Real Depreciation Research Articles

Explaining Trends and Factors Affecting Export Diversification in ASEAN and SAARC Regions: An Empirical Analysis

This paper examines the role played by country-specific factors in the determination of export product diversification process. To meet this objective, the paper begins by constructing a time series data for export diversification using the Herfindahl index. Then, it applies the fully modified OLS co-integration model to a panel of selected ASEAN and SAARC countries to find out the main determinants of export product diversification. Export diversification pattern shows that since the mid-1980s the ASEAN countries have continuously witnessed export diversification and the SAARC countries embarked on export diversification journey since the early 1990s. Analysis of the determinants suggests that foreign direct investment, domestic investment, competitiveness, real depreciation of domestic currency, financial sector development and institutional strength are significantly and positively related to export product diversification in both regions. These findings have important policy implications for the two regions. They call upon the policymakers for further diversification of exports, especially in the areas of their specialization that are vital for their smooth and sustained foreign exchange earnings as well as economic development. The study also recommends improving international competitive strength via improving business environment to achieve the goal of export product diversification.

ANALYSIS OF THE CAUSES OF BUILDING DEFECTS AND ADMINISTRATIVE PROBLEMS

This article analyzes what determines the decrease in the value of real estate, physical and moral depreciation. These studies explain how environmental conditions affect buildings from the outside. The consequences of the primary change are identified and predicted. Aggressive soil causes are clarified and the expression of soil strength properties are presented. The study also specifies the procedure and administration for monitoring building defects.

Are the Predictions of the Mundell-Fleming Model Applicable to Mexico?

According to the Mundell-Fleming model (Romer, 2006) under a floating exchange rate system, fiscal expansion is ineffective in raising output and causes real appreciation whereas monetary expansion raises output and causes real depreciation. Applying an extended Mundell-Fleming model, this paper employs a simultaneous-equation model to test whether the predictions of the Mundell-Fleming model would apply to Mexico. The GARCH process is employed in empirical work. This study finds that fiscal expansion reduces output and causes real appreciation and that monetary expansion raises output and leads to real depreciation. In addition, a higher real interest rate reduces output and causes real appreciation, and a higher real stock price results in real appreciation. Therefore, except for the impact of fiscal expansion on output, the Mundell-Fleming model applies to Mexico.

Conceptual approach to depreciation potential

The paper considers the category of “economic potential”, reveals the approaches of researchers to the understanding of economic potential. Investment potential is one of the components of economic potential. The presented indicators (factors) reflecting the investment potential do not reflect the sources of investment in fixed assets. In this regard, the author proposes to introduce the concept of “depreciation potential”. The content of the depreciation potential is clarified. The need for the importance of the use of depreciation charges as a source of funding is substantiated. The author proposes to single out the real and nominal depreciation fund, the ratio of which allows calculating the coefficient (index) of the use of the depreciation fund, which is one of the indicators to assess the depreciation potential. The proposed coefficient is calculated on the basis of statistical data from the Perm Territory. The obtained values indicate the intended use of the depreciation fund of enterprises of the Perm Territory.

Effects of Real Exchange Rate on Trade Balance in Cote d’Ivoire: Evidence from Threshold Nonlinear ARDL Model

The objective of this paper is to shed new light on the nonlinear relationship between real exchange rate changes and trade balance in Cote d’Ivoire. In examining this issue, previous studies have relied on the nonlinear autoregressive distributed lag model developed by Shin et al. (2014) where real exchange rate is decomposed into partial sum of positive and negative changes. They fail to examine the response of the trade balance to extreme changes in the real exchange rate. In order to investigate possible sign and size-dependence in the response of the trade balance to exchange rate, this study uses multiple threshold nonlinear ARDL modeling. The approach is implemented using annual data covering the period 1975-2017. The results reveal that the effects of changes in real exchange rate are asymmetric in both time horizons. More specifically, real exchange rate appreciations deteriorate the trade balance while real depreciations improve it. Further, the effect of large depreciations is higher when compared with large appreciations.

