Effective Exchange Rate Appreciation Research Articles

Effects of real effective exchange rate volatility on export earnings in Ethiopia: Symmetric and asymmetric effect analysis

The exchange rate is one of the key monetary policy instruments used to dictate the economy. However, the effect of exchange rate volatility on macroeconomic outcomes has been a subject of debate in previous research. Thus, this study examined the effects of real effective exchange rate (REER) volatility on Ethiopia's export earnings using quarterly data covering 2007 to 2021. The GARCH model is employed to estimate the volatility of the real effective exchange rate, and its effect is examined at the aggregate and disaggregate levels. Disaggregation is made at commodity and partner country levels. Besides these, the study also examined the symmetric and asymmetric effects of exchange rate volatility on the three categories of export earnings. To estimate the effects, both the linear autoregressive distributed lag (ARDL) and nonlinear ARDL (NARDL) models are employed. The short-run ARDL result shows that the real effective exchange rate and its volatility affect export earnings only in a few cases. Real effective exchange rate appreciation is significant and reduces total export earnings and export earnings from vegetables, meat, and oilseed-related products. Similarly, exchange rate volatility reduces total export earnings and earnings from coffee, vegetables, and meat-related products. At the aggregate level, the NARDL result shows that exchange rate volatility has an asymmetric effect on total export earnings. Positive volatility reduces total export earnings, while negative volatility is not significant. At the commodity level, volatility also has an asymmetric effect on earnings from coffee and meat exports in the short run. However, in the long run, there is no asymmetric effect of exchange rate volatility on total and commodity-level export earnings. In terms of the country of destination, there is no strong evidence of the effect of real effective exchange rate appreciation and its volatility on export earnings. Thus, policies that stabilize the volatility of the exchange rate are needed in Ethiopia in order to enhance export earnings.

The real exchange rate and services export diversification

PurposeThe relationship between real exchange rate and services export diversification is at the heart of this study.Design/methodology/approachThe analysis is performed using a sample of 113 countries over the period 1985–2014, and the 2-step system Generalized Method of Moments (GMM) approach. The analysis uses both the Theil index and Herfindahl–Hirschman index of services export concentration.FindingsThe analysis shows that over the full sample, the real effective exchange rate appreciation induces a greater services export diversification. This outcome applies to high-income countries and developing countries. However, the positive effect of the appreciation of the real exchange rate on services export concentration is lower in least developed countries than in other countries. Finally, the effect of the appreciation of the real exchange rate on services export concentration in tax haven countries depends on the indicator of services export concentration, as this is positive for the Theil index and negative for the Herfindahl–Hirschman index of services export concentration.Research limitations/implicationsThese findings highlight the strong influence of real exchange policies on countries' path of services export diversification.Originality/valueTo the best of the authors' knowledge, this topic is being addressed in the empirical literature for the first time.

Currency Union and Regional Trade Integrations in West Africa: The Role of Institutional Quality

This study investigates the effect of currency union on intra-regional trade integrations in West Africa. The empirical analysis also examines the interaction effect of institutional quality on currency union-trade flows nexus in the West African region over the period of 1996 - 2019.The study employs a Driscoll-Kraay standard error estimator technique on data obtained from the IMF direction of trade statistics and World Bank governance indicators. The study findings suggest that all the gravity variables (Gross domestic product, population, and distance) are in line with a priori expectations; currency union dummy produced a positive association with intra-regional trade integrations; real effective exchange rate appreciation boosts trade performance, and the interaction of currency union and institutional quality produced a positive impact on intra-regional trade flows among the countries in the West African region. Among the disaggregated institutional quality index, the rule of law and political stability have a significant impact on trade flows. The rule of law influenced trade flows positively, while political stability influenced trade flows negatively. The study concludes that the Rose effect of a common currency on trade exists in West Africa and that the level of institutional quality also subscribes to the currency union trade flows relationship.

