Real Appreciation Research Articles

Dutch Disease – Ökonomische Prozesse und Implikationen für die Entwicklungszusammenarbeit

Summary We analyze some potential adverse macroeconomic side-effects of aid transfers: Real appreciation of the recipient′s currency may impair the aggregate output via crowding-out productive export sectors, the so-called Dutch Disease. We use simplified balance sheets to elucidate the effects of four typical combinations of the following actions: The government may or may not spend the value of the aid transfer for nontradable goods. The central bank may or may not sell the respective reserves. If the loss of competitiveness induced by the appreciation is over-compensated by the improved productivity induced by the use of the transfer, then there is no need to worry about the Dutch Disease.

Real Exchange Rate and Economic Growth in China

Abstract: By proposing a real exchange rate augmented Cobb-Douglas production function, it is demonstrated that the real exchange rate exerts multiple effects on economic growth. If a real appreciation has negative effects on growth by deteriorating international competitiveness in the tradable sector and by causing job losses, at the same time it exercises positive effects on economic growth by favoring capital intensity, human capital and by exerting pressure for efficiency improvements. The function is estimated by using the GMM system estimation approach and a panel data for the 29 Chinese provinces over the period from 1987 to 2008. The results show that the real exchange rate appreciation had a negative effect on economic growth, which was more marked in coastal provinces than in inland provinces, contributing to a reduction in the difference in GDP per capita between the two kinds of provinces.

Current Accounts and National Savings: Rebalancing Demand in China and the United States

The persistence of global current account imbalances in the last decade has highlighted the importance of examining and understanding the causes of imbalances. Although generally studied as a macroeconomic phenomenon, changes to the current account may have effects on the microeconomy that warrant examination. This paper uses an applied microeconomic general equilibrium model to examine changes to current account imbalances existing between the U.S. and China. The microeconomic effects of a rebalancing of domestic demand in China that lessens the current account surplus and generates a real appreciation of the renminbi are analyzed. The U.S. current account deficit narrows in response to the real appreciation of the renminbi, but the economy contracts by a small amount. Further analysis demonstrates a reduction in the rate of consumption in the U.S. also results in a narrowing of the current account deficit and suggests that consumption fuels both the current account deficit and economic growth. The analysis has implications for global current account imbalances, as the importance of domestic structural adjustments in reducing imbalances is highlighted.

Political Cycle, Real Exchange Rate and Aggregate Supply in Mexico

This paper analyzes the relationship between the political cycle, the real exchange rate and the aggregate supply in Mexico. The period under analysis goes from 1981 to 2007, in which there were five presidential elections: 1982, 1988, 1994, 2000 and 2006. Significant evidence is found of a real appreciation of the peso, an increase in imports and an increase in the aggregate supply in the late months of each Presidential term, followed by a depreciation of the peso, a contraction of imports and a contraction in the aggregate supply in the first months of the new administration. Some conclusions and implications are discussed, as well as some lines for future research

Moving sciences beyond museums and theatres

Recent literature suggests that art and aesthetics are evident in ancient times, as well as in Islamic, Indian, Chinese, African and Western medieval traditions. However, literature on the incorporation of art and aesthetics into economic and management sciences and social sciences is not so readily available. Using a narrative exploratory study, this article reported on two lecturers’ interpretation of the sensory contemplation or appreciation of aesthetic judgement within their academic programmes at a higher education institution. Stimulating creativity, passion and imagination is just part of an array of characteristics that prospective educators will need to develop in their teaching. Research has indicated that to become a reflective practitioner, educators should be able to assess and explore the success of their practices. It is this freedom to imagine, assess, explore and reflect continuously on new ways of doing things that leads ultimately to practical application. Teaching aesthetically also requires a strong grounding in pedagogical content knowledge, thereby allowing students to become transformers of society. The main thrust of this article was to determine how we develop and embody these qualities in ourselves and in the modules we teach. The results of the study indicated that whilst early socialisation processes did impact on how aesthetics was incorporated for one participant, culture did not play a very significant role for the other. The findings also indicated that students have a real appreciation of the incorporation of the aesthetic domain within the disciplines.

What determines government spending multipliers?

