Determinants Of Real Exchange Rate Research Articles

Asymmetric effect of real effective exchange rate and Saudi non-oil export determinants

Asymmetric effect of real effective exchange rate and Saudi non-oil export determinants

Factors Responsible for Movements in Real Effective Exchange Rate of Selected African Countries

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.

The demand for money and the real exchange rate misalignments in emerging European countries: A nonlinear approach

AbstractThis paper investigates the extent to which domestic and foreign money balances in emerging European countries are influenced by foreign exchange considerations. A well‐specified and stable relationship between real money demand and the exchange rate can be perceived as an important part of a successful monetary policy. This study examines the long‐run determinants of real exchange rates (RERs) associated with the behavioral equilibrium exchange rate (BEER) approach and identifies currency misalignments in these countries. The misalignment is later used to test the nonlinear behavior of the demand for money. The results indicate that the RER misalignments have a significant impact on domestic money demand. When the currencies are overvalued, there is a reduction in domestic money demand, and when they are undervalued, there is an increase in domestic money demand. Furthermore, it can be concluded that overvaluation causes an increase in foreign money demand indicating a shift of preference from domestic to foreign currency.

The Asymmetric Effects of the Determinants of Real Exchange Rate in Jordan: The Role of Price Index Selection

This study examines the asymmetric effect of real exchange rate (RER) determinants on RER. Workers' remittances (REM), foreign reserves (RES), government expenditures (EXP) and terms of trade (TOT) were chosen as determinants of the RER, which was measured with four different price indices; (CPIU.S/CPIJOR, GDP Def. rU.S/GDP Def.JOR, IPIU.S/GDP Def. JOR , PPIU.S/GDP Def. JOR). Quarterly data were applied from Jordan for the period of (2004-2017) using nonlinear autoregressive distributed lag (NARDL) model. The results indicate that the choice of the price index affect significantly the symmetry/asymmetry patterns of the RER determinants, thus, the choice of the price index should be directly linked to the purpose of the study to gain accurate results. Moreover, expansive fiscal policy may increase TOT by causing a country’s currency to depreciate. However, TOT was the only determinant that resulted in symmetrical behavior regardless of the price index chosen as a basis for measuring a currency’s RER. Contrary to the study’s hypothesis, fluctuations in Jordanian imports and exports do not fluctuate with RER. With respect to the short-run symmetry, foreign reserves (RES), governmental expenditures (EXP) and TOT may influence RER asymmetrically leading to possibility to peg RER in the short-run. The expansionary economic policy may have a greater impact on RER than the contractionary policy, which may in turn increase TOT. Hence, overvaluation of RER may hamper economic growth. This may be particularly true for emerging economies, such as Jordan’s, this may be particularly true for emerging [or emerging-market] economies, such as Jordan’s, which are overseen by weak institutions and plagued by market failure.

DAMPAK KETERBUKAAN PERDAGANGAN, FDI, DAN PERTUMBUHAN EKONOMI TERHADAP STABILITAS MONETER MELALUI NILAI TUKAR EFEKTIF RIIL DI INDONESIA

AbstractThere are still few studies on Indonesia's Effective Real Exchange Rate, so this study tries to examine the determination of Indonesia's Effective Real Exchange Rate (REER). The variables used in this study are Trade Opponess, Foreign Direct Investment (FDI), and Gross Domestic Product (GDP) with time series data from 1990-2019. Data obtained from The Federal Reserve (The Fred) and the World Bank. The analytical method used in this research is Autoregressive Distributed Lag (ARDL). The results show that trade opennes has a negative effect on REER, while FDI both in the short and long term has a positive effect on REER, but GDP has a positive effect in the short term but does not have a significant effect in the long term on REER.  Based on these findings, the government needs to pay serious attention to REER by maintaining exchange rate stability. 