The impact of exchange rate and exchange rate volatility on Mauritius foreign direct investment: A sector‐wise analysis

AbstractThis article analyses the structure of FDI inflow in different sectors of the Mauritian economy. While undertaking this investigation, we primarily allow interaction of FDI with exchange rate and exchange rate volatility and with other equally important macroeconomic variables such as trade openness, human capital, GDP, wages and salaries, gross capital formation, and inclusion of a dummy variable to assess the Mauritian Corporate Income Tax (CIT) reform of 2007. Sectors classified as manufacturing, financial, construction, real estate, tourism, and telecommunication, are considered. Using semi‐annual data spanning from 1990 to 2015, the cointegration bound test reveals a systematic long‐run relationship between the set of variables. This justifies the use of an ARDL model. While exchange rate and exchange rate volatility have negligible impact on FDI inflow in the short run, the ARDL results show that a real depreciation of the Mauritian Rupee against the U.S. dollar over the last decades has been beneficial as it has consistently enhanced FDI inflow in various sectors. Besides, there is evidence that investors in the construction, real estate, and telecommunication sectors, as compared to the financial and manufacturing sectors, are more affected by exchange rate volatility. The ARDL model also suggests that investors are particularly concerned with infrastructure capital, trading opportunity, and human capital, mostly when it comes to labour‐intensive industries such as manufacturing, construction, and tourism. Additionally, the significance of the FDI lag values in the restricted error correction model (ECM) confirms the presence of short‐run dynamism in FDI inflow modelling.

The asymmetric J-curve phenomenon: Kenya versus her trading partners

This paper examines asymmetries in the J-curve effects of real exchange rate on Kenya’s trade balance by using panel data for bilateral trade with 30 trading partners. The data covers the period from 2006q1 to 2018q4 and the Pooled Mean Group (PMG) estimation technique, under both the linear and nonlinear ARDL frameworks, is applied. This paper departs from previous studies by using a modified version of the standard trade balance model, which is more suited for bilateral trade analyses, and by incorporating nonlinearities. The findings of the PMG estimation based on the assumption of symmetric exchange rate effects reveal J-curve effects in only 7 bilateral trade relations. However, when the estimation is performed assuming asymmetric effects, the J-curve effects are evident in 13 cases. Long-run and short-run asymmetries are also confirmed and it is established that a simultaneous bilateral real depreciation of the exchange rate boosts the long-run trade balance. The implication of these findings is that a devaluation policy can be used to raise competitiveness of Kenya’s exports in the long-run.

Differences in Exchange Rate Effects on Production Growth: the Case of Iranian Industries

Abstract There has been a long debate about whether exchange rate depreciation promotes output growth or not. In this context, we use Iran’s foreign exchange market which has had large fluctuations in recent years. Since the exchange rate influence on industries’ activity through different mechanisms, we examine the exchange rate effects in the industry level. To do this, the Iranian manufacturing industries data at 4-digit ISIC level are used from 2011 to 2017. The results of GMM dynamic panel data estimations show that the effects of real exchange rate depreciation on average, are positive in the non-crisis periods. But this relationship does not remain valid in a currency crisis conditions. Accordingly, depreciation does not have any positive effects during the currency crisis. Also, estimation results indicate the exchange rate volatility negatively affects industrial production in all periods. Our findings confirm that due to different characteristics of industries, the effects of exchange rate on production vary among them. So, export orientation, access to the preferential rate and higher level of raw material inventory amplify the positive effect of the real depreciation while import dependency and a higher level of final goods inventory fade the effect and turn into negative in some industries.

Post-COVID-19 EMU: Economic Distancing by Parallel Currencies

The coronavirus crisis has caused new distress in the European Economic and Monetary Union (EMU), as the southern part of the EMU has been hit stronger than the northern part. The common currency prevents nominal exchange rate adjustment in response to the asymmetric shock. Policymakers have therefore taken recourse to large-scale financial transfers. Based on the lessons from the German monetary union, this article proposes instead the introduction of parallel currencies to facilitate relative price changes. Parallel currencies in the south would allow an increase in competitiveness of the south via real depreciation. The introduction of a parallel currency in Germany would lead to capital inflows and a real appreciation of the new German mark. The pre-EMU pressure for structural adjustments and productivity gains would be restored.

Dollarization, inflation and foreign exchange markets: A cross‐country analysis

AbstractThis article investigates determinants of deepening dollarization and the relationship between exchange rate and inflation across foreign exchange regimes and degrees of dollarization. To this end, the fixed effect models are adopted using 28 country‐level panel incorporating countries that have experienced dollarization from 1995 to 2016. The overall estimation results show that first, high inflation, less flexible exchange rate movements, the sluggish real economy and the inadequacy of the institutional environments are contributing factors to intensify the dollarization. Secondly, the estimation results using the de‐dollarization country group indicates that real appreciation of the domestic currency is an important factor in mitigating the degree of dollarization while the increasing effects of inflation on dollarization are more pronounced in the dollarized economies. Finally, high dollarization or a high depreciation rate of the domestic currency tends to increase inflation, and those effects are found to have more significant in the dollarized economies, while real depreciation is a factor contributing to lowering inflation.

