre la misma. Los resultados alcanzados muestran que los movimientos del TCR no generan cambios significativos en la balanza comercial. Sin embargo, cuando se aíslan los efectos directos e indirectos de la concentración económica, la balanza comercial aumenta su sensibilidad al TCR y se cumple la CML.

Exploring the Dynamic Effects of Urbanization and Real Effective Exchange Rate on Tourism Output of Singapore

The main aim of this article is to examine the short-run and long-run impacts of urbanization and real effective exchange rate on the tourism output of Singapore. This article uses the Autoregressive Distributed Lag (ARDL) bounds test to examine the relationship between urbanization, inflation, and tourism output by using the time series data for 30 years (1985–2015). The findings of this article confirm that a 1% increase in urbanization will increase tourism output by 132.87% in the longrun. A 1% positive change in urbanization will decrease tourism output by 68.83% in the short-run. The findings of this article also confirm that a 1% increase in the real effective exchange rate will decrease the tourism output of Singapore by 6.25% in the long-run. A 1% positive change in real effective exchange rate will increase tourism output by 2.23% in the short-run. This study has implications for policy makers and academics.

The Real Exchange Rate, the Ghanaian Trade Balance, and the J-curve

ABSTRACTUsing linear and nonlinear specifications, we studied the effects of real exchange rate changes on the trade balance of Ghana during the period 1986Q1 to 2016Q3. We found no evidence in support of the short- and long-run impact of exchange rate changes on the trade balance in the linear specification. The J-curve is refuted in this case. In contrast, exchange rate changes affected the trade balance in the nonlinear specification. Depreciations improve the trade balance in the long run, but appreciations have no impact. Hence, exchange rate changes have nonlinear effects on the trade balance. This is consistent with the J-curve phenomenon.

Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods prices. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via long-run restrictions and is estimated for a group of advanced economies. The results indicate that for some countries, relative supply shocks can be a significant source of real exchange rate fluctuations.

Zimbabwe’s Trade Performance Under Alternative Trade Policy Regimes

This study examines Zimbabwe’s export and import performance under alternative trade policy regimes, from 1976 to 2014. Taking into account export and import volumes, gross domestic product (GDP), price of exports and imports, foreign income, real effective exchange rate and policy changes, log-linear errorcorrection models were adopted to estimate export supply and import demand elasticities. The study concludes that the relationship of exports and imports to GDP is significantly positive, while foreign income has no significant effect. A devaluation is estimated to have a significantly negative effect on imports in the short-term. Though highly inelastic, the effect of prices of imports on import demand is estimated to be significantly negative in the short- and long-term, and that of exports on export supply is positively significant in the short-term. The adoption of outward-oriented strategies was estimated to result in a 13.86 per cent increase in exports in the long-term, and a 32.3 per cent increase in imports in the short-term between 1990 and 1995 alone, and an additional 33.62 per cent between 1996 and 2000. The analysis also reveals that adopting a multi-foreign currency regime will only significantly influence export supply in the long-term.

Exchange Rate Adjustments and US Trade with China: What does a State Level Analysis Tell Us?

In this paper we explore the trade effects of bilateral real exchange rate changes between the 50 US states and China over the period of 2005–2012. The empirical results based on state-level trade flows and state-level relative prices suggest that the long-run real exchange rates elasticity of US exports to China is in the range of [–3.77, –2.85] and that of Chinese exports to the US is in the range of [–0.23, –3.34]. We also find that state-level differences in human capital and financial development are significant determinants of their export performances with respect to China. Based on the most optimistic scenario, our results suggest that the RMB needs to further appreciate against the dollar by at least 1.8 percent a year for 16 years for the US to achieve balanced trade with China.

