Real Exchange Rate Fluctuations Research Articles

Sources of real exchange rate fluctuations in Egypt

PurposeThis paper aims to empirically investigate the sources of real exchange rate fluctuations in Egypt using structural vector autoregression (SVAR). The data covers the period between 1980 and 2016, where exchange regime has been changed more than once.Design/methodology/approachThis paper investigates the source of real exchange rate fluctuations for the period between 1980 and 2016 using the SVAR method. The SVAR method will incorporate real gross domestic product (GDP), real effective exchange rate (REER) and price level in a multidimensional equations system. However, impulse response function (IRF) and error variance decompositions (EVDC) will be generated by the system to have a behavioral insight of real exchange rate in response to economic shocks.FindingsThe IRF and EVDC results indicate a significant impact of demand shocks over the real exchange rate relative to supply shocks and monetary shocks in the period between 1980 and 2016. On the other hand, monetary shocks will have a negligible effect on the real exchange rate in the short run and converging to its previous level in the covering period of the study.Originality/valueIn the best of the authors' knowledge, the topic of the source of the real exchange rate fluctuations in Egypt has not been discussed in a wide range due to the lack of time series data. However, this study provides constructed data for REER for Egypt with the published method in the International Monetary Fund (IMF). Furthermore, the study involves theoretical and econometric modeling to ensure the reliability of the economic results.

Trade Opening and The Real Effective Exchange Rate of the RMB

This paper uses the Redux model and shows that the fluctuation of the RMB under certain fluctuations; then analyzes the effect of the fluctuation of the RMB on the actual effective exchange rate. The study found that trade opening can reduce the fluctuation of the real effective exchange rate of the RMB; the rationalization of industrial structure can also enhance trade opening and restrain the real effective exchange rate fluctuation of the RMB. Meanwhile, the "Belt and Road" initiative intensifies the real effective exchange rate fluctuation of the RMB, possibly due to the change of the "Belt and Road" initiative and implementation in the total industrial structure of import and export. Therefore, all provinces (autonomous regions and municipalities directly under the Central Government) should increase basic research such as science and technology, promote the rationalization of industrial structure, and make the help of the good opportunity of the "Belt and Road" initiative to reduce the real effective exchange rate fluctuations of RMB.

Global banking, financial spillovers and macroprudential policy coordination

AbstractThe transmission of financial shocks and the gains from international macroprudential policy coordination are studied in a two‐region, core–periphery model with a global bank, a two‐level financial structure and imperfect financial integration. The model replicates the stylized facts associated with global banking shocks, with respect to output, credit, house prices and real exchange rate fluctuations in recipient countries, as documented empirically. Numerical experiments, based on a parametrized version of the model, show that the gains from coordination increase with the degree of financial integration, which raises the scope for spillback effects from the periphery to the core, through trade and private capital flows. However, even when coordination is Pareto‐improving, the resulting gains may be highly asymmetric across regions.

The differential effects of exchange rate fluctuations on local housing price growth: evidence from Australia

ABSTRACT We investigate whether real exchange rate fluctuations contribute to the fluctuations in housing prices differently across local housing markets through the differential compositions of immigrants. We first develop a new measure of the immigrant-weighted local real exchange rate, which varies across areas and over time within Australia. Using this measure and a fixed-effect instrumental variables approach, we find that the growth in local real exchange rate positively affects housing price growth. This positive relationship is mainly driven by urban metropolitan areas.

Effect of Exchange Rate Volatility on Exports: An Empirical Analysis of Disaggregated Data of the Indian Manufacturing Sector

The effect of real exchange rate volatility on real exports is explored empirically in this article. The study uses disaggregated Indian manufacturing sector data consisting of seven categories: leather & leather manufactures, chemicals and related products, engineering goods, electronic goods, textiles (excluding readymade garments), readymade garments and other manufactured goods. The analysis is focused on India’s quarterly data from 2004Q2 to 2018Q2 using the ARDL bound test procedure. The ARDL bound test results show that real exports are co-integrated with fluctuations in real exchange rates and world real GDP. The study also reveals that exchange rate volatility has mixed effects on manufacturing exports both in the long run and short run. The impact of real-world GDP (WGDP) on real exports has been found positive and significant in the long run except for leather and leather manufacturers where it is negative and significant. In the case of the short-run, real-WGDP has mixed effects on exports. JEL Classification: C22, F14, F31, F1