This paper studies how the effects of government spending vary with the economic environment. Using a panel of OECD countries, we identify fiscal shocks as residuals from an estimated spending rule and trace their macroeconomic impact under different conditions regarding the exchange rate regime, public indebtedness, and health of the financial system. The unconditional responses to a positive spending shock broadly confirm earlier findings. However, conditional responses differ systematically across exchange rate regimes, as real appreciation and external deficits occur mainly under currency pegs. We also find output and consumption multipliers to be unusually high during times of financial crisis. — Giancarlo Corsetti, André Meier and Gernot J. Müller

Capital flows, exchange rate flexibility, and the real exchange rate

This paper first analyzes the impact of capital inflows on the real effective exchange rate for a sample of 42 emerging and developing countries over the period 1980–2006. The results from the pooled mean group estimator show that both public and private inflows are associated with an appreciation of the real effective exchange rate. Among private inflows, portfolio investments display the biggest impact on the appreciation – almost seven times that of foreign direct investment or bank loans – while private transfers have the smallest effect. The paper also shows that a more flexible exchange rate regime, measured by different indicators, could effectively dampen the real appreciation associated with capital inflows, supporting countries’ competitiveness.

Does China Still Have a Labor Cost Advantage?

In recent years wages in China have been rising and the yuan has appreciated, potentially eroding China’s cost advantage in manufactures. This paper explores the evolution of China’s relative unit labor costs in manufacturing over 1998-2009. Between 1998 and 2003 China’s unit labor costs fell, but since 2003 they have increased both absolutely and relative to US unit labor costs. Much of the rise in China’s relative unit labor costs can be traced to a real appreciation of the yuan against the dollar. Despite the recent rise, China’s unit labor costs remain low relative to those in most other countries.

Real Exchange Rate Movements in Developed and Developing Economies: A Reinterpretation of the Balassa‐Samuelson Hypothesis*

This article applies panel‐data techniques to examine the Balassa‐Samuelson hypothesis (BSH) for 33 countries. We introduce a new approach for classifying traded and non‐traded industries which allows for country‐specific heterogeneity over each industry and changes in classifications across periods. We find that in developed countries, productivity growth in traded goods leads to a real depreciation of the currency, inconsistent with the BSH; however, higher growth countries experience real appreciation. The results of developing countries support the BSH in that higher productivity growth in traded goods leads to real appreciation.

Short-run and long-run effects of exchange rate change on trade balance: Evidence from China and its trading partners

As one of largest exporting countries in the world, China has experienced a large amount of trade surpluses for the past decade. However, a growing criticism has been focused on the manipulation of Chinese Yuan (RMB) exchange rate by the Chinese government. While China implemented the exchange rate reform policy in July 2005, the question, whether its currency is undervalued remains as a debatable issue. Different from previous studies by focusing on individual trading partners, this paper tests the short-run J-Curve hypothesis and long-run trade balance effect of real exchange rate between China and its eighteen major trading partners using a panel dataset over the 2005–2009 period. We adopt the methodologies of panel cointegration test, fully modified OLS for heterogeneous cointegrated panel (panel FMOLS) and panel error correction model (panel ECM) to investigate the above examination. Our empirical results lend support to the inverted J-curve hypothesis between China and its trading partners. However, we find that a real appreciation of RMB has a decreasing long-run effect on China's trade balance in only three of the eighteen trading partners, while it has an increasing long-run effect in five of the eighteen trading partners. These mixed findings, therefore, lead to the empirical evidence that the real appreciation of RMB has no overall long-run impact on China's trade balance.

Trade openness, real exchange rates and job reallocation: evidence from Belgium

This paper investigates the impact of real exchange rate movements on job reallocation at the industry level. The analysis focuses on the manufacturing sector of Belgium, using data for 82 NACE 3-digit industries, over the time span 1996–2002. I find that real exchange rate changes do have a significant impact on job flows, and that this impact is magnified by increasing levels of trade exposure. In particular, a real appreciation is found to lower net employment growth through higher job destruction, while job creation is not significantly affected. These results are in line with previous empirical evidence on the United States, and differ from earlier findings for France and Germany, where the adjustment to real exchange rate shocks has been found to occur mainly through the job creation margin. I suggest that these differences may be explained by the fact that Belgium is a small open economy.

