Equilibrium Real Exchange Rate Research Articles

Real Exchange Rate And External Competitiveness In Bangladesh: An Autoregressive Distributed Lag Analysis

Economists and policymakers often associate external competitiveness with the real exchange rate. This paper seeks to study Bangladesh’s external competitiveness by critically examining the determinants of the country’s real equilibrium exchange rate. While a number of studies have been done on Bangladesh in this area, no consensus has emerged on the determinants of real exchange rate. Few studies explicitly incorporate net foreign assets when modeling exchange rate change of Bangladesh. This paper plans to bridge this gap by developing a simple model in line with Musa (1984), Faruqee (1995), and Egert (2004). In this model, the current account in the long-run is driven by adjustment in the net foreign assets (NFA) towards a targeted level. Given a country’s long-run target for the stock of net foreign assets, the real equilibrium exchange rate then corresponds to a current account balance that is consistent with the income flows from this stock. The model is then tested by applying the autoregressive distributed lag (ARDL) bound testing approach by Pesaran et al. (2001) to the cointegration for the long-run and using the error correction model to examine the short-run dynamic relationship among real exchange rate, dual productivity differentials, net foreign assets, and real absorption. The empirical analysis is based on the annual data series from 1980 to 2014, collected electronically from the online databases of the IMF, the Penn World Table, and the World Bank. The empirical result show that, once shocked, real exchange rate convergence to equilibrium is quick with 64% of the adjustment occurring in the first year. The study finds that increased capital flow, greater real absorption, and faster productivity growth in the tradable sector relative to that of the non-tradable sector lead to real exchange rate appreciation. The estimated parameters are also stable. The paper then discusses policy implications and sheds some lights on the research limitations and future research considerations. For example, the paper recommends that Bangladesh should try to keep its currency relatively weak to protect domestic producers from foreign competition and strengthen their competitiveness to produce for and sell, particularly readymade garments, to world markets.

Exchange rate misalignment and economic growth in India

PurposeThe purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014.Design/methodology/approachFirst, misalignment is measured, which is defined as the deviations of the actual real exchange rate (RER) from its equilibrium level. The equilibrium real exchange rate (ERER) is estimated using the auto-regressive distributed lag (ARDL) model by considering key macroeconomic fundamentals of the determinants of RER. Zivot and Andrews’ unit root with structural break is used to test the stationarity property of data. The impact of exchange rate misalignment on economic growth has been examined using ARDL and variance decomposition techniques.FindingsOur results find an overvaluation of the exchange rate till 2000, and thereafter, an undervaluation of the exchange rate prevails in India. Further, the result indicates that an increase in exchange rate misalignment leads to a decrease in economic growth and vice versa. Moreover, a positive misalignment (overvaluation) hurts the economic growth and a negative misalignment (undervaluation) promotes the economic growth.Research limitations/implicationsFrom the policy perspective, the results highlight that India needs to maintain an appropriate exchange rate which can reduce the RER misalignment. It is better for the Reserve Bank of India (RBI)’s intervention to smoothen the fluctuations of the exchange rate to avoid the inefficiency in the allocation of resources. However, to minimize the RER misalignment, the intervention should be conducted only in the short run.Originality/valueThe study contributes to the existing literature by estimating the exchange rate misalignment for India and its impact on economic growth.

Estimating the Equilibrium Real Exchange Rate in Algeria during the period: 1980-2015

The aim of this paper is to estimate the long-run Equilibrium Real Exchange Rate (ERER) path using VECM approach, and assesses the degree of misalignment in Algeria. Based on annual data from 1980 to 2015, our results show that the macroeconomic variables such as terms of trade, trade openness, differential productivity with trading partners (Balassa-Samuelson effect), real price of oil, and government expenditures, plays significant role in determining the equilibrium of Algeria’s ERER, the results also reveal that Algerian economy suffered from RER misalignment. As finding, and according to the Edwards’ [6] Model and the Cashin’s [2] model, results showed same evidences that there are three episodes of undervaluation of the Algerian dinar’s and also three episodes of overvaluation, the seventh episode (2004-2015) shows that the Actual ERER appears to have been close to its estimated equilibrium.