Trade openness and real effective exchange rate volatility: The case of Vietnam

2004–2020. The study was conducted in the context that Vietnam’s trade openness is increasing, causing significant challenges in macro management, including exchange rate management. The authors use vector autoregression model and Granger causality test to test this relationship. The study used a vector autoregression model and Granger causality test to investigate the causal relationship between trade openness and real effective exchange rate volatility in Vietnam over the period 2004–2020. The study was conducted in the context of Vietnam’s trade openness index rising, causing significant challenges in macro management, including exchange rate management. The study takes a new approach (i) using Vietnam’s real effective exchange rate relative to 143 trading partners; and (ii) examining the impact of economic growth on trade openness and exchange rate volatility. The research results indicate that trade openness has a two-way Granger causality with effective real exchange rate volatility in Vietnam at the 1% significance level. Specifically, the effect of trade openness on real exchange rate volatility is positive at a 1-period lag and 4-period lag. Meanwhile, real exchange rate fluctuations have a negative effect on trade openness with a 1-period lag. At the same time, the study also finds that increased economic growth reduces real effective exchange rate volatility and increases Vietnam’s trade openness. On that basis, the study proposes implications for the management of trade openness and exchange rate management in the current Vietnamese context.

Accounting for real exchange rates in emerging economies: The role of commodity prices

A puzzling feature of international price data is that real exchange rates are much more volatile than macroeconomic fundamentals. This study empirically disaggregates international prices into their component parts to examine the key sources of high real exchange rate volatility with emphasis on Emerging Market Economies (EMEs). Using quarterly data over 1985–2015 for 28 countries, we document that 1) relative tradeable goods prices account for most of the observed volatility, 2) world commodity prices explain about 30% of real exchange rate fluctuations, and 3) commodity price shocks are associated with large and persistent real exchange rate appreciations in EMEs. Our results underscore the importance of commodity prices for the conduct of exchange-rate policy in EMEs.

An Investigation into the Sources of Depreciations in Mongolian Tugrik Exchange Rate: A Structural VAR Approach

This paper empirically investigates the sources of fluctuations in real and nominal Mongolian Tugrik (MNT) exchange rates by estimating the structural vector autoregressive (SVAR) model over the period January 1994–May 2021 and decomposing the exchange rate series into stochastic components induced by real and nominal shocks under the assumption of the long-run neutrality of nominal shocks on the real exchange rate level. The empirical results show that the real MNT exchange rate movements are primarily due to the real shocks, while the nominal shocks have a major role in explaining nominal exchange rate movements in the short and long run. The nominal exchange rate shows a delayed over-shooting occurring between one and three years after a nominal shock hits the economy. The long-run effect of a monthly one standard deviation nominal shock on nominal MNT exchange rate is 2.5%, which results in a permanent divergence between real and nominal MNT exchange rate and causes non-cointegrated relation between real and nominal MNT exchange rates. The historical decomposition of forecast error indicates that the nominal shock plays a significant role in explaining the depreciation in nominal MNT exchange rate over the last three decades. Our recommendation is to stop “cash handling” policy, minimize monetary shock, and coordinate fiscal and monetary policies to avoid large nominal depreciation.

A panel VAR analysis of macro-financial imbalances in the EU

We investigate the interactions across current account misalignments, real effective exchange rate misalignments and financial gaps within EU countries, applying a Bayesian panel Vector Autoregression to 27 EU members over the period 1994–2012. We find that, for the euro area, the reaction of current account misalignments to a shock in the real effective exchange rate misalignments is the largest. In non-euro area countries and euro periphery an increase in current account misalignments leads to a temporary increase in the real effective exchange rate misalignments, lowering competitiveness and thus amplifying current account fluctuations. For the core, increase in the rate or an expansion of the financial gap may help rebalancing the current account. In the central eastern european members, an increase in the real effective exchange rate misalignments may bring larger current account deficits in the medium-long run. Different policies should be applied to different countries in order to reach a balanced current account and to move close to the equilibrium level of the real effective exchange rate, given real and financial fluctuations. The different directions of transmissions are crucial for defining the right path towards equilibrium and they should be taken into account.

Non-linear analysis of effects of energy consumption on economic growth in China: Role of real exchange rate

In this study, we developed a simple economic growth model with energy consumption, wherein the fluctuations of the real exchange rate may produce uncertainty in the nexus of energy use and economic growth. Then, using a two-regime threshold model with smooth transition and Chinese data from 1980 to 2017, we empirically confirmed that the effects of the total consumption and that of the three energy sources on economic growth are nonlinear when exchange rate changes are included. Our results are robust by introducing variables and alternative real exchange rate measures. In particular, it reveals that oil consumption is more sensitive to the exchange rate volatility. Our conclusions also imply that in an economy that relies on energy consumption, real exchange rate fluctuations with structural breaks have a nonlinear impact on economic growth, and the devaluation of domestic currency does not necessarily play a role in promoting economic growth.