The Macroeconomic Effects of Large Exchange Rate Appreciations

Although currency adjustment is often proposed as a policy tool to reduce current account imbalances, there is no consensus regarding the macroeconomic effects. In this paper we study the macroeconomic aftermath of large exchange rate appreciations. Using a sample of 128 countries over the period 1960–2008, we identify 25 episodes of large nominal and real appreciations shocks. We use narrative identification of exogenous appreciation episodes and study the macroeconomic effects in a dummy-augmented panel autoregressive model. Our results indicate that exchange rate appreciations tend to have strong effects on current account balances. Within 3 years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, but the output costs are small and not statistically significant. All these effects appear somewhat more pronounced in developing countries.

The Macroeconomic Effects of Large Exchange Rate Appreciations

Although currency adjustment is often proposed as a policy tool to reduce current account imbalances, there is no consensus regarding the macroeconomic effects. In this paper we study the macroeconomic aftermath of large exchange rate appreciations. Using a sample of 128 countries over the period 1960–2008, we identify 25 episodes of large nominal and real appreciations shocks. We use narrative identification of exogenous appreciation episodes and study the macroeconomic effects in a dummy-augmented panel autoregressive model. Our results indicate that exchange rate appreciations tend to have strong effects on current account balances. Within 3 years after the appreciation event, the current account balance on average deteriorates by three percentage points of GDP. This effect occurs through a reduction of savings without a meaningful reduction in investment. Real export growth slows down substantially, but the output costs are small and not statistically significant. All these effects appear somewhat more pronounced in developing countries.

Processing trade, exchange rates and China's bilateral trade balances

This paper analyzes the role of processing trade in China's bilateral trade balances and the impact of the yuan's appreciation on China's processing trade. The analysis is based on panel data covering bilateral processing trade between China and its partners from 1993 to 2008. The empirical results show that: (1) processing trade accounted for 100% of China's annual trade surplus during the period; (2) China's processing trade showed a significant regional bias—77% of processing imports originated from East Asia while only 29% of processing exports was destined to the region in 2008; and (3) a real appreciation of the yuan would negatively affect both processing imports and exports—specifically, a 10% real appreciation of the yuan would reduce not only China's processing exports by 9.1% but also its processing imports by 5.0%. Based on these empirical findings we conclude that the combined effect of the yuan's appreciation on the balance of processing trade and thus China's overall trade balance will be limited.

Adjustment patterns to commodity terms of trade shocks: The role of exchange rate and international reserves policies

We analyze the way in which Latin American countries have adjusted to commodity terms of trade (CTOT) shocks in the 1970–2007 period. Specifically, we investigate the degree to which the active management of international reserves and exchange rates impacted the transmission of international price shocks to real exchange rates. We find that active reserve management not only lowers the short run impact of CTOT shocks significantly, but also affects the long run adjustment of REER, effectively lowering its volatility. We also show that relatively small increases in the average holdings of reserves by Latin American economies (to levels still well below other emerging regions current averages) would provide a policy tool as effective as a fixed exchange rate regime in insulating the economy from CTOT shocks. Reserve management could be an effective alternative to fiscal or currency policies for relatively trade closed countries and economies with relatively poor institutions or high government debt. Finally, we analyze the effects of active use of reserve accumulation aimed at smoothing REERs. The result support the view that “leaning against the wind” is potent, but more effective when intervening to support weak currencies rather than intervening to slow down the pace of real appreciation. The active reserve management reduces substantially REER volatility.

AID ALLOCATION, GROWTH AND WELFARE WITH PRODUCTIVE PUBLIC GOODS

ABSTRACTThis paper develops an open‐economy intertemporal growth model with endogenous relative prices and an imperfect world capital market. The government provides infrastructure and health services, which are both productive. The model is calibrated for a ‘typical’ low‐income country and used to examine the growth and welfare effects of both permanent and temporary, tied and untied, increases in aid. Simulation results show that aid tied to productive government spending delivers high growth rates and substantial welfare gains, without leading to a sustained real appreciation, only if the efficiency of public expenditure (a proxy for the quality of governance) is sufficiently high. The presence of production externalities has important implications for the path of the real exchange rate. Copyright © 2012 John Wiley & Sons, Ltd.