How Equilibrium Exchange Rate Misalignments Influence on Economic Growth? Evidence for European Countries

Abstract The determination of the equilibrium real exchange rate is one of the most important issues in open economy since the policymakers are concerned about predicting and monitoring misalignments and they are usually associated with current account problems and currency crises. To the best of my knowledge, this is the first time a study provides empirical evidence on the impact of deviations from the long-run sustainable real exchange rate equilibrium on real economic growth rate applying panel ARDL model (pooled mean group, mean group and dynamic fixed effect estimators) for the 27 European countries during the 2000–2016 period. This study applies the EQCHANGE database developed by Couharde et al. (2017) to obtain the real effective exchange rate (REER) misalignments according to the behavioral equilibrium exchange rate approach for each country. One of the main objectives is to determine the relationship between REER misalignments and economic growth trying to differentiate between short- and long-run effects. To this purpose, a neoclassical growth model is considered controlling for several economic variables such as gross capital formation, degree of openness, human capital, inflation rate, and population rate.

Fiscal Cyclicality and Currency Risk Premia

Abstract I develop a model of real exchange rate determination that attributes a central role to the intertemporal government budget condition, which equates the market value of government debt to the present value of government surpluses. To enforce this equilibrium condition in the presence of nominal rigidities, the real exchange rate has to adjust in response to shocks to government surpluses. The model predicts that fiscal shocks account for real exchange rate movements, and the factor structure in fiscal shocks aligns with the factor structure in currency returns. Both predictions are confirmed in the sample of developed countries.

Econometric Analysis of the Determinants of Real Effective Exchange Rate in the Emerging ASEAN Countries

Econometric Analysis of the Determinants of Real Effective Exchange Rate in the Emerging ASEAN Countries

Investigating the Possibility of Changing the Saudi Arabian Riyal Exchange Rate Regime

This study examined the determinants of the Saudi riyal real effective exchange rate (REER) and the possibility of changing Saudi Arabia’s exchange rate regime from pegged to floating. A regression model was used to investigate the impact of Saudi Arabia’s total reserves, cost of living, money supply, non-oil exports, interbank lending rate, and crude oil production on the REER. The results revealed crude oil production as the only significant determinant: a 10% increase in production will reduce the rate by 1.32%. Although Saudi Arabia is cannot yet change its exchange rate regime, the goals of Vision 2030 are achieved and Saudi Arabia is no longer an oil-dependent economy, a change may be possible.

The Transfer Problem Surfaces in Sub-Saharan Africa: Net Foreign Assets, Financial Liberalization and Real Exchange Rates

This paper presents new links among net foreign assets (NFA), financial liberalization, and the real exchange rates in Sub-Saharan Africa (SSA), utilizing a testable theoretical model inspired by Lane and Milesi-Ferreti (2004) and newly constructed data sets for real exchange rates, net foreign assets, and financial liberalization. First, we check for the existence of a transfer problem – the hypothesis that increases in NFA strengthen the real exchange rates. Second, we examine how real exchange rates have reacted to financial liberalization in SSA. Finally, we explore whether financial liberalization dampens the effects of a transfer problem. Empirical analysis, using cross-country data, confirms the existence of a transfer problem that decreases with increases in trade openness in SSA. We also find that, overall, countries with financial liberalization have more depreciated real exchange rates and that financial liberalization dampens the transfer problem so that the semi-elasticity of NFA becomes negative, implying that financially liberalized SSA countries that experience an increase in net external liabilities would eventually require an appreciated, rather than depreciated, real exchange rate. The results are robust to various model specifications and estimation techniques, inclusion of other determinants of real exchange rates and consideration of endogeneity.

Determinants of Real Exchange Rate: Case of Jordan

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.