UNEQUAL EXCHANGE RATE PASS-THROUGH ACROSS INCOME GROUPS

Exchange rate pass-through (ERPT) into prices and into income loss are shown to be enough to calculate ERPT into welfare loss using implications of a simple model. These ERPT measures are estimated at the good level using a unique micro-price data set from Turkey, and they are combined with income-group-specific expenditure shares at the good level to obtain aggregate-level ERPT measures for alternative income groups. An exchange rate shock resulting in a real depreciation of 1% is shown to decrease welfare by about 0.80% for the average-income consumer, while this estimate ranges between 0.73% and 0.83% for consumers in the lowest- and highest-income quintiles, respectively, suggesting evidence for redistributive effects of an exchange rate shock. Using micro prices has further resulted in showing that traded, nondurable, flexible-price, or income-elastic goods contribute more to ERPT into welfare loss for the average-income consumer, suggesting important policy implications for filtering out the noise in the measurement of aggregate-level prices.

Effects of Exchange Rate Shocks and Political Risk on the Turkish Manufacturing Industry: Some Evidence

In cases where debt dollarization of firms is more than asset dollarization, sudden and high depreciation of the national currency causes firms to lose net wealth and may adversely affect their investments and profitability. Real exchange rate depreciation, on one hand, increases the incomes of manufacturing industry firms by providing international competitive advantage and it can prevent the competitive advantage by creating negative balance sheet effect due to high debt dollarization on the other. In this context, the aim of this study is to discuss the determinants of the debt-dollarization and the balance sheet situation of the manufacturing industry, which is facing political instability and exchange rate volatility. Dynamic panel data method was used for manufacturing industry sub-sector data for the 2008-2015 period. Overall, our empirical results reveal that the exchange rate shocks have positive impact on both debt dollarization and profitability. That means there is an exchange rate dependency in manufacturing industry. In addition, results show that there is no significant effect of political uncertainty on debt dollarization and the profitability of firm.

A re-examination of the impacts of macroeconomic and financial shocks on real exchange rate fluctuation: evidence from G7 and Asian countries

ABSTRACT This paper aims to investigate the sources of real exchange rate fluctuation by utilizing sign restrictions in structural vector autoregressive (SVAR) method. Under an agnostic identification scheme, the empirical results show that the delayed overshooting puzzle still exists in response to monetary shock even if price puzzle is ruled out by construction. In contrast, all countries experience a significant initial real depreciation, and then gradually appreciate in response to currency risk premium (CRP) shock. This finding is consistent with Dornbusch’s overshooting model. In addition, I examine the importance of investors’ expectations in determining the short-term variations in the real exchange rate. The results indicate that the CRP and expectation shocks obviously outperformed the demand, supply and monetary shocks in terms of explaining the real exchange rate fluctuation.

Impact of real exchange rate fluctuations on aggregate cocoa and coffee exports in Sierra Leone

The regression and the vector autoregressive VAR models have been employed in this analysis. I use the autodistributed lag regression model to estimate both the short and the long-run impacts. In the VAR model, orthogonalized impulse response functions are employed to estimate the short-run. The regression result shows that while depreciation of the RER increases aggregate cocoa and coffee exports AGX in the current year, this variable is not significant in determining AGX in Sierra Leone. This is due to the fact that AGX have long gestation periods and until this period is over, suppliers cannot actually raise their output and hence exports. The negative effect of the one period lag of RER variable on AGX can be attributed to the fact that in the long run, depreciation in the nominal exchange rate leads to real exchange rate depreciation. This will lead to increase in cost of imported farming inputs in domestic currency terms. The reduction in imports that follows decreases the output and hence cocoa and coffee exports. However, this variable is not significant in determining AGX in Sierra Leone. An increase in the orthogonalized shock to the first difference of log RER causes a short series of increases in first difference of log AGX followed by a decrease, followed by an increase that dies out after four periods. The null hypothesis that the lag of first difference of log RER does not Granger-cause the lag of first difference of AGX cannot be rejected. The paper concluded that in the short and long-run, the RER should not be taken as policy variable to influence AGX in Sierra Leone.

Real Exchange Rate Dynamics Beyond Business Cycles

We examine how medium-term movements in real exchange rates and GDP vary with international financial conditions. For this purpose, we study the international transmission of productivity shocks across a variety of IRBC models that incorporate different assumptions about the persistence of productivity shocks, the degree of international risk sharing and access to international asset markets. Using a new global solution method, we demonstrate that the transmission of productivity shocks depends critically on the proximity of a national economy to its international borrowing limit. We then show that this implication of the IRBC model is consistent with the behavior of the US-UK real exchange rate and GDP over the past 200 years. The model also produces a negative correlation between relative consumption growth and real depreciation rate consistent with more recent data, and hence offers a resolution of the Backus-Smith puzzle.