Aid Transfers, Supply Shocks, Dutch Disease and the Informal Sector

Summary I present an integral approach for the analysis of supply shocks, financial transfers and combinations thereof in a model of monopolistic competition. Introducing an informal sector reveals an asymmetry between „spending“ the value of the transfer by the recipient government and „absorption“, i. e. selling the foreign exchange by the recipient central bank: With flexible prices, the increased demand for formal sector domestic goods does not only crowd out exports, but also informal sector products. The real appreciation after selling foreign exchange crowds out exports and cheapens nontradables. With wage and price rigidities in the formal sectors, the adjustment pressure on the informal sector is increased.

Exchange Rates and the Margins of Trade: Evidence from Chinese Exporters

This article studies how real exchange rate movements affect firm export behavior, using monthly data that cover the universe of Chinese export transactions over the period of 2000–2006. Specifically, we examine exchange rate effects on an exporter's extensive (entry, exit, and product churning) and intensive margins of exports. We find significant effects on the extensive margin. A 10% real appreciation of the renminbi is associated with a 1 percentage point decline in the probability of entry, and a 0.2 percentage point increase in the probability of exit. The effects among foreign-invested enterprises almost double for both entry and exit. Despite the seemingly large effect on the extensive margins, exchange rates alone can only explain about 4% of entries and about 1.6% of exits during the sample period. The exchange-rate elasticity of exports is estimated to be around 0.4 in the first year after the shock, with most of the adjustment taking place in the first six months. This finding of a relatively fast response to exchange rate shocks is consistent with anecdotal evidence about intense competition in the Chinese export sectors. (JEL codes: F14, F31, F32)

THE TRANSFER PROBLEM IN INDONESIA AND POLICY RESPONSES

This paper examines the implications of, and policy responses to the transfer problem phenomenon, which is the interaction between surging capital inflows and real exchange rate. In particular, this paper identifies three episodes of large net private capital inflow to Indonesia during 1995 - 2010. Episodes of large capital inflows are often associated with real exchange rate appreciations. In turn, these conditions could undermine economic competitiveness in terms of price. This paper adopts theoretical framework that leads to test the long-run co-movements of real exchange rates and capital inflows. This long run relationship is modeled on the cointegration framework. The Full-Modified Ordinary Least Square (FMOLS) is used to provide optimal estimates of cointegration regressions, dealing with endogeneity and serial correlation effect in the regressors that result from the existence of the cointegrating relationships. Controlling for relative output levels, degree of openness, and the terms of trade, time series empirical evidence presented evidence supporting the existence of a significant transfer problem in Indonesia. Moreover, using disaggregated measure of inflows, this paper finds that portfolio investment has the most significant impact on REER appreciation in Indonesia. A comprehensive assessment of various policy responses to the transfer problem leads to two major conclusions. First, the problematic relationship between REER apreciation and capital inflows would be more moderate in which the authorities exercised countercyclical fiscal. It means that greater fiscal restraint would also help ease pressures for real appreciation of the exchange rate. Second, aggressive sterilization could be the first line of defense against REER apreciation during surge of capital inflows. Keywords: Transfer Problem, Real Effective Exchange Rate, Capital Inflows, Cointegration, Full-Modified Ordinary Least Squared (FMOLS)

Diagnosing the ‘Russian Disease’: Growth and Structure of the Russian Economy

The Russian economy is experiencing ‘Russian Disease’ (R-D) whose major symptom is a strong positive relationship between the real output growth and oil prices from 1995 through 2010. The symptoms differ significantly from those characterizing Dutch Disease. We also show that there is no negative impact of the real exchange rate on output growth in Russia. Second, we find a long-run positive relationship between oil prices and the real exchange rate. Third, we show that the effect of oil prices can be captured by terms of trade and trading gains in the System of National Accounts. Fourth, we show that the increase in imports due to real appreciation of rubles, in turn, contributed to GDP growth in the trade sector, which is a major source of overall Russian growth and a symptom of R-D.