Equilibrium Exchange Rates And Misalignments: The Beer Approach

Bu çalışmada, BEER (Davranışsal Denge Döviz Kuru) yaklaşımı ile cari açık sorunu yaşayan 15 gelişmekte olan ülke için 1995-2012 döneminde uzun dönem denge döviz kuru ve sapmaların belirlenmesi amaçlanmıştır. Uygulanan panel veri analizi neticesinde, uzun dönem denge reel efektif döviz kurunun en önemli belirleyicisinin göreli verimlilik olduğu tespit edilmiştir. Ayrıca net yabancı varlık stokundaki değişmelerin de önemli etkiler yarattığı gözlenmiştir. Elde edilen uzun dönem denge reel efektif döviz kuru değerleri, ulusal ve uluslararası ekonomik gelişmelere bağlı olarak denge düzeyinden sapmaların dönemden döneme ve ülkeye göre önemli farklılıklar gösterdiğini ortaya koymuştur. Buna göre, 2008 küresel krizinin reel efektif döviz kurları üzerinde önemli etkilerinin olduğu görülmüştür. Hindistan, Polonya, Hırvatistan ve Litvanya’da reel efektif döviz kurunun uzun dönem denge düzeyinden sapmasının diğer ülkelere oranla düşük oranda olduğu ancak Güney Afrika, Mısır, Gana, Kolombiya, Uruguay, Bulgaristan ve Tunus’ta yüksek oranda olduğu belirlenmiştir. Türkiye için elde edilen sonuçlar, reel efektif döviz kurunun seyrinin genel olarak krizlerin habercisi olduğunu göstermiştir. Reel efektif döviz kurunun 2003’ten itibaren küresel krizin etkilerinin hissedildiği 2009 yılına kadar hem yurtiçi hem de küresel ölçekteki gelişmelere bağlı olarak denge düzeyine göre aşırı değerli olduğu ve sonraki süreçte 2011 yılından itibaren ise yaşanan gelişmelere bağlı olarak düşük değerli bir görünüme sahip olduğu belirlenmiştir. 

Equilibrium Real Exchange Rate, Currency Misalignment, and Trade Performance - The Case of Vietnam: 1992-2017

This paper is conducted to uncover the determinants of the equilibrium real exchange rate and evaluate the magnitude of exchange rate misalignment for the Vietnamese dong over the period 1992-2017 under the cointegration framework. The results of econometric analysis indicate that the Vietnamese dong was overvalued during the periods 1996-2002, 2007-2010, 2015-2017. This was due to the fact that the Vietnamese dong was rigidly kept stable while the economy experienced a persistent high inflation environment through many consecutive years in the past. The overvaluation of the Vietnamese dong apparently contributed to the deterioration of the trade account. The monetary authority allowed the currency to be largely devaluated only at the time when loss of competitiveness was clearly discerned and when there were pressures emerged from crisis periods. The findings suggest that the real exchange rate should be managed in line with its equilibrium level and any misalignment should be adjusted on time in order to maintain the country’s trade competitiveness and external equilibrium.

Heterogeneous Common Factor Approach to Examination of Real Effective Exchange Rate Determinants

Using a dataset of the Eastern European countries over the 1995–2015 period, we examine the determinants of the real effective exchange rates and their equilibrium path. In an attempt to address the econometric estimation uncertainty, we employ the recent panel time series estimators that deal with the panel with heterogeneous coefficients and can accommodate potential endogeneity and cross-sectional dependence. Using common factor representation of the equilibrium exchange rate, we manage to separately analyse the dynamics and evaluation of a common dynamic process that represents similar factors which drive the real effective exchange rate, with a differential impact across countries. After confirming the robustness of productivity and the terms of trade influence on the real exchange, we provide evidence that the relation productivity – the real effective exchange rate is nonlinear and turns negative after a certain threshold.