Analysis of short- and long-run interactions between real exchange rate and private domestic investment in South Africa

This study analysed the short- and long-run interactions between the real exchange rate and private domestic investment in South Africa, during the period of a free-floating exchange rate system. Vector autoregressive (VAR) model, a multivariate Johansen co-integration approach and Granger causality test were used to analyse quarterly observations from 1994 to 2014. Co-integration analysis found no evidence supporting the long-run relationship between real exchange rate and private domestic investment in South Africa. However, short-run analysis showed that both variables are mostly driven by their own innovation with short-run changes in real exchange rate being affected by changes in private domestic investment. Granger causality test found a one-way causal relationship from private domestic investment to real exchange rate; implying that previous changes in private domestic investment lead to changes in current real exchange rate. This study concluded that growth in South African private domestic investments is linked with the depreciation of the domestic currency.

Analysis of short- and long-run interactions between real exchange rate and private domestic investment in South Africa

This study analysed the short- and long-run interactions between the real exchange rate and private domestic investment in South Africa, during the period of a free-floating exchange rate system. Vector autoregressive (VAR) model, a multivariate Johansen co-integration approach and Granger causality test were used to analyse quarterly observations from 1994 to 2014. Co-integration analysis found no evidence supporting the long-run relationship between real exchange rate and private domestic investment in South Africa. However, short-run analysis showed that both variables are mostly driven by their own innovation with short-run changes in real exchange rate being affected by changes in private domestic investment. Granger causality test found a one-way causal relationship from private domestic investment to real exchange rate; implying that previous changes in private domestic investment lead to changes in current real exchange rate. This study concluded that growth in South African private domestic investments is linked with the depreciation of the domestic currency.

Structural Transformation and Its Implications for the Chinese Economy

This study applies a two-sector model to examine the conditions under which the excess labour force can be reallocated from the tradable to the nontradable sector during structural transformation. We find that to maintain employment stability, output in the nontradable sector should be 1.9-to-3.5 percentage points higher than in the tradable sector, if labour shares in the two sectors approach the level of major developed economies in the next one and a half decades. Such output differentials mean the productivity increment in the nontradable sector should reach as high as 1.5 percentage points at the start, if job loss in the tradable sector is associated with negative investment shocks, or 1 percentage point if job loss is associated with an improvement in efficiency. In the absence of technological progress in the nontradable sector, the government could increase its consumption of nontradables by as much as 4 percentage points to help maintain employment. While the pure labour reallocation has a small effect on aggregate output, the shrinking working population and an improvement in efficiency in the tradable sector have larger effects on aggregate output. Price falls only slightly and the real exchange rate change is small during structural transformation. Although the structural transformation goal seems achievable, it is important to revive high-end tradable industries through product innovations to reduce employment pressure on the nontradable sector.

Effects of Changes in Foreign Exchange Reserves and Real Effective Exchange Rate on Industrial Output Growths in Bangladesh

This paper studies the effects of foreign exchange reserves and real effective exchange rate on industrial output in Bangladesh. Quarterly data are used from 1981-1982 to 2013-2014. The standard ARDL procedure and VECM are applied. Both DF-GLS and Ng-Perron efficient tests exhibit non-stationarity of each variable in log-level with I (1) behavior. The ARDL estimates provide evidence of co-integration among the variables. The VECM estimates confirm convergence with moderate pace of adjustment toward long-run equilibrium. Short-run net interactive effect of foreign reserves on industrial output is weakly positive while the net effect of real effective exchange rate is negative.

Non-Traded Goods and Real Exchange Rate Fluctuations: A Structural VAR Analysis

Real exchange rate variance decompositions indicate that only a small fraction of real exchange rate movements can be attributed to changes in the relative price between traded and non-traded goods. This paper argues that those exercises, by ignoring the nature of the shocks behind real exchange rate changes, may be inadequate to measure the relative importance of non-traded goods. Instead, it proposes using a structural vector autoregression (SVAR) model to study the effects of shocks to the relative supply and relative demand for non-traded goods on the real exchange rate. The SVAR model is identified via longrun restrictions and is estimated for a group of advanced economies. The results indicate that relative supply shocks are a significant source of real exchange rate fluctuations.

