Impact Of Exchange Rate Misalignment Research Articles

The asymmetric impact of real exchange rate misalignment on growth dynamics in Turkey

Earlier empirical studies examining the impact of exchange rate misalignment on economic growth were based on a symmetric approach, assuming that undervaluation and overvaluation affect economic growth symmetrically. However, recent empirical studies have shown that exchange rate misalignments asymmetrically affect economic growth. This study, therefore, examines the asymmetric effects of real exchange rate misalignments on economic growth in Turkey. The asymmetric effects of the non-linear autoregressive distributed lag model show that both overvaluation and undervaluation impede economic growth in Turkey. The study recommends that Turkey should maintain a market-based exchange rate policy to reduce currency misalignment. The study also recommends that the central bank of Turkey should intervene in the foreign exchange market for a short-term to mitigate the excessive distortions in exchange rates and avoid inefficiencies in resource allocation.

Fundamentals and Misalignment of the Real Effective Exchange Rate in the Democratic Republic of Congo

This study aims to assess the determinants of the real exchange rate and to study the impact of exchange rate misalignment on economic growth in the DRC over the period from 1980 to 2020. This article uses a dual methodology to achieve its objective, first the BEER (Behavioral Equilibrium Exchange Rate) approach of Clark and Mc Donald to determine the fundamentals of TCER, then the approach of Lawson to assess the impact of misalignment of the exchange rate on economic growth based on the augmented Solow endogenous growth model. In view of the results obtained using econometric modeling (Cointegration, VCEM and ARDL), it has been observed that there is a long relationship between the real effective exchange rate (REER) and its fundamentals. In addition, the results of the REER fundamentals (relative productivity, term of trade, public expenditure and foreign exchange reserves) verify the Balassa-Samuelson effect in the DRC. In addition, the misalignment of the exchange rate exerts a negative impact on real GDP growth in the DRC. However, a disaggregation of the REER misalignment shows that exchange rate depreciation strengthens economic activity while an appreciation constrains economic growth in the DRC.

The asymmetric impact of exchange rate misalignment on economic growth of India: An application of Hodrick–Prescott filter technique

Prior research that examined the effect of exchange rate misalignment on economic growth was based on the symmetric approach, which suggested that both overvalued and undervalued exchange rates would have a similar effect on economic growth. Recent studies, however, have demonstrated that the exchange rate tends to have an asymmetric effect on major economic variables such as trade flows and output economic growth. The current study seeks to explore the asymmetric effects of exchange rate misalignment on India’s economic growth. The findings demonstrate that. in the symmetric approach scenario, exchange rate misalignment negatively impacts India’s economic growth. However, after employing the non-linear ARDL technique, the study indicates significant evidence in favor of asymmetric effects. Intriguingly, the findings show that undervaluation promotes economic growth in the case of the Indian economy whereas overvaluation tends to affect it negatively. The study concludes that while an undervalued exchange rate may provide short-term economic respite, a market-based equilibrium exchange rate is essential for a growing economy like India.

Exchange Rate Misalignment: An Application of Purchasing Power Parity and the Behavioral Equilibrium Exchange Rate in Vietnam

The impact of exchange rate misalignment on economic growth has become an important research topic in recent years in many different countries. Especially, in the context of global economic turmoil and trading conflicts between China and the United States, many countries have raised interest rates to combat rising inflation. Governments try to find suitable exchange rate policies to help stabilize the inflation and develop their economies. This paper aims to analyze the misalignment of the real effective exchange rate in Vietnam by using the Behavioral equilibrium exchange rate and purchasing power parity model. The result shows that the Vietnam Dong was undervalued in the period 2000-2010 and overvalued in the period 2010-2020.