Asymmetric Effects of Exchange Rate and Its Relationship with Foreign Investments: A Case of Indian Stock Market

Emerging markets, including India, are witnessing an influx of foreign capital. The article investigates the role of exchange rate which influences both the net foreign institutional investments (FIIs) and the stock markets, using monthly data, from January 2008 to May 2018. The effects of real effective exchange rate are studied through non-linear ARDL co-integration. The long-run relationship is found in all the three models constructed. The results highlight the nature of FII flows in relation to exchange rate asymmetry. Real rupee depreciation has a long-run effect on their debt flows. The ‘adjustment asymmetry effect’ of exchange rate is found for equity flows in the long run. The similar effect is observed for the Nifty 50 model. Due to high volatility, even positive stock returns do not attract equity FII flows. In the short run, rupee depreciation in real terms negatively influences Nifty returns. The S&P 500 returns explain FII flows indicating information asymmetry. These outcomes serve a vital input for key stakeholders such as potential FIIs, domestic traders, regulators and policymakers.

Efectos de los auges y la crisis del petróleo en la economía colombiana: un enfoque autorregresivo vectorial variable en el tiempo

El propósito de este documento es estimar el impacto de los choques de precios y producción de petróleo en variables macroeconómicas como la deuda pública, el tipo de cambio real y la actividad económica colombiana. Este país depende en gran medida de las exportaciones de petróleo, lo que podría conducir a diferentes obstáculos en el manejo macroeconómico cuando los precios y la producción de petróleo registran fluctuaciones. El documento describe la importancia del petróleo en Colombia, que pasó de ser un país completamente importador en 1976 a una economía exportadora de petróleo en 1986. El análisis empírico utiliza una metodología de vectores autorregresivos con parámetros cambiantes en el tiempo, que supone que la relación entre los precios y la producción de petróleo con las variables macroeconómicas cambia dinámicamente. Los resultados confirman que existen diferentes patrones de volatilidad estocástica de las variables incluidas en el modelo. De acuerdo con las funciones impulso-respuesta, los choques positivos del precio del petróleo no causaron efectos significativos en el tipo de cambio real ni en la deuda pública. Sin embargo, el choque negativo de los precios en 2015 condujo a una depreciación real y a un aumento de la deuda pública.

Exchange rate movements and aggregate output: The case of China

Applying an extended IS-MP-AS model (Romer, 2000), this paper finds that real GDP in China has a positive relationship with real depreciation during 1990-2005 and the real stock price and a negative relationship with real depreciation during 2006-2016, the lagged US real interest rate, the real oil price and the expected inflation rate. Therefore, during 1990-2005, the benefits of real depreciation such as more exports overwhelmed the costs of real depreciation such as higher import costs, higher inflation and less capital inflows whereas during 2006-2016, the benefits of real appreciation such as lower import costs, lower inflation, and more capital inflows dominated its negative effects such as less exports.

Exchange rate movements and aggregate output: the case of China

Applying an extended IS-MP-AS model (Romer, 2000), this paper finds that real GDP in China has a positive relationship with real depreciation during 1990-2005 and the real stock price and a negative relationship with real depreciation during 2006-2016, the lagged US real interest rate, the real oil price and the expected inflation rate. Therefore, during 1990-2005, the benefits of real depreciation such as more exports overwhelmed the costs of real depreciation such as higher import costs, higher inflation and less capital inflows whereas during 2006-2016, the benefits of real appreciation such as lower import costs, lower inflation, and more capital inflows dominated its negative effects such as less exports.

Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa

AbstractDo government spending patterns and composition influence the behaviour of the real exchange rate in sub‐Saharan Africa (SSA)? First, we present a two‐sector small open economy model which proposes that government spending together with productivity differential leads to real exchange rate appreciation. Then, we take these propositions to SSA data and perform a coordinated empirical analysis. Interestingly, we find empirical support for the propositions in SSA. Finally, we disaggregate government spending into three components—consumption, investment and transfer payments—and check whether the composition of government spending provides any insight into the behaviour of the real exchange rate in SSA. Our results suggest that government composition does influence the real exchange rate in SSA. Specifically, we find that government consumption induces a real appreciation while government investment leads to a real depreciation. Although these findings yield appropriate magnitudes and signed directions, their effects are not always significant.