Appreciation Of Real Effective Exchange Rate 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.

Determining The Real Exchange Rate Equilibrium for Pakistan

The achievement of macroeconomic stability and sustained economic growth are the main targets of macroeconomic agents and policymakers. High volatility in Real Effective Exchange Rate (REER) is noticed while moving towards flexible Exchange rate regime. Three assessment methodologies are followed in the paper i.e., PPP approach, PPP approach adjusted for Penn effect and reduced form equation approach to gauge REER misalignment. VAR modelling suggest that, PPP holds for Pakistan and Penn effect is witnessed in the country for FY1980-FY2018. The determinants of REER, like “openness to GDP ratio, Govt consumption to GDP ratio, Long term Investment to GDP ratio, relative productivity and terms of trade” are responsible for depreciation in REER. While, worker remittances and FDI leads towards the REER appreciation in. It is indispensable to opt for the devaluation of PKR to gain export competitiveness, which may result in shrinkage of current account deficit. To increase the productivity of tradable items and to reduce the GOVT consumption of imported items are few steps to push REER towards equilibrium level. As per the state of art model the range of misalignment in REER is from -3.9% to 4.2% in Pakistan

Studying the flip side of migrant remittances: A panel cointegration analysis of 18 selected Asian countries

This study is an attempt to gauge the effect of remittances on Real Effective Exchange Rate (REER) with the help of a panel of 18 selected Asian countries. The period considered for this study is from 1998 to 2016. To achieve the objective of the study, along with Pedroni panel cointegration technique, ‘Fully Modified Ordinary Least Square’ and ‘Dynamic Ordinary Least Square’ methods were applied. The results of the study suggest that remittances exert upward pressure on REER. In case of both the estimators (FMOLS and DOLS), the coefficient of remittances is negative and statistically significant at 1% level. Impulse response functions (IRFs) derived from the Panel Vector Auto Regressive model (PVAR) exhibits similar kind of results. The results obtained from this study raise the concerns similar to the ones raised by the Dutch disease or discoveries of natural resources leading to the appreciation of REER.

The impact of real effective exchange rate on revealed comparative advantage and trade balance of Pakistan

This study estimates the effects of devaluation and appreciation of real effective exchange rate (REER) on revealed comparative advantage (RCA) at Harmonized System 2-digit level of exports in Pakistan. A non-linear Autoregressive Distribute Lag (ARDL) technique is applied to test the asymmetric evidence. This study employs two models to explore the export performance. Findings/Originality: The results of model 1 estimation confirm the proof of asymmetric ARDL and concludes that devaluation has a positive effect on selected RCA’s index value and helps enhance exports of Pakistan. Meanwhile, the appreciation of REER is having an adverse impact. Model-2 estimates the effect of these selected RCA’s, REER, and world aggregated income (Yw) on the trade balance (TB) of Pakistan. The results estimate that an increase in selected RCA’s index values, world aggregated income, and REER depreciation is useful to decrease in deficit TB of Pakistan.

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.

Foreign direct investments into 33 Indonesian provinces: is the rupiah a boon or a bane

The degree to which exchange rate movements and fluctuations affect foreign direct investment (FDI) inflows is a subject of policy importance for several emerging markets and developing economies like Indonesia. In particular, considering the heavily skewed nature of FDI inflows into Indonesia, it becomes important to understand the determinants of FDI to its provinces. Given the context, we undertake an empirical analysis to study the impact of real effective exchange rate (REER), both in terms of levels and volatility, on FDI inflows to Indonesian provinces. Using a panel dataset featuring data on 33 Indonesian provinces for 2000 to 2014, our panel estimation results strongly suggest that an appreciation of REER as well as greater volatility of REER deters FDI inflows to Indonesia's provinces. Our findings are suggestive that the nature of FDI inflows to Indonesia is export-oriented. Our results remain consistent and robust to different model specifications.

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.

The Impact of RMB Exchange Rate Fluctuation on Enterprises’ Export Decisions—From the Perspective of Heterogeneity

This paper empirically discusses the impact of exchange rate fluctuations on enterprises’ export decisions by using the annual data of the database of China’s industrial enterprises and the database of China’s customs merged according to the hs6-digit code from 2000 to 2007. The study found that: 1) the appreciation of RMB real effective exchange rate will significantly increase the probability of enterprises exiting export markets and reduce the probability of enterprises entering export markets; 2) compared with state-owned enterprises and private enterprises, foreign-owned enterprises have stronger ability to fight against exchange rate risks, and enterprises in eastern China are more sensitive to exchange rate fluctuation; 3) based on the analysis of heterogeneity of enterprise characteristics, it is found that such factors as enterprise productivity, enterprise profit margin, enterprise size and enterprise export experience can reduce the positive impact of RMB real effective exchange rate appreciation on enterprises exiting from export markets. This paper provides some useful advice for enterprises to avoid exchange rate risks and make better export decisions.

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.

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.

THE ROLE OF PRIVATE CAPITAL INFLOWS AND THE EXCHANGE MARKET PRESSURE ON REAL EXCHANGE RATE APPRECIATION: THE CASE OF TURKEY

AbstractThe aim of this paper is to investigate the role of different private capital inflows and the exchange market pressure (EMP) on the real effective exchange rate (REER) appreciation of the currency in Turkey. To that end, the paper first investigates the long‐run equilibrium relationship and then employs Granger causality analysis. Results of the bounds test for cointegration within the autoregressive distributed lag (ARDL) modelling approach of Pesaran et al. (2001) reveal level relationship between the diverse private capital inflows, EMP and REER. Granger causality analysis suggests that there is a unidirectional causality running from all the concerned private capital inflows and EMP to REER. The ARDL model shows first that the impact of bank liabilities and portfolio investment liabilities are almost equal, high and positive. Second, foreign direct investment and workers' remittances have a negative but statistically insignificant effect. Third, EMP mitigates REER appreciation of the currency in Turkey. The empirical results suggest that speculative portfolio investment liabilities but particularly bank liabilities with short maturities should be better managed; more flexibility should be introduced to the floating exchange rate regime to avoid loss of competitiveness related with capital inflows; whereas foreign direct investments and remittances should be encouraged.

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.