Nonlinearities and asymmetric adjustment to PPP in an exchange rate model with inflation expectations

PurposeThis paper aims to explain real exchange rate fluctuations by means of a model including both standard fundamentals and two alternative measures of inflation expectations for five inflation targeting countries (the UK, Canada, Australia, New Zealand and Sweden) over the period January 1993–July 2019.Design/methodology/approachBoth a benchmark linear autoregressive distributed lag (ARDL) model and a nonlinear autoregressive distributed lag (NARDL) specification are considered.FindingsThe results suggest that the nonlinear framework is more appropriate to capture the behaviour of real exchange rates given the presence of asymmetries both in the long and short run. In particular, the speed of adjustment towards the purchasing power parity (PPP) implied long-run equilibrium is three times faster in a nonlinear framework, which provides much stronger evidence in support of PPP. Moreover, inflation expectations play an important role, with survey-based ones having a more sizable effect than market-based ones.Originality/valueThe focus on linearities and the estimation of a NARDL model, which is shown to outperform the linear ARDL model both within sample and out of sample, is an important contribution to the existing literature which has rarely applied this type of framework; the choice of an appropriate econometric method also makes the policy implications of the analysis more reliable; in particular, monetary authorities should aim to achieve a high degree of credibility to manage them and thus currency fluctuations effectively; the inflation targeting framework might be especially appropriate for this purpose.

Real Exchange Rate Determinants in Nigeria: An Application of Cointegration and Error Correction Model

The study examines the elements of real exchange rate in Nigeria. The ADF and KPSS stationarity tests were employed to examine the stationary process of each series and it shows that the macroeconomic variables under study have no stochastic trends, hence, are stationary in leves. The result from Johansen cointegration showed a long-run relationship between real exchange rate and the five explanatory variables. R2 of the estimated Fully Modified Ordinary Least Squares (FMOLS) model shows that about 73.39% of the total variability in real exchange rate has been explained by the independent variables and it further revealed that inflation rate and government expenditure contribute more to exchange rate volatility. Our model adjust its prior periods dis-equilibrium at a speed of 56.98% annually with the ec(-1) coefficient value -0.5698; also to achieve long term equilibrium stable state, the VECM shows a significant speed of correction of about 56.98% for adjusting dis-equilibrium annually. The VECM is well specified and its parameter coefficients are not biased because the ARCH test indicates that it is free from serial correlation and heteroscedasticity. Finally, the strong forces that influence real exchange rate fluctuations in Nigeria as revealed bythe Granger causility test are: government expenditure, money supply growth, inflation and real interest rates.

Heterogeneous effects of foreign exchange appreciation on industrial output: Evidence from disaggregated manufacturing data

Real exchange rate fluctuations impact domestic economic activity throughout the trade and financial channels. Using granular data from the Brazilian manufacturing sector, we decompose the manufacturing sector into different sub-sectors according to their net exposures to international trade and analyze how the industrial production responds to real exchange rate appreciation innovations. On the aggregate level, our evidence suggests a non-significant role of the exchange rate in explaining the dynamics of industrial production, before and after the Great Financial Crisis of 2008. However, consistent with the trade channel of real exchange rates, we find that shocks to the exchange rate (e.g., an unanticipated depreciation) positively (negatively) affect output in net export (import) sectors. Though non-homogeneous, these effects are modest in terms of economic magnitude. Further, by including analysts’ macroeconomic forecasts in the model, we find that such effects stem from exogenous, unanticipated shocks to the exchange rate. Our evidence is robust to a trade-weighted measure of the exchange rate and to alternative manufacturing outcomes rather than output. Overall, our results highlight how heterogeneous are manufacturing responses to exchange rate shocks in an important emerging economy.

Corporate investment and the real exchange rate

We examine the relationship between real exchange rate fluctuations and firm-level investment and growth using data for a sample of close to 33,000 firms from 68 advanced and emerging market countries over the 2000–2014 period. We show that real depreciations boost profits, investment, and asset growth of tradable sector firms that have higher labor shares and are relatively more financially constrained. These findings are consistent with an “internal financing channel” whereby depreciations boost profits by reducing real product wages, spurring investment of labor-intensive but financially-constrained firms. Our results are robust to controlling for alternative channels through which real exchange rates affect corporate investment, including via direct competitiveness gains, balance sheet mismatch, costs of imported intermediate inputs, and aggregate credit supply.

