Real Exchange Rate Appreciation Research Articles

Current account deficit across South Asia: A Second Generation Methodological Adaptive Approach

Current account deficit poses a serious threat for a country's macroeconomic stability despite the fast economic growth. The primary objective of this paper is to explain and critically examine the determinants of current account deficit across seven South Asian countries using yearly data for 1980–2016 period. This paper employed several econometric techniques such as cross-sectional dependence to see if shocks that occur in one country affect another, panel unit root test to check the stationary of the data and Panel cointegration test to check long-run relationship among the variables. This study also implemented Continuously Updated estimation procedure given to estimate long-run coefficients. The findings suggest that an appreciation of real effective exchange rate leads to a reduction in current account deficit, contrary to popular belief. The analysis also reveals that financial development, trade openness, fiscal balance and population growth have positive and significant relationship with current account deficit in South Asia but net foreign asset negatively affects current account deficit. This study, therefore, has several policy implications for South Asian countries.

Oil Price and Real Exchange Rate Appreciation: Is there Dutch Disease in Nigeria?

Oil Price and Real Exchange Rate Appreciation: Is there Dutch Disease in Nigeria?

The response of Zimbabwe tobacco exports to real exchange rates volatility: 1980–2019

The focus of this study was on investigating the response of tobacco exports to real exchange rates and real exchange rate volatility and other factors in Zimbabwe using secondary data spanning from 1980 to 2019. Bilateral nominal exchange rates and time-variant weights of Zimbabwe’s 10 major trading partners were calculated and used to compute the real exchange rate index. The time-dependent weighting system was used to better represent the evolution of trade patterns in the index. The arithmetic method was employed for computing the index. Generalized autoregressive conditional heteroskedasticity (GARCH) and autoregressive conditional heteroscedasticity (ARCH) models were used to generate the real exchange rate volatility index. The export response function was adopted as the tobacco exports response model. The variables in the tobacco exports response model were the realworld Gross Domestic Product (GDP), real exchange rate, terms of trade, real exchange rate volatility and dollarization. A vector error correction model (VECM) was used to estimate the response of tobacco exports to real exchange rate, real exchange rate volatility and other factors. The VECM results indicated that real world GDP was insignificant in both the short and long run. In the long run, the real exchange rate appreciation had a negative impact on tobacco exports. Conversely, in the short run, the depreciation of real exchange rate had a positive impact on tobacco exports. Hence, the government has to adopt other mechanisms that reduce uncertain movements of exchange rates.

Does productivity drive the real exchange rate movements? A re-examination of the Balassa–Samuelson hypothesis

PurposeThe primary purpose of this study is to examine whether the classification of industries into the tradable and nontradable matters for the Balassa–Samuelson (BS) effect.Design/methodology/approachThe study uses annual data for 38 countries from 1995 to 2014. To examine whether the classification of industries matter, the study proceeds with two approaches, that is, “traditional” and “benchmark”.FindingsFirst, by applying panel cointegration tests of Pedroni and Westerlund, the results validate the BS hypothesis. However, the coefficients of long-run elasticities show appreciation of real exchange rate (RER) due to increase in productivity in the case of “traditional approach”, whereas depreciation of RER in the case of “benchmark approach”. Second, by applying the Dumitrescu-Hurlin panel Granger causality test, the results reveal the bi-directional causality among RER and productivity for both the approaches. Further, to provide more insights, the study employs a fixed-effects panel threshold model. The results indicate that increase in productivity leads to both appreciation and depreciation of RER depending on threshold regimes.Practical implicationsThe study ascertains that the evidence of BS effect depends on the choice of approach considered. However, irrespective of the classification, there exists a BS effect beyond a threshold.Originality/valueAlthough the BS effect is well established in the literature; there is no study examining the importance of classification of industries at a disaggregated level. Furthermore, there is no consideration of threshold effects.

Was the Balassa–Samuelson Effect Small? Uncaptured Quality Improvements and Japan’s Real Exchange Rate Appreciation, 1956–1970

Japan, China, and Central and Eastern European countries experienced substantial real exchange rate appreciation during their catch-up industrialization periods. In each, the measured Balassa–Samuelson effect was small while the greatest source of long-term currency appreciation was the real appreciation in tradables, increases in tradable prices expressed in the common currency, which went counter to PPP. For Japan in the 1950s and 1960s, we suspect price mismeasurement associated with uncaptured product quality improvements in manufactures. Our findings suggest that the Balassa–Samuelson effect would account for three quarters of Japan’s real exchange rate appreciation vis-a-vis the USA then.