THE ASYMMETRIC IMPACT OF RER-MISALIGNMENT ON ECONOMIC GROWTH: AN APPLICATION OF HODRICK–PRESCOTT FILTER TECHNIQUE

Previous studies that examined the impact of exchange rate misalignment on economic growth were based on the symmetric approach where both overvalued and undervalued exchange rates were supposed to affect the economic growth in a similar way. However, in recent years, a number of studies have established that exchange rate changes affect the trade flows in an asymmetric way. Hence, this study investigates the asymmetric effect of exchange rate misalignment on the economic growth of Pakistan. The findings of the study indicate that in the case of the symmetric approach, exchange rate misalignment has a negative impact on economic growth. However, after applying the nonlinear ARDL approach, the study finds significant evidence in favor of the asymmetric effect of exchange rate misalignment on economic growth. Interestingly, the results indicate that undervaluation spurs while over-valuation hampers the economic growth in Pakistan. The study recommends that though under-valued exchange rate may have temporary relief for the economy, yet in the long run, a market-based equilibrium exchanger rate is imperative for a developing economy like Pakistan.

Real exchange rate misalignments in CEECs: Have they hindered growth?

We study the impact of exchange rate misalignment on economic activity in nine Central and Eastern European economies. Exchange rate misalignments are computed from country-specific long-run exchange rate relationships with determinants suggested by open macroeconomic models such as interest rate differentials or the Balassa–Samuelson effect. There was a clear reduction in misalignments, but this has been reversed to some extent after 2008. Exchange rate overvaluation has a negative impact on economic activity. The effect of misalignments on economic activity seems to be nonlinear, as overvaluation has a stronger effect than undervaluation. Other factors of economic activity, including institutions, also show nonlinear effects.

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

This study investigates the impact of exchange rate misalignment on outward capital flight in Botswana over the period 1980–2015. The study uses the autoregressive distributed lag (ARDL) approach to cointegration and the Toda and Yamamoto (1995) approach to Granger causality. Botswana’s currency misalignment was caused by current account imbalances. The most important determinant of capital flight from Botswana is trade openness, which indicates that exportable commodities are misinvoiced leading to net capital outflows. Our main findings show that in the long-run, when the currency is overvalued, the volume of capital flight through trade misinvoicing declines and increasing foreign reserves does not reduce outward capital flight. However, when the currency is undervalued, the volume of capital flight through trade misinvoicing increases and foreign reserves reduce outward capital flight. Investors respond more to prospects of devaluation than to inflation. Botswana should tolerate overvaluation of the pula of only up to 5%. When the pula is overvalued beyond 5%, capital flight increases substantially. The government has to formulate trade regulations and monitor imported and exported commodities. Botswana should also implement capital controls to limit capital smuggling and maintain monetary autonomy.

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

This study investigates the impact of exchange rate misalignment on outward capital flight in Botswana over the period 1980–2015. The study uses the autoregressive distributed lag (ARDL) approach to cointegration and the Toda and Yamamoto (1995) approach to Granger causality. Botswana’s currency misalignment was caused by current account imbalances. The most important determinant of capital flight from Botswana is trade openness, which indicates that exportable commodities are misinvoiced leading to net capital outflows. Our main findings show that in the long-run, when the currency is overvalued, the volume of capital flight through trade misinvoicing declines and increasing foreign reserves does not reduce outward capital flight. However, when the currency is undervalued, the volume of capital flight through trade misinvoicing increases and foreign reserves reduce outward capital flight. Investors respond more to prospects of devaluation than to inflation. Botswana should tolerate overvaluation of the pula of only up to 5%. When the pula is overvalued beyond 5%, capital flight increases substantially. The government has to formulate trade regulations and monitor imported and exported commodities. Botswana should also implement capital controls to limit capital smuggling and maintain monetary autonomy.

Exchange rate misalignment and economic growth: evidence from nonlinear panel cointegration and granger causality tests

AbstractWe analyse the impact of exchange rate misalignment on economic growth for a sample of emerging economies from 1970 to 2014 using a panel smooth transition regression vector error correction model. Besides, we provide a granger causality test conducted in a non-linear framework. We find that a rise in misalignment increases significantly the output in the short-run when currencies are close to equilibrium. When they are highly misaligned, the impact on growth is reduced. However, no significant impact of output on misalignment was found in the short-run. We provide evidence that misalignment granger causes the output at any given level of misalignment both in the short and long-run. Weaker granger causality was found between output and misalignment. This raises some important policy implications. Although emerging economies can use undervaluation as a growth strategy, the benefits are smaller when currencies are highly undervalued. There is, therefore, an incentive to keep exchange rates closer to their equilibrium.