Deindustrialization and the Demand for Protection

AbstractCurrent explanations of demand for anti-dumping protections focus on the role of the business cycle, and fluctuations in real exchange rates. However, empirical evidence supporting these explanations is based primarily on the experience of industrialized countries. Here, we examine anti-dumping petitions in a broader sample of thirty-four industrialized and middle income countries from 1978–2015. We also propose a new determinant of demand for anti-dumping petitions—changes in the pattern of industrial production between developed and developing economies over this period have contributed to deindustrialization in advanced economies and premature industrialization some developing countries. These changes threaten established industries and motivate them to demand protection.

Financial instability as a sustained export growth limiting factor of the Russian far east regions

The paper analyses the export dynamics of the Russian Far East regions in the context of cyclical business activity. A multi-regression model with lag variables is formed during correlation-regression analysis, since a tendency for a lagging export reaction in response to fluctuations in financial instability indicators was revealed. The analysis showed that exports are influenced by factors of economic activity, fluctuations in real exchange rates, oil prices and levels of external debt relative to GDP. During the crisis, there was a short-term pattern of growth, but in the subsequent period, the decline in the output of exporters, the shortage of financial resources, the increase in the cost of materials and other costs led to a reduction in the sales of products for export. Financial instability is becoming the main source of financial risk for exporters, requiring regional government intervention and business support mechanisms.

Global value chains and the missing link between exchange rates and export diversification

Conceptually, the present paper links export diversification and the real exchange rate (RER) by investigating the direction of causation. On one hand, a stable and competitive exchange rate is a key instrument in promoting export diversification through the tradable sectors’ profitability. But on the other hand, export diversification can help to reduce macroeconomic volatility, which in turn helps to consolidate a stable and competitive exchange rate. We propose a Granger causality test using panel data of the relationship in the middle-income countries of Asia and Latin America over the period from 1995 to 2015. We augment our baseline specification by examining how FDI (a key vehicle of GVC participation) and financial crises (which expose GVCs to disruptions) affect the causal relationship. Intuitively, the benefits of participation in GVCs may differ across countries, depending on external factors that might influence economic outcomes.Looking at the whole sample, our study finds a unidirectional positive causality running from export diversification to RER changes when we consider financial crises. However, we observe no causality for the regional sub-samples, meaning that it is global interactions that are the issue here. To go further, we rule out small islands from the Granger causality test. Again, our empirical findings show that the financial crises affect the causation but in contrast to the previous result, we observe the same unidirectional positive causality in the Asian sub-set. Overall, there is clear evidence that during financial crises, export diversification helps to reduce RER fluctuations, corroborating recent development studies that make a case for diversification to build macro resilience.

The euro area periphery and imbalances: Is it an Anticipation Story?

This paper investigates the sources of the current account (CA) imbalances experienced within the euro area periphery (Greece, Ireland, Portugal and Spain) before the Great Recession by assessing the role played by anticipated shocks. Since 1996, before the actual introduction of the euro, widening of CA deficits occurred in countries with appreciating real exchange rates and output growing faster than trend. To understand the causes of these patterns, I develop and estimate a small open economy DSGE model encompassing plausible drivers of CA imbalances. Anticipated spread convergence, and not catching-up, caused euro area periphery imbalances. Quantitatively, anticipated shocks are important drivers of CA and real exchange rate fluctuations.

Modeling a Multinational Firm’s Manufacturing Network as a Portfolios of Real Options

To fill the gaps in research on the portfolios of real options, we adopt analytical modeling and simulation that allows complex and interacting relationships in parameters. We also take a dyadic analysis to examine how a firm’s strategic decision is shaped in the perspective of portfolios of options with the consideration of production cost uncertainty and how the valuation of portfolios changes with either positive or negative cost correlation, switching/coordination costs, and capacity constraint of manufacturing facilities. This study brings fruitful insights to the understanding of the effect of industry-level cost uncertainty and real exchange rate fluctuations on switch or growth and contraction options and can become the forefront of real options research.

On Cross-Country Differences in the Contribution of Nontraded Goods to Real Exchange Rate Fluctuations

We propose a new Quantity Dual Approach (QDA) to estimate the contribution of nontraded goods to Real Exchange Rate (RER) fluctuations. This method is immune to the bias resulting from the non-inclusion of some goods in CPI calculations and can be applied even in a stringent data environment where Engel’s (1999, JPE) approaches would not be possible to implement. The QDA requires only national income accounts data and traded good price indices, which are more reasonably available for many countries. The estimated contributions of nontraded goods to RER fluctuations using both our proposed new approach and Engel’s approaches yield negative correlations with income level, government expenditure, exchange rate volatility, and political stability but positive correlations with inflation and private consumption expenditures.