Markups and misallocation with evidence from exchange rate shocks

In a setting with firms that charge variable markups, this paper finds that firm heterogeneity has welfare implications that result exclusively from the differential markup adjustment to global shocks. Changes in allocative efficiency are summarized by a sufficient statistic that can be directly measured with aggregate data. I use Chilean data between 1995 and 2007 to show that exchange rate shocks can be an important driver of allocative efficiency, as there are large changes in misallocation over time due to the way firms pass-through these shocks into markups. At the firm-level, there is evidence that importing firms pass-through real exchange rate appreciations into their markups. Over time, due to the compositional effect that ensues, industries that import a larger share of their inputs become more misallocated. In a structural model with productivity gains from importing, where firm market power increases with size, I show how firm reallocation in response to a positive supply shock rationalizes the reduced-form results.

Structural changes and the real exchange rate dynamics

Since China joined the WTO in 2001, the Chinese economy has grown very rapidly, especially, the tradable goods sector. However, the Chinese real exchange rate did not exhibit a persistent and stable appreciation until 2005. This is a puzzling fact that is inconsistent with theories. This paper documents several stylized facts during the economic transition and argues that two features of Chinese economy may help explain the puzzling real exchange rate pattern for Chinese economy: (i) the faster total factor productivity (TFP) growth in export sector compared with the import sector; (ii) excess supply of unskilled labor. Our hypotheses are supported by cross-country evidence. Furthermore, we construct a small open economy model with an H-O trade structure and show that, due to heterogeneous skilled labor intensity in export and import sectors, the faster TFP growth in the export sector over that in the import sector will lead to the decline of return to capital and the rise of skilled wage. Therefore, the decrease of return to capital and the low unskilled wage, which is caused by the excess supply of unskilled labor, inhibit the rise in the relative price of non-tradable goods to tradable goods as well as the appreciation of real exchange rate. Finally, we show that a dynamic small open economy model with multiple tradable goods sectors does fairly well in explaining the Chinese real exchange rate and other stylized facts in the economic transition.

Choosing sides in the trilemma: international financial cycles and structural change in developing economies

ABSTRACT This paper analyzes the impact of international financial cycles on structural change in developing economies. It is argued that the impact of these cycles depends on the specific combination of macroeconomic and industrial policies adopted by the developing economy. The cases of Brazil and Argentina are contrasted with those of Korea and China. In the Asian economies, macroeconomic policy has been a complementary tool along with industrial policy to foster the diversification of production and capabilities. Inversely, in the case of the Latin American countries, long periods of real exchange rate (RER) appreciation, combined with the weaknesses (or absence) of industrial policies, contributed to the loss of capabilities and lagging behind.

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.

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.

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.

Can Financial Development Mitigate the Impact of Remittances on Real Exchange Rate Appreciation?

Remittances have been blamed for causing real exchange rate appreciation by raising the relative prices of nontraded goods and services in the recipient countries. However, empirical studies seeking to support this claim are lacking in Asia, despite the huge amount of remittances received by the region. In view of that, this paper used a panel dataset from eighteen remittance-recipient Asian countries during the period of 1981 – 2010 and Pooled Mean Group (PMG) estimator to examine the effect of remittances and financial sector development on real exchange rate. The paper, specifically, questions if the real exchange rate appreciation caused by the inflow of remittances varies with the degree of financial sector development in these countries. The paper finds that inflow of remittances has significant long-run impact on the appreciation of the real exchange rates in the remittance-recipient Asian countries. However, such effect of appreciation declines in countries with enhanced financial sector development.

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.

To what extent real exchange rate appreciation contributed to the shrinking of China's trade surpluses following the global financial crises?

In this paper, we investigate the extent to which real appreciation of the Chinese currency contributed in a meaningful way to the drop of its trade surpluses during the great recession subsequent to the financial and economic crises beginning in 2007. Chinese currency appreciated 14.75% in real terms during April 2008 and December 2011. The beginning of 2008 witnessed the most significant part of this real appreciation, after then the appreciations slowed through the crisis and recovery and has included intervals of real depreciation. Using data on exports and imports for Foreign owned firms in China and Chinese owned firms, disaggregated for 29 provinces, spanning the period 2007–2012, we find significant impact which differs from regions also. The results are robust to including a common factor and when compared with impact in the pre-crisis period, before 2006.