Some dynamic macroeconomic perspectives for India’s economic growth

PurposeThe purpose of this paper is to study impacts of changes in crude oil price, money supply, fiscal deficit and effective exchange rate on India’s economic growth (expressing all variables in real term).Design/methodology/approachFirst, a simple macroeconomic model is formulated to this effect. Next, linear autoregressive distributed lag procedure and vector error-correction model are applied for growth empirics. Annual data are used from 1977 through 2015.FindingsRises in real crude oil price and monetized real fiscal deficits have negative short-run and long-run effects on real economic growth. Increase in real money supply and real effective exchange rate appreciation helps promote real economic growth in both short run and long run. In all cases, there is evidence of net interactive positive feedback effects among the variables in the short run. Real effective exchange rate appreciation dampens exports, but it is helpful to imports of capital goods and crude oil that contribute to economic growth. So, the net effect on the economy may be conjecturally positive.Originality/valueTo the best of the authors’ knowledge, this paper is unique because of the formulation of macro-economic model pertaining to the topic and its subsequent empirical verification. Moreover, this paper seems more comprehensive than some other studies, cited in the literature review.

Dinamika stope nezaposlenosti u maloj otvorenoj privredi - slučaj Srbije

Dynamic relationship among unemployment rate and key macroeconomic variables is explored for the Serbian economy that has been characterized by high unemployment rates since the outcome of the Great Recession. This analysis reveals how effective policy measures can be in reducing unemployment rate. Cointegrated vector autoregressive model is employed for the period 2014-2019. Prior to multivariate dynamic modelling, the validity of hysteresis hypothesis for unemployment rate is assessed. Obtained results show significant negative long-run effect of real wages on unemployment rate, and positive long-run effect of real effective exchange rate appreciation on real wages. For further reduction of unemployment rate demand-side measures should be employed.

Economic volatility and sovereign yields’ determinants: a time-varying approach

Using monthly data for 10 euro area countries between 1999:01 and 2015:12, we take a new three-step methodological approach: first, we inspect the key determinants of 10-year government bond yield spreads; second, we compute country-specific time-varying coefficient models of spreads’ determinants; third, we use these estimates as explanatory variables in panel regressions using output volatility as the dependent variable. We find that better fiscal positions or higher-than-expected economic growth prospects reduce the yield spreads, while increases in the VIX, bid-ask spread, debt-to-GDP ratio or real effective exchange rate appreciation increase the spreads. Moreover, the responsiveness of the yield spread determinants increased in the run-up to the global financial crisis. Finally, for the case of the budget balance and real growth (bid-ask spread, debt-to-GDP ratio, real effective exchange rate and VIX), the larger (higher) in absolute value the corresponding spread’s responsiveness, the lower (higher) the economic volatility.

Diagnosing the curse of natural resources in Kuwait

PurposeThe purpose of this paper is to empirically examine the phenomenon of natural resource curse in an oil abundant economy of Kuwait. The study estimates a behavioral equilibrium exchange rate model for Kuwait during the period 1980-2014 to assess the impact of prices and productivity factors on real effective exchange rate.Design/methodology/approachIt uses time series econometric techniques, such as unit root tests, Johansen cointegration test, Vector Error Correction Model, and Impulse Response Function, to estimate the model.FindingsUnlike the results of the few other studies, the empirical results show a significant impact of the variables, such as balance of trade, economic growth, oil exports, interest rate, and inflation rate, on real effective exchange rate appreciation which indicates the existence of Dutch disease within the Kuwaiti economy. Similarly, the comparative analysis between changes in public expenditure and inflation rate shows the existence of Dutch disease in Kuwait during specific periods of time.Originality/valueNatural resource curse or Dutch disease is a widely recognized phenomenon affecting the balance of economic activities in natural resource abundant countries. Symptoms of Dutch disease are perceived in several changes in the economy, particularly on price level, sectorial productivity, employment, and aggregate demand which in the long run worsen the country’s economic position and lower its international competitiveness. Dutch disease is not only a feature of natural resource abundant economies, but also can affect any economy with excessive revenue generating sector or high capital inflows which appreciates country’s exchange rate. However, the examination of Dutch disease in the economy is more important when investigating the impact on oil-producing countries (Apergis et al. 2014; Mohammadi and Jahan-Parvar, 2012; Jahan-Parvar and Mohammadi, 2011). Therefore, scholars studying Dutch disease phenomenon pay greater attention to cases of Dutch disease among oil-producing countries (i.e. Arezki and Ismail, 2013; Van der Ploeg and Venables, 2013; Jahan-Parvar, 2012; Cologni and Manera, 2013).

