Real Effective Exchange Rate Index Research Articles

Measuring Competitiveness in a World of Global Value Chains

All common real effective exchange rate indexes assume trade is only in final goods, despite the growing presence of global supply chains. Extending effective exchange rate indexes to include such intermediate goods can imply radically different effective exchange rate weights, depending on the relative substitutability of goods in final demand and in production. Unfortunately, the effect of these shifts in weights are difficult to identify empirically because the two currencies most affected—the dollar and the renminbi—have moved closely together. As the renminbi becomes more flexible, however, it will be important to determine which assumptions are the most realistic.

Forecasting real effective exchange rate indices of currencies using a stochastic factor

This article considers the possibility of forecasting real effective exchange rate indices for leading world countries. A stable unified mean trajectory for a reliable forecast of the index cannot be constructed using data from 31 January 1994 to 30 April 2017; however, it is reasonable to use data of the last period for this purpose. To construct a short-term forecast of real effective exchange rates based on initial value, we propose using a simulation with a discrete approximation of stochastic differential equations of Merton, Vasicek, Dosen, Ogden, and Cox-Ingersoll-Ross, and a polynomial residues model. Simulations using discrete approximations of the Vasicek, Merton, Dosen, and Ogden equations did not allow constructing a reliable forecast of the specified index using data from April 2016 to March 2017 for the USA, UK, Eurozone countries, Japan, and Switzerland. Processing simulation results based on a discrete approximation of the stochastic Cox-Ingersoll-Ross equation and the polynomial residues model, and for the considered countries for most of the same time period, resulted in a 50 % confidence interval for the mean trajectory of observed values of effective exchange rates indexes. The quality of the forecast essentially depends on the selected time period and methods used to determine the numerical parameters of discrete approximations for the original stochastic equations.

Exchange rate flexibility and financial integration: The case of France 1977-2014

From 1977 until 2014, the real effective exchange rate in France declined. Over the same period, the total value of stocks traded in proportion to the nation’s GDP increased. The data is consistent with economic theory - currency depreciation was followed by an increase in the total value of stock transactions (in proportion to GDP). The results of most regression analyses have shown that the relationship between currency depreciation and stock transactions are not always consistent with economic theory. The effect of currency depreciation on stock transactions can be either positive or negative due to various reasons, one of which is the omission of an important variable. Phylaktis and Ravazzolo (2005) showed that the lack of a significant relationship between exchange rate movements and stock transactions could be due to excluding the influence of the world capital markets. This paper builds on Phylaktis and Ravazzolo (2005) and tests the hypothesis that currency depreciation increases the total value of stock transactions in France. Annual data is obtained from the World Development Indicators of the World Bank. The total value of stocks traded is expressed as a percentage of GDP. The real effective exchange rate index is the nominal effective exchange rate divided either by a price deflator or by an index of costs. A trivariate VECM is estimated for the period 1977-2014. The paper investigates the short-run and long-run relationships between the real effective exchange rate and the total value of stocks traded in France. The effect of the U.S. stock market, representing the world capital markets, is also examined. The Dickey-Fuller Generalized Least Squares unit root test indicates that the variables are I(1). The Johansen cointegration test indicates a long-run relationship between the variables. Since AIC selected a model with 4 lags and the maximum rank of the cointegrating matrix is found to be 1, the VECM is estimated with 4 lags and 1 rank specification. The short-run results indicate that the adjustment coefficient is statistically insignificant; thus the estimated results are plausible in the short-run but not in the long-run. The short-run results indicate a significantly negative relationship between the real effective exchange rate and the total value of stock transactions in France; thus there is a close association between the stock market and the foreign exchange market in France. The short-run relationship between stock transactions in the U.S. and France is also found to be significantly negative.