Demographics and the Real Exchange Rate

We develop a two-country, two-sector overlapping generations model to examine the effect of population aging on the real exchange rate (RER). While an older population raises the relative demand for nontradables (a feature of structural transformation) putting upward pressure on relative prices thus appreciating the RER, it also implies a lower real interest rate (distinctive of secular stagnation) that dampens the elderly nontradables consumption and thus mitigates the RER appreciation. We quantify a general equilibrium effect of 0.1% RER appreciation following a rise by 1% in the relative old dependency ratio in line with our empirical estimates.

OIL PRICE VOLATILITY AND INFRASTRUCTURAL GROWTH: EVIDENCE FROM AN OIL- DEPENDENT ECONOMY

Since the discovery of crude oil in Nigeria in 1957, the Nigerian economy has remained a mono-product economy largely impacted by the effects of oil price volatility with its attendant adverse consequences on the nation’s revenue profile and infrastructural growth. Accordingly, this paper attempts to investigate the nexus between oil price volatility and infrastructural growth in Nigeria, utilizing cointegration and error correction modeling approach for the period 1981-2015. The data for this study were sourced from the Central Bank of Nigeria Statistical Bulletin, 2014 and 2016 editions. The results suggest that both oil price volatility and inflation rate tend to exert negative impact on infrastructural growth, while the appreciation of real exchange rate tend to trigger investment in infrastructure. Accordingly, we recommend, among others, the need to design and implement effective diversification policies with a view to raising the nation’s revenue trajectory, while strengthening local crude oil refining capacity so as to minimize the adverse consequences of such external shocks on the domestic economy.

Financial flows and economic growth in developing countries

This paper assesses the impact of financial flows and their composition on the real exchange rate and on economic growth for a sample of low- and middle-income countries over the period of 1980–2012. Financial flows can directly support economic growth by relaxing constraints on domestic resources, but can also indirectly weaken growth through appreciation of the real exchange rate. We use the generalized method of moments (GMM) for dynamic panel. Results show that net financial flows affect economic growth both directly and indirectly: (i) a one percent increase in total financial flows appreciates the real exchange rate by 0.5 percent; (ii) the real exchange rate appreciation effect of remittances is twice the effect of aid and ten times greater than the effect of Foreign Direct Investments; (iii) financial flows stimulate economic growth regardless of the development level. An increase of $10 per capita financial flows leads to a gain of 0.08 points of annual growth. This gain amounts to 0.15 when we control for the negative impact of the real exchange rate. Instability of market-oriented flows, such as FDI and portfolio investments, exacerbates instability of the economic growth rate.

Macroeconomic Consequences of Tariffs

We study the macroeconomic consequences of tariffs. We estimate impulse response functions from local projections using a panel of annual data that spans 151 countries over 1963-2014. We find that tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance. The effects on output and productivity tend to be magnified when tariffs rise during expansions, for advanced economies, and when tariffs go up, not down. Our results are robust to a large number of perturbations to our methodology, and we complement our analysis with industry-level data.

Real exchange rate misalignment and economy

PurposeThe purpose of this paper is to examine the impact of real exchange rate misalignment on economy and economic sectors, namely construction, manufacturing and mining and quarrying in Malaysia.Design/methodology/approachThe equilibrium real exchange rate and economic models are estimated using the autoregressive distributed lag approach.FindingsAn increase in productivity differential or reserve differential will lead to an appreciation of real exchange rate in the long run. An increase in positive (negative) real exchange rate misalignment will lead to an increase (decrease) in economy. An increase in long-run real exchange rate misalignment will lead to a decrease in economy. Real exchange rate misalignment or long-run real exchange rate misalignment can influence the manufacturing sector in Malaysia. More specifically, undervaluation will promote whereas overvaluation will hurt the manufacturing sector.Originality/valueReal exchange rate misalignment can be a policy to influence economy but may not be the best choice.

Macroeconomic Consequences of Tariffs

We study the macroeconomic consequences of tariffs. We estimate impulse response functions from local projections using a panel of annual data that spans 151 countries over 1963-2014. We find that tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity. Tariff increases also result in more unemployment, higher inequality, and real exchange rate appreciation, but only small effects on the trade balance. The effects on output and productivity tend to be magnified when tariffs rise during expansions, for advanced economies, and when tariffs go up, not down. Our results are robust to a large number of perturbations to our methodology, and we complement our analysis with industry-level data.