CURRENT ACCOUNT DETERMINANTS IN SOUTHEAST EUROPEAN (SEE) COUNTRIES – PANEL APPROACH

The aim of this paper is to examine the relation between the current account balance and its determinants for a sample of 9 SEE countries (Bulgaria, Croatia, Romania, Moldova, Serbia, Bosnia and Herzegovina, Macedonia, Montenegro, and Albania) over the period from 2000 to 2015. After we had established the existence of panel cointegration in the sample, we estimated cointegration equations using FMOLS and DOLS estimator. The results show that real effective exchange rate appreciation had an adverse effect on the current account, while the net inflow of direct foreign investments has a positive impact, as private remittances. The survey also confirmed that the current account deficit in the SEE countries is persistent. The results indicate that the structural changes in the SEE countries should be carried out in order to reduce the CA deficit. Also, the appreciation of the national currency should be avoided, since it will lead to an increase in the CA deficit.

The Role of Oil Prices in Exchange Rate Movements: The CIS Oil Exporters

Undoubtedly, oil prices play a crucial role in the macroeconomic performances of oil-exporting developing countries. In this regard, the exchange rate is one of the key macroeconomic indicators worthy of investigation. Existing literature shows that world oil prices play an important role in the appreciation of the exchange rates of oil-exporting developing countries. However, only a few studies have examined this issue by considering all three oil-exporting countries of the Commonwealth Independent States, namely Azerbaijan, Kazakhstan and Russia, together. In order to fill this gap and given the increasing importance of these economies in the world’s energy markets, this paper examines the role of oil prices in the movement of real effective exchange rates of the above-mentioned CIS countries. We applied the autoregressive distributed lag bounds testing method with a small sample bias correction to the data of these countries over the 2004Q1–2013Q4 period. The estimation results indicate that oil prices are certainly a main driver behind real effective exchange rate appreciation in the selected economies. Moreover, estimations show that productivity, to some extent, can also lead to the appreciation. The policy implication of this research is that an appreciation of the real exchange rate is harmful for the exports of non-oil goods and services in these countries. Since oil prices lead to the appreciation mainly through higher domestic prices, which is a result of tremendous public spending, decision-makers should reconsider the prevailing fiscal policy to make it much more counter-cyclical.

A Non-Linear Analysis of the Oil Price-Exchange Rate Nexus in Nigeria

This paper studies the effect of oil price shocks on the Nigerian exchange rate on the basis of monthly data over the period January, 2008 to October, 2015. In order to explore the effects of oil prices on the competitiveness of the Nigerian currency, which had hitherto attracted little attention in literature, the paper adopts the real effective exchange rate measure within a five-variable VAR model, analysed using both linear and non-linear approaches. We find evidence of a non-linear impact of oil prices on real effective exchange rate. Specifically, decreases in oil price are found to have an appreciating impact on real effective exchange rate, implying a loss of competitiveness of the Naira, while increases in oil price are found to be irrelevant for movements in the real effective exchange rate. Our study also suggests a link between Naira depreciation and the real effective exchange rate appreciation through a pass-through effect on rising domestic prices.