Real Effective Exchange Rate and Regional Economic Growth in China: Evidence from Provincial Data

AbstractUsing data for the period 2000–2011, we construct province‐level real effective exchange rate (REER) indices for China and test the effect of REER depreciation on regional economic growth in a generalized method of moments regression framework. Our results show that REER depreciation, in general, promotes regional economic growth, through increasing net exports and lowering FDI costs. After dividing the full sample into coastal and inland subsamples, we find that REER depreciation influences economic growth in inland areas but not in coastal areas. This is due to the fact that the inland areas have more surplus labor or other resources to expand their production capacity when REER depreciation leads to increased world demand. Furthermore, compared to inland areas, processing‐and‐assembly trade comprises a larger share of trade in the coastal areas, where traders import more raw materials and intermediate goods to process and assemble goods. When the exchange rate depreciates, the costs of imported materials and immediate goods increase. In this case, the benefits from REER depreciation in coastal areas are offset to some extent and are thus lower than in inland areas.

Petrol Gelirleri ve Ekonomik Büyüme: Seçilmiş Petrol Zengini Gelişmekte Olan Ülkeler Üzerine Bir Panel Veri Analizi

Bu calisma, secilen 12 petrol zengini gelismekte olan ulkede, petrol gelirlerinin ekonomik buyumeyi nasil etkiledigini belirlemeyi amaclamaktadir. Kisi basina reel gayri safi yurtici hâsila ekonomik buyumeyi gosterirken, petrol gelirini temsilen ham petrol fiyati ve ihracati alinmistir. Bu iliskiyi etkilemesi beklenen reel efektif doviz kuru ve tuketici fiyat endeksi de diger aciklayici degiskenler olarak modele eklenmistir. Kaynak talihsizligi bulgusunu arastirmaya yonelik olarak 2000-2010 donemi icin panel veri regresyon analizi uygulanmistir. Petrol gelirlerinin buyume uzerine olan pozitif etkisinin oldukca dusuk olmasi, ‘kaynak talihsizligi hipotezi’ni destekler niteliktedir. Genel sonuclar, petrol kaynaklarinin daha etkin kullanilmasina ve kaynak talihsizliginin gelisim mekanizmalarinin engellenmesine yonelik politikalarin onemini ortaya koymaktadir.

Commodity prices, the exchange rate and manufacturing in South Africa: what do the data say?

Purpose – The purpose of this paper is to investigate the empirical relationships between changes in OECD output, commodity prices, the real exchange rate, real money supply, unit labour costs and manufacturing in South Africa. In particular, to test a version of the Dutch disease argument that increases in the prices of South Africa’s main commodity exports have had a negative effect on domestic manufacturing against the alternative hypothesis that there is a positive relationship between such changes in commodity prices and domestic manufacturing output. Design/methodology/approach – Construction of a model including real manufacturing output in South Africa as the dependent variable and the following independent variables: OECD output, an international real metals price index, a real effective exchange rate index, real M3 money supply and manufacturing unit labour costs. The time series sample data comprise 124 quarterly observations for the period 1980-2010. The model equation was tested and estimated using a Johansen cointegration approach. Findings – The main findings are: OECD output is the single most important determinant of domestic manufacturing output; while the real exchange rate has the predicted negative sign, rising commodity prices are associated with increases rather than decreases in domestic manufacturing and; large increases in unit labour costs since the early 1980s have dragged down manufacturing over the sample period. Originality/value – The finding of a positive relationship between commodity prices and domestic manufacturing means that the Dutch disease argument must be revised when applied to South Africa. While rising commodity prices may lead to a negative exchange rate effect on manufacturing competitiveness, this is more than offset by the positive growth effects associated with upswings in the commodity price cycle.

An Investigation into the Crude Oil Price Pass-Through to the Macroeconomic Activities of Malaysia

This study examines the pass-through of crude oil prices (CP) into economic activities of Malaysia including industrial production index (IP), consumer price index (CPI), real effective exchange rate (REER), interest rate (IR) and stock price index (SPI) within the framework of hidden cointegration technique over the quarterly data ranging from 1987 to 2013. The estimated results suggest that positive and negative changes of IP, CPI, REER, IR and SPI do not maintain a long-run association with positive as well as negative changes of real CP. Although the negative changes in CPI, negative changes in IP and negative changes in REER are found to be cointegrated with the positive changes of CP the estimated signs of the error correcting terms do not provide enough evidence to support this provision.