Heterogeneous common factor approach to examination of real effective exchange rate determinants

Heterogeneous common factor approach to examination of real effective exchange rate determinants

Much Ado about the Egyptian Pound: Exchange Rate Misalignment and the Path Towards Equilibrium

Abstract This paper estimates Egypt's equilibrium real exchange rate and exchange rate misalignment based on economic fundamentals over the period 2001Q3–2017Q3. Focusing on the more recent period, we find that the Egyptian pound was undervalued by about 22.3% in 2017Q1 due to overshooting its equilibrium value after floating the currency in 2016Q4. The currency undervaluation then declined to 18.5% in 2017Q3 driven by an increase in the real effective exchange rate due to a surge in domestic inflation. With regard to the determinants of the equilibrium real exchange rate, we find the productivity differential (vis-à-vis Egypt's trade partners) and trade openness to be the most significant factors. We also provide projections for the equilibrium real exchange rate and exchange rate misalignment until 2020Q4, which reveal that the exchange rate undervaluation will be dissipating fast due to high inflation. If the nominal exchange rate stabilizes at its level in 2017Q3 (17.73 pounds per US dollar), the currency will be overvalued by 13.1% in 2020Q4. Given the uncertainty surrounding the projections, a forecast combination approach is also presented. Finally, the paper highlights the implications of the empirical findings for the conduct of monetary policy in Egypt.

Determinants of Turkish real effective exchange rates

Widening current account deficits went hand in hand with considerable volatility, and financial fragility for last three decades. Within these circumstances, Turkish Lira has been exposed to huge oscillations from time to time. These kind of substantial ups and downs raise the questions on the persistency of equilibrium exchange rates for TL. This paper aims to assess the long run equilibrium path for Turkish Lira and its fundamental determinants. Empirical investigation suggests that the main fundamental determinants of Turkish real effective exchange rates are the real GDP per capita relative to trading partners, oil prices, fiscal expenditures and international openness. Despite expectations, net foreign assets do not exhibit a significant long run relationship with real exchange rates in Turkey. Persistent rise in productivity measure (GDP per capita relative to major trading partners) is associated with the appreciation pressure on equilibrium exchange rates.

Determinants of Real Effective Exchange Rates in Emerging Market Economies

This paper uses quarterly data to examine the effect of global and domestic factors on the real effective exchange rates (REER) for 20 emerging market economies for 2000-2015. We find that GDP growth and the domestic policy interest rate are robustly associated with REER appreciation in emerging economies. Among global factors, an increase in global risk is negatively related to the real exchange rate, while the Brent crude oil price is positively related. The overall positive effect of crude oil price is more pronounced for the REER of oil-exporting countries, and negative for oil-importing countries. We also find that a relatively flexible exchange rate regime reduces the negative impact of global risk on REER, but capital account openness does not seem to play a role. These findings have implications for emerging market economies in developing policies to respond to commodity price fluctuations and changes in the global monetary and risk environment.

Impact of Monetary Policy Instruments on Exchange Rate Volatility in Sudan (1997-2017)

This paper analyzed the impact of monetary policy instruments on real exchange rates volatility in Sudan during the period 1997-2017. The paper applies co-integration analysis to examine short run relationship between monetary policy determinants of real exchange rate. At first the stationary of the variables at first differences is obtained, then Vector Error Correction model (VECM) was estimated to explain the existent of long run relationship, after establishing the short run co-integrating relation among set of incorporated variables. The result from the paper show that, real exchange rate in Sudan have unstable during the period of study. In the short run, the variation in monetary policy instruments, namely money supply (MS) and profit margin rate (PMR) variable explain the movement of real exchange rate volatility through a self correction mechanism process with many interventions from central bank of Sudan. Moreover , the result from VECM test show that an increase of money supply have negative impact on real exchange rate volatility, such that a change in the value of money supply variable causes exchange rate volatility, while profit margin rate have positive impact on real exchange rate volatility in Sudan and there is possibility of self-adjustment of the model. The paper recommended the important of increasing the quantity of money supply as crucial policy to restore previous equilibrium level.

Fiscal Risks and Currency Returns

I develop a model of real exchange rate determination that attributes a central role to the intertemporal government budget condition, which equates the market value of government debt to the present value of government surpluses. To enforce this equilibrium condition in the presence of nominal rigidities, the real exchange rate has to adjust in response to shocks to government surpluses. The model predicts that fiscal shocks account for real exchange rate movements, and the factor structure in fiscal shocks aligns with the factor structure in currency returns. Both predictions are confirmed in the sample of developed countries.