Effects of the Global and Domestic Business and Economic Factors on Aggregate Output in Austria

<p>Based on a quarterly sample during 2003.Q1 – 2015.Q1, this paper finds that Austria’s aggregate output is positively affected by the lagged German or U.S. output, the real oil price and labor productivity and is negatively influenced by real effective exchange rate appreciation, the real lending rate, central government debt as a percent of GDP and the expected inflation rate. Hence, a rising oil price would not harm aggregate output, and recent depreciation of the euro would be beneficial to aggregate output.</p>

External Imbalances in the EU: A REER-based Explanation

The debt crisis of the eurozone revealed a structural problem of the single market rooted in the external imbalance problem of indebted member states. The assumption of this paper is that the current account imbalances within the eurozone are based on an intra-eurozone competitiveness disparity originated in the single currency and the heterogeneity of member state development. The mix of infinite pegging and heterogeneity creates real effective exchange rate appreciation in the less competitive members, which further ruins their competitiveness in the EU.

Fiscal Austerity and Export Performance: The Case of Greece

Financial integration and common monetary policy, along with improved prospects for the EMUmember countries, instigated a flow of funds from north to south, causing a positive aggregate demand shock in those countries that absorbed the funds. The result was a surge in imports and prices of non-tradable and tradable goods, effective exchange rate appreciation and external imbalances. Greece was one of the southern countries that experienced a significant decline in competitiveness. The resulting large and persistent current account deficits contributed to the accumulation of a sizeable external debt. The financial crisis that erupted in 2008 resulted in the macroeconomic imbalances of the Greek economy, the downgrading of Greek sovereign debt and the consequent debt and economic crises. The recommendation of European Central Bank (ECB), European Commission (EC) and International Monetary Fund (IMF) for the restructuring of the Greek economy and an improvement in competitiveness was “internal devaluation” through fiscal austerity and structural reforms. These recommendations were designed to restore the lost competitiveness of the tradable sector, reallocate resources to the production of exportable goods, raise exports, eliminate the current account deficit and reduce external debt. However, the performance of Greek exports has been worse than expected. Among other factors, some economists argue that the unprecedented fiscal contraction imposed by Greece’s creditors has been an obstacle to export growth. The purpose of this paper is to evaluate the impact of fiscal austerity on exports by investigating possible reasons for the poor export performance. To begin with, Greek exporters have not really cut prices much. One could argue that exporters took advantage of lower wages and raised profit margins rather than cutting prices to capture market share. Another explanation could be that the cost of production has not declined proportionally to labor costs. Exporters incurred higher business taxes and the cost of Int Adv Econ Res (2015) 21:121–122 DOI 10.1007/s11294-014-9501-0

What Causes China's High Inflation? A Threshold Structural Vector Autoregression Analysis

AbstractChina's astonishing economic growth implies a necessity to understand its inflation. The present paper employs threshold nonrecursive structural vector autoregression analysis to explore the asymmetric effects of macro‐variables on inflation in low and high inflation regimes. The empirical evidence demonstrates, first, that the reactions of inflation to various shocks are inflation‐regime‐dependent and asymmetric. Second, monetary policy influences China's high inflation and adjusting the domestic interest rate in China may be an effective way to control inflation in a high inflation regime, but not in a low inflation regime. In a high inflation regime, a high inflation rate may cause the macro‐policy authorities to increase the domestic interest rate, in an attempt to stabilize high inflation. Third, contrary to expectations, the world oil price is not a strong cost‐push factor in a low inflation regime. Oil price increases may increase inflation in a high inflation regime, but there is no such obvious effect in a low inflation regime. Finally, China's nominal effective exchange rate influences inflation in both low and high inflation regimes. A nominal effective exchange rate appreciation might be effective in controlling domestic inflation in both regimes.