Possible Best Currency Basket Selection from the Perspective of Real Effective Exchange Rate

AbstractWe calculated the real effective exchange rate indexes and measured their volatilities based on four currency baskets to find which currency basket is optimal for achieving China's policy target of keeping exchange rates stable. The volatility of the bilateral exchange rate between the RMB and the US dollar is also calculated to make a comparative analysis. Results showed that the bilateral exchange rate of the RMB and the US dollar is only stable in special time periods. In most time periods, pegging to the G3 currency basket is optimal to achieve the goal of stabilizing exchange rates while pegging to the AMU currency basket will result in the most volatile exchange rates.

Testing the J-Curve Hypothesis: A Case of Nepal

This paper attempts to explore the J-curve phenomenon in the case of Nepalese foreign trade sector in order to examine whether devaluation2 of Nepalese currency can be taken as a policy tool for improving Nepalese trade imbalance with the rest of the world economies. Johansen's cointegration test, vector autoregression (VAR) model, impulse response function as well as autoregressive distributed lag (ARDL) bounds testing cointegration approach has been employed in order to see the relationships between the nominal effective exchange rate index (NEER) and trade balance (TB) as well as the real effective exchange rate index (REER) and trade balance (TB) of Nepal. The study found no evidence of "J-curve" in the case of Nepalese trade. On the contrary to the "J-curve" phenomenon as explained by the classical text books, the findings of the study suggest that depreciation of Nepalese exchange rate rather produces a flatter "L-curve" phenomenon indicating that there is no room for improving Nepalese trade imbalance through a currency devaluation process.

Valuation effects and long-run real exchange rate dynamics

This paper uses the Johansen test for cointegration to check the prediction of a portfolio balance model that predictable valuation effects are associated with a saddle-path dynamic relationship between the net foreign asset position and the real exchange rate. The analysis uses newly constructed quarterly series on the net foreign position as a percentage of the nominal gross domestic product, together with data on real effective exchange rate indices for a sample of developed countries which borrow in their own currency. The results indicate that the net foreign asset position and the real exchange rate are not cointegrated for all the countries in the sample. The rejection of saddle-path dynamics suggests that predictable valuation effects are quantitatively small in developed countries. The rejection of cointegration suggests that the net foreign asset position is not a determinant for long-run real exchange rates in developed countries.

Oil Price Volatility and Real Effective Exchange Rate: The Case of Thailand

The main objective of this study is to directly examine the relation between real oil price and real effective exchange rate in Thailand during July 1997 to December 2013. Under the floating exchange rate regime, bilateral exchange rates are expected to fluctuate more than under the fixed exchange rate regime. The monthly data of real effective exchange rate index and real oil price are used. The results from this study reveal that there is no cointegration and causality in levels of the two series. However, an increase in oil price volatility causes real exchange rate volatility to increase. This main finding gives some policy implications to policy makers.

Industry‐specific Real Effective Exchange Rate for China: 2000–2009

AbstractThis paper measures the industry‐specific real effective exchange rate (REER) for China by matching domestic and foreign industry‐level price and trade data series. We find that after 2005 the REER appreciates more in the “chemical, plastics, rubber and fuels industry” and the “machinery and equipment industry,” but remains roughly constant or even depreciates in other industries. The nominal exchange rate generally accounts for over 50 percent of the aggregate real effective exchange rate fluctuations, but this conclusion does not apply to three of nine industries. We apply the industry‐specific REER to re‐examine the relationship between the exchange rate and trade, and find that the industry‐specific REER index performs better than the traditional aggregate REER index. We recommend that the Chinese Government officially adopt industry‐specific exchange rates instead of using the aggregate effective exchange rates to evaluate the competitiveness of Chinese industries in the international market.