Competitiveness divergence in the Eurozone: The need for symmetric adjustment

This paper investigates whether the adjustment mechanisms driven by the fiscal and monetary policies can restore real exchange rate equilibrium and thus, competitiveness symmetry between deficit and surplus countries in the Eurozone. Focusing on the dominant role of Germany as the leading economy in the EMU, we test the presence of real exchange rate equilibrium between Germany and selected EMU countries. For comparison reasons, we examine the same research question between Germany and selected non-EMU countries. Our main finding is that, under the framework of the monetary union, the examined adjustment mechanisms cannot restore equilibrium between Germany and deficit countries. Although the loss of nominal exchange rate fluctuation could explain this failure, policy makers should focus on national fiscal policies and on the structure of national markets. Besides the implementation of structural reforms, the way out of the crisis requires a symmetric adjustment process, in which the European Central Bank has a crucial role to play.

Real exchange rate misalignment of Asian currencies

This paper examines the size of real exchange rate (RER) misalignment in seven developing Asian counties and Japan. An analytical framework is developed to estimate the equilibrium RERs, which are then used to derive the RER misalignments. The estimation results from the model indicate that RERs have been misaligned in most of the Asian countries during the sample period, although not to the extent claimed in some studies. The real exchange behaviour in these countries is mostly consistent with the economic fundamentals and the magnitude of measured RER misalignment is not alarming.

Modelling long-run equilibrium exchange rate in Botswana

ABSTRACTThe paper estimates the equilibrium real exchange rate for Botswana. It also reviews the country’s exchange rate regimes. Botswana operated a fixed exchange – without adjustable pegs from 1966 to 1976; with adjustable pegs from 1976 to 1980; and with a currency basket from 1980 to date. Using the autoregressive distributed lag bounds testing procedure, the paper found terms of trade and trade openness to determine the equilibrium real exchange rate. The actual real exchange rate has deviated significantly from the equilibrium exchange rate. The estimated speed of adjustment is very slow, which calls for policies that could raise it in order to avoid excess misalignments.

Tipo de cambio real en la República Dominicana: enfoques alternativos de equilibrio y desalineamiento

El presente artículo tiene dos objetivos fundamentales. Primero, estimar el tipo de cambio real de equilibrio (TCRE) de la República Dominicana, y segundo, determinar la desalineación, si es que existe, entre el tipo de cambio real observado (TCR) y su nivel de equilibrio. Para llevar a cabo el análisis se construyeron seis medidas diferentes de TCRE y seis medidas de desalineación. Los resultados empíricos indican que en los años 50, 60, 90 y en la primera década del 2000 hubo una sobrevaluación, mientras que en los años 70 y 80 hubo una subvaluación del TCR. Entre los años 2010-2013 el TCR se situó muy cerca de su nivel de equilibrio de largo plazo. No obstante, la desalineación y la magnitud tienen distintas respuestas dependiendo de la metodología utilizada para estimar el TCRE.

The equilibrium real exchange rate and macroeconomic performance in developing countries

ABSTRACTThis article presents first estimates of the growth impact of the equilibrium real exchange rate (ERER) for a sample of 63 developing countries over 1970–2007. The results suggest that real exchange rate misalignment, not the level of the ERER, matters for macroeconomic performance in these countries.

A New Approach to the Estimation of Equilibrium Real Exchange Rates among East-Asian Economies

A New Approach to the Estimation of Equilibrium Real Exchange Rates among East-Asian Economies

Econometric analysis of exchange rate in Serbia and its influence on agricultural sector

This paper attempts to empirically estimate equilibrium exchange rate level of Serbian dinar. In that purpose reduced form equilibrium real exchange rate approach (ERER) is used, developed by IMF's Consultative Group on Exchange Rate Issues (CGER). The research was made by using ARDL approach in the single-country analysis. It has been started from dynamic model which has described relation between real effective exchange rate and a set of fundamental variables. Bound test has been provided due to determination of the long-term relationship existence between variables. F-statistics has been used for long-term relationship testing between dependent variable and set of indicators. Since assumptions were met, least squares method was used for coefficient estimation. The results have shown constant dinar's overvaluation over medium term.

Determination of Renminbi Equilibrium Exchange Rate, Misalignment, and Official Intervention

We use an equilibrium real exchange rates (ERER) model to estimate the equilibrium exchange rate (EER) and hence the misalignment between the EER and actual renminbi (RMB) exchange rate with quarterly data from 1994 to 2012. The effect of various policy changes on this misalignment with a focus on official intervention is then examined. We find that the RMB EER rose 45 percent from 1994 to 2012, mainly due to trade policy and relative technological progress. The central bank’s (the People’s Bank of China) official intervention had quick effect on the misalignment, especially after 2005.