Relative productivity increases and the appreciation of the Turkish lira

This paper studies the Balassa–Samuelson hypothesis between Turkey and 27 members of the European Union. More specifically, using recently developed cointegration techniques with multiple breaks, we test the relationship between the real effective exchange rate and inter-country differences in the relative productivity of the tradable and non-tradable sectors over the period 1990:Q1–2011:Q2. In recent years, the Central Bank of the Republic of Turkey (CBRT) has emphasized the importance of the B–S hypothesis for Turkey. Our findings, however, suggest that changes in relative productivity have played a limited role in explaining the real effective exchange rate appreciation. In particular, the relationship between the real effective exchange rate and productivity indicated by the Balassa–Samuelson hypothesis is not supported for the post 2001 era in Turkey.

How does China’s macro-economy response to the world crude oil price shock: A structural dynamic factor model approach

This paper investigates how does China’s macro-economy response to the world crude oil price shock, applying a structural dynamic factor model approach based on 71 China monthly macroeconomic indicators from January 1997 to August 2011. Main conclusions are the following. First, China’s prices are raised, and moreover, the responses of China’s crude oil price, import price index, producer price index, retail price index and consumer price index to the WTI crude oil price shock weaken gradually, which accords with price transmission mechanism. Second, because there are probably China’s high demand for import products, lower added-value or technology of China’s export products and many venture capital in China’s stock market, foreign trade and stock market have sensitivities to price, and then the responses of China’s foreign trade and stock market are larger than one of investment, consumption and industrial production to the WTI crude oil price shock. Finally, after the WTI crude oil price shock, China’s interest rates and interbank offered rates are raised, the growth rate of Money supply (M1) does not immediately fall and begins to decrease after 3months due to time delay, and furthermore there is RMB real effective exchange rate appreciation.

The impact of oil price volatility on the macroeconomy in Russia

Since the beginning of the 1980s a large number of studies using a vector autoregressive (VAR) model have been made on the macroeconomic effects of oil price changes. However, surprisingly few studies have so far focused on Russia, the world’s second largest oil exporter. The purpose of this paper is to empirically examine the impact of oil prices on the levels of inflation, real effective exchange rate and real GDP for Russia using the VAR model. The time span covered by the series is from 1995:Q1 to 2009:Q3, giving 59 observations. The analysis leads to the finding that a 1% increase (decrease) in oil prices contributes to the growth (decline) in real GDP by 0.44% in the long run. Likewise, we find that in the short run (4 quarters) rising oil prices not only stimulate inflation and economic growth negatively and positively, respectively, but also induce real effective exchange rate appreciation.

The effects of oil price shocks on the Iranian economy

The Iranian economy is highly vulnerable to oil price fluctuations. This paper analyzes the dynamic relationship between oil price shocks and major macroeconomic variables in Iran by applying a VAR approach. The study points out the asymmetric effects of oil price shocks; for instance, positive as well as negative oil price shocks significantly increase inflation. We find a strong positive relationship between positive oil price changes and industrial output growth. Unexpectedly, we can only identify a marginal impact of oil price fluctuations on real government expenditures. Furthermore, we observe the ”Dutch Disease” syndrome through significant real effective exchange rate appreciation.

Singapore: 2007 Article IV Consultation: Staff Report; Staff Supplement; and Public Information Notice on the Executive Board Discussion

Singapore’s recent economic performance has been impressive, underpinned by prudent macroeconomic management. Economic activity remains strong despite a softening in external demand. On the demand side, domestic demand strengthened driven by private consumption and investment while net exports were broadly unchanged during the first half of 2007. It has been noted that the exchange-rate-based monetary policy framework has served Singapore’s small, open economy well. As inflation expectations are well anchored, they agreed that the present monetary policy stance of targeting a gradual nominal effective exchange rate appreciation remains appropriate.

Ruble Real Effective Exchange Rate: Problems of Appeciation

The article is focused on the estimation of advantages and risks of the policy of "strong" ruble. The author analyzes factors, that cause effective exchange rate appreciation, studies the influence of ruble appreciation on the import dynamics. In the end suggestions on the optimal exchange rate policy in Russia are offered.