Revisiting the effective exchange rates of the euro

This paper describes in detail the methodology currently used by the European Central Bank (ECB) to determine the nominal and real effective exchange rate indices of the euro. Building on the work of Buldorini et al. (2002), it shows how the ECB’s techniques for calculating effective exchange rates have been updated over time and explains the related theoretical foundations. In particular, the paper discusses the use and development of trade weights based on trade in manufactured goods (taking account of third market effects), the trading partners selected, and the choice of deflators for constructing the real effective exchange rate indices. In addition, it presents evidence on exchange rate and competitiveness developments for both the euro area as a whole and individual Member States. While the growing importance of China is reflected in the updated trade weights of euro effective exchange rates, it appears that the increasing integration of the euro area with other European economies accounts for the largest variation in trade weights. The US dollar, an anchor currency for a number of large emerging markets, continues to play an important role for the effective exchange rate of the euro and euro area competitiveness. Overall, euro area competitiveness has improved slightly since the introduction of the single currency, despite significant heterogeneity within the euro area. JEL Classification: C43, D12, E31

Revisting the Effective Exchange Rates of the Euro

This paper describes in detail the methodology currently used by the European Central Bank (ECB) to determine the nominal and real effective exchange rate indices of the euro. Building on the work of Buldorini et al. (2002), it shows how the ECB’s techniques for calculating effective exchange rates have been updated over time and explains the related theoretical foundations. In particular, the paper discusses the use and development of trade weights based on trade in manufactured goods (taking account of third market effects), the trading partners selected, and the choice of deflators for constructing the real effective exchange rate indices. In addition, it presents evidence on exchange rate and competitiveness developments for both the euro area as a whole and individual Member States. While the growing importance of China is reflected in the updated trade weights of euro effective exchange rates, it appears that the increasing integration of the euro area with other European economies accounts for the largest variation in trade weights. The US dollar, an anchor currency for a number of large emerging markets, continues to play an important role for the effective exchange rate of the euro and euro area competitiveness. Overall, euro area competitiveness has improved slightly since the introduction of the single currency, despite significant heterogeneity within the euro area.

Euro Area Export Performance and Competitiveness

Concerns about export growth within the euro area peripheral countries due to a lack of competitiveness within the euro area are a key policy issue. Our analysis suggests that: (i) Long-term price elasticities for intra-euro area exports are at least double those for extra-euro area exports, so traditional real effective exchange rate indexes may overstate the effectiveness of euro depreciation in restoring exports growth in the euro area periphery and; (ii) There are surprisingly wide divergences across alternative relative price measures and even when relative price data suggest a steady loss in intra- (and extra-) euro area competitiveness, the pace of deterioration depends on the measure of relative prices used.

Nominal and Real Effective Exchange Rate for Bosnia and Herzegovina

This paper is presenting the overview of theoretic approach to Real Effective Exchange Rate (REER) and Nominal Effective Exchange Rate (NEER) indicators calculation for Bosnia and Herzegovina. Special attention is dedicated to statistical difficulties in calculation and still limited implementation of this approach in Bosnia and Herzegovina. NEER and REER indices are indicators by themselves that BH has to work a lot to improve its competitiveness position. It is a widely known statement that a country's competitiveness improves when the relative price of its tradable goods declines. BH mostly trade with its raw materials, which are mostly natural wealth of the county like wood, coal and aluminium, so this cannot be a long-term and permanent solution for the country.