Exchange rate misalignment and economic growth in India

PurposeThe purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014.Design/methodology/approachFirst, misalignment is measured, which is defined as the deviations of the actual real exchange rate (RER) from its equilibrium level. The equilibrium real exchange rate (ERER) is estimated using the auto-regressive distributed lag (ARDL) model by considering key macroeconomic fundamentals of the determinants of RER. Zivot and Andrews’ unit root with structural break is used to test the stationarity property of data. The impact of exchange rate misalignment on economic growth has been examined using ARDL and variance decomposition techniques.FindingsOur results find an overvaluation of the exchange rate till 2000, and thereafter, an undervaluation of the exchange rate prevails in India. Further, the result indicates that an increase in exchange rate misalignment leads to a decrease in economic growth and vice versa. Moreover, a positive misalignment (overvaluation) hurts the economic growth and a negative misalignment (undervaluation) promotes the economic growth.Research limitations/implicationsFrom the policy perspective, the results highlight that India needs to maintain an appropriate exchange rate which can reduce the RER misalignment. It is better for the Reserve Bank of India (RBI)’s intervention to smoothen the fluctuations of the exchange rate to avoid the inefficiency in the allocation of resources. However, to minimize the RER misalignment, the intervention should be conducted only in the short run.Originality/valueThe study contributes to the existing literature by estimating the exchange rate misalignment for India and its impact on economic growth.

Exchange rate misalignment and total factor productivity growth in case of emerging market economies

This paper examines the impact of exchange rate misalignment on total factor productivity growth in case of 15 emerging market economies using the annual data from 1990 to 2014. First, this study through panel cointegration test found a long-run cointegrating relationship between RER misalignment and TFP growth. Second, the DOLS results indicated that RER misalignment has negatively affected the TFP growth in the majority of the countries within the EMEs and the group as a whole too. Third, we found bi-directional panel long-run and short-run Granger causality between real exchange rate misalignment and total factor productivity growth. Finally, in order to check the robustness, the dynamic panel data results showed that RER misalignment has negatively affected the TFP growth, which is consistent with our results derived from the DOLS. Further, when we decomposed the series into pre and post global financial crisis periods, this study found that real exchange rate misalignment did not affect the TFP growth in the pre-global financial crisis, but it has significantly adverse impact on TFP growth after the global financial crisis periods.

Exchange rate misalignment and export diversification in developing countries

The impact of exchange rate misalignment on export diversification in developing countries is highly debated and the empirical evidence is conflicting. However, no deep investigation of such an impact has been provided so far. This paper uses the different explanations to this lack of consensus to investigate the conditions under which misalignment could affect export diversification. While we found some support to the effect of undervaluation on the share of manufactures in total exports, no support is found for an impact of misalignment (neither over nor under valuation) on exports diversification within manufactures. The conclusion resists numerous robustness checks.

The impact of exchange rate misalignment on portfolio inflows in Malaysia

The primary reason why exchange rate misalignment is of interest to economists lie with the notional premise that risks emanating from overvaluation may undermine the competitiveness of Malaysia as a destination for portfolio investment inflows. On the other hand, undervaluation should make her a more attractive host. This study presents an attempt to examine the impact of exchange rate misalignment on portfolio inflows in Malaysia. Results show that events of misalignment have a negative impact on portfolio inflows. Specifically, overvaluation has significant deterrent effect on portfolio inflows but the opposite could not be implied in the case of undervaluation. Therefore, exchange rate policies should be geared to keep the exchange rate in line with the economic fundamentals so as to avoid prolonged overvaluation.