Industrial Research and Development and Real Exchange Rate Depreciation in a Small Open Economy

To examine how changes in relative national prices affect innovation input, this paper studies the impact of changes in industry-specific real exchange rates on manufacturing R&D in a small open economy. For this purpose I introduce a partial equilibrium model of R&D investment. Under some regularity conditions about pass-through elasticities, the model predicts that an increase in price competitiveness may adversely affect the R&D expenditures of a representative firm. Employing dynamic panel data estimation techniques, I use industry-level observations from Korea to test the predictions of the model. The results reveal that a lagged depreciation in the effective real exchange rate has a negative impact on current industrial R&D expenditures. Particularly, this adverse effect is evident among highly concentrated industries with high export shares, which are expected to have relatively low pass-through elasticities.

Obstfeld and Rogoff׳s international macro puzzles: a quantitative assessment

Obstfeld and Rogoff (2001) propose that trade frictions lie behind key puzzles in international macroeconomics. We take a dynamic multicountry model of international trade, production, and investment to data from 19 countries to assess this proposition quantitatively. Using the framework developed in Eaton et al. (2016), we revisit the puzzles in a counterfactual world without trade frictions in manufactures. Removing these trade frictions goes a long way toward resolving a number of puzzles. The dependence of domestic investment on domestic saving falls by half or disappears entirely, mitigating the Feldstein and Horioka (1980) puzzle. Changes in nominal GDPs in U.S. dollars become less variable across countries and line up with changes in real GDPs as much as with real exchange rates, mitigating the exchange rate disconnect puzzle. Less dramatically, changes in consumption become more correlated across countries, mitigating the consumption correlations puzzle and changes in real exchange rates become less variable across countries, mitigating the relative purchasing power parity puzzle.

Trade Patterns and Exchange Rates in East Asia

This paper shows that East Asian trade pattern exhibits a dynamic shift in the regional value chain. Several developing Asian economies including China notably gained comparative advantage in the production and exporting of medium-and-high technology products. Japan and the NIEs further deepened their intra-regional comparative advantage across product lines. Nonetheless, the region significantly depends on final demands from the Americas and Europe. The build-up of an unsustainable payment imbalance in the US was substantially mirrored in the reserve accumulation by East Asian countries. Given that a disorderly unwinding of the imbalance is in progress amid the global financial crisis and a fear of prolonged recession, the present study examines how real exchange rate changes and a shift in relative demand will affect exports from the East Asian countries. The findings show that both the real exchange rate change and a shift in relative foreign income would significantly reduce exports from East Asia. The findings further show that with the value chain becoming increasingly fragmented along the production network, changes in the intra-regional exchange rates significantly affect their exports but in an asymmetric way. The implication is that the production network has called for a greater symmetry in their intra-regional real exchange rates. An arrangement whereby East Asian exchange rates converge to relative stability within the region but greater flexibility against others (particularly the US dollar and Euro) would itself be a mechanism for international adjustment.

Contract farming risks: A quantitative assessment

The objective of this study is to identify the key risks facing each of the stakeholders in the export-focused paprika value chain in Zambia. Although a deterministic cost-benefit analysis indicated that this outgrower scheme would have a very satisfactory net present value (NPV), a Monte Carlo analysis using an integrated financial–economic–stakeholder model identifies a number of risk variables that could make this system unsustainable. The major risks include the variability of the real exchange rate in Zambia; the international price of paprika; and the farm yield rates. This analysis points out that irrigation systems are very important for both stabilising and increasing yields. The analysis also shows the limitations of loan financing for such outgrower arrangements when at the sector level it is difficult or even impossible to mitigate the risks from real exchange rate movements and changes in international commodity prices. This micro-level analysis shows how critical real exchange rate management policies are in achieving sustainability of such export-oriented value chains.