An Econometric Model of Tourism Demand and Room Rates: A Study in Belek, Antalya

ABSTRACT In this study, International tourism demand and short-run supply for Antalya-Belek hotel industry are examined via simultaneous equations econometric model using monthly data between 1998-M01 and 2006-M10. The overall goodness-of-flt of both demand and supply models is very high, suggesting a high predictive power. Through empirical Implementation of the theoretical model, several important determinants of supply and demand are identified. On the demand side, “tourist arrivals” is a significant factor driving the demand for beds, while “room rate” has a significant negative impact on the bed demand. At the same time, “bed demand”, “the Consumer Price Index based on real effective exchange rate index”, and “the GAP between bed supply and demand” have a significant positive impact on room rates. Empirical results suggest that the hotel operators in Antalya-Belek attempt to raise the room rates in order to close the gap between actual and expected incomes, when they face high excess gap between the bed supply and demand. Also, yield management is employed by the hotel operators in Antalya-Belek due to the positive impact of the bed demand on room rates.

Real effective exchange rate volatility and growth: A framework to measure advantages of flexibility vs. costs of volatility

By devising a real effective exchange rate (REER) index where bilateral exchange rates are weighted for relative trade shares, we find that the REER volatility (differently from the bilateral exchange rate volatility with the dollar) has significant impact on growth of per capita income after controlling for other variables traditionally considered in conditional convergence estimates. We also find that this (cost of volatility) effect can be reconciled with the concurring negative and significant effect on growth of the adoption of a fixed exchange rate regime (advantage of flexibility effect), where the latter may be also interpreted as the cost of choosing pegged regimes without harmonization of rules and macroeconomic policies with main trading partners. The adoption of an REER volatility measure, instead of a bilateral exchange rate with the dollar, has the advantage of making it possible a joint test for these two effects. This is because, while fixed exchange rate regimes are strongly negatively correlated, and almost collinear, with bilateral exchange rate volatility with the dollar, the correlation is much weaker when considering our REER volatility measure.

Argentina's Currency Board Collapse: Weak Policy or Bad Luck?

Two basic views can be discerned in post‐mortems of Argentina's currency board: (1) that weak fiscal policy was fundamentally to blame, and (2) that the peso had become too severely overvalued for the peg to survive. This paper evaluates the evidence for these rival interpretations. The real effective exchange rate index did not indicate massive overvaluation, but this index does not capture the effects on the equilibrium rate of the ‘sudden stop’ in capital flows to emerging markets after 1998. It also understates the amount of adjustment required for Argentina to reach the equilibrium rate, because neighbour countries’ dollar exchange rates were held up by Argentina's overvaluation, as is indicated by their depreciation in 2002. Argentina was particularly vulnerable to the sudden stop because of the extreme volatility of its portfolio inflows. Fiscal policy simulations suggest that, even with a substantially improved primary balance from 1994 onwards, loss of investor confidence would still have triggered unsustainable debt dynamics once the recession began to bite after 1998. The stagnation of output and prices in Argentina created a yawning gap between the interest rate on debt and the rate of growth of nominal GDP. Had the currency been floated in, say, 1995, the real devaluation of the peso would still have pushed up the debt/GDP ratio, but higher output would have left greater scope for addressing this by running a sizeable primary surplus. Moreover, the more gradual depreciation under floating might have allowed the economy to adjust to higher debt service payments without resort to default. The IMF has criticised itself for not pressing for tighter fiscal policy in the 1990s. A more fundamental criticism would be that it was seduced by the bipolar model into complacency about adjustment to real shocks and forgetting the teachings of optimum currency area theory.

The Effective Exchange Rates of the Euro

This paper details the methodological framework underlying the construction of the effective exchange rate (EER) indicators of the euro. This framework yields two sets of indicators - (i) one nominal and several real EER indices against a narrow reference group of euro area trading partners based on different price and cost deflators; and (ii) a nominal and a real EER index against a broad reference group of countries based on consumer prices. The narrow group consists of 12 industrial and newly industrialised euro area partner countries, while the broad group is made up of 38 trading partners including emerging market economies and economies in transition. In addition the paper computes national competitiveness indicators for the individual euro area participating countries. Finally, recent developments in the international price and cost competitiveness of the euro area as well as of euro area countries are briefly discussed on the basis of the constructed indices.