PENGARUH MISALIGNMENT NILAI TUKAR TERHADAP KEBIJAKAN SAFEGUARDS DI ASEAN-5

The purposes of this study are to analyze the occurence of exchange rate misalignment and its effect on non-tariff policy in ASEAN-5. We use Panel Dynamic OLS to estimate the equilibrium real exchange rate, while for determining the opportunities of the Non-Tariff Measures (NTMs) such as safeguards measures;we use Conditional Fixed-Effects Logistic Regression. The results shows that the magnitude of exchange rate misalignment tends to be large when specific country has a domestic turmoil. In addition, undervalued currrency of exporting country will increase the chances of safeguards measures enforcement from partner countries.

Real Exchange Rates in Advanced Transition Economies

The recent evidence from Eastern Europe suggests that one of the major obstacles towards the adoption of euro may lie in the impact that the recession of 2008 exerted on the trajectory of real exchange rates in new member countries (European Commission, 2015). This paper aims to establish and explain the relationship between the external shocks derived from the global financial crisis and recession of 2008 and equilibrium real exchange rate in advanced transition economies of Eastern Europe. The interplay between the external and internal balances is explained by developing an inter-temporal optimizing model of the real exchange rate determination in a small open economy with structural distortions. The results of our model suggest that, in the aftermath of recession, if the Eastern European economies attempt to restore and maintain the balance between the consumption, saving, and investment, the equilibrium real exchange rate will tend to reverse its trajectory from appreciation to depreciation over time in order to encourage a greater production in the future. The equilibrium real exchange rate depreciation in the future may obtain either as a result of an increase in the direct subsidies on investment or as a result of reduced subsidies on the net-of-investment income. The deprecation of countries’ real exchange rate, however, may continue to act as an effective constraint against the adoption of euro.

The Determinants of Long-run Real Exchange Rate in South Africa: A Fundamental Equilibrium Approach

In this paper, we identify the fundamental determinants of the long-run exchange rate in South Africa. We then estimate the equilibrium real exchange rate for this country using a dataset covering the period 1975–2012. In order to account for possible short-run fluctuations in the real exchange rate, we conducted a cointegration test using the ARDL bounds testing procedure. First, we found terms of trade, trade openness, government consumption, net foreign assets and real commodity prices to be the long-run determinants of the real exchange rate in South Africa. Second, we found that nearly 68.06% of the real exchange-rate disequilibrium is corrected annually. Overall, the estimated equilibrium rate indicates that the Rand has been depreciating in real terms over the years. Tightening trade openness is not an option, given international agreements; on the other hand, terms of trade and real commodity prices are determined by the world market. The obvious policy alternative is for South Africa to increase government spending and moderately decrease her net foreign asset position.

The Real Exchange Rate and Growth in Emerging Markets: The Case of Zimbabwe

AbstractZimbabwe has been facing growth and external competitiveness challenges, as shown by declining shares in global exports, high current account deficits, external debt and a widening productivity gap with South Africa. Estimates of the real equilibrium exchange rate reveal periods of sizeable misalignment, both prior to 2008 and under the current multicurrency regime. Misalignment has an asymmetric impact on growth. While overvaluation hampers growth, we have not found robust evidence that undervaluation would raise it. Replacing the multicurrency regime anchored in the US dollar by the South African rand would help reduce overvaluation and stimulate exports and growth. Under any currency regime, Zimbabwe needs to implement sound macroeconomic policies and an environment conducive to investment.

An Assessment of the Real Exchange Rate Misalignment in Egypt: A Structural VAR Approach

This paper calculates the equilibrium real effective exchange rate for the Egyptian economy during the period (1974-2012). The paper reviews the evolution of Egypt’s exchange rate policy and the most significant developments of its real effective exchange rate during the same period. Using a structural vector auto-regression model identified with long-run restrictions, it evaluates the relative importance of real supply, demand and nominal shocks to the disturbances of Egypt’s real effective exchange rate. The identified shocks and their impulse responses are consistent with the theoretical priors stemming from the Mundell-Fleming model. The main contribution to the fluctuations of the real effective exchange rate, roughly 80 percent, comes from both real demand and supply shocks. The model is used to check if the real exchange rate in Egypt is misaligned during the period under investigation. It shows that the actual real effective exchange rate has deviated from the equilibrium real effective rate with various degrees during the estimation period

ANATOMIZING INCOMPLETE-MARKETS SMALL OPEN ECONOMIES: POLICY TRADE-OFFS AND EQUILIBRIUM DETERMINACY

We propose a simple incomplete-markets small-open-economy model that is amenable to analytical dissection of its policy-relevant mechanisms. In contrast to its complete-markets limit, the equilibrium real exchange rate is irreducible from the incomplete-markets equilibrium. Market incompleteness exacerbates the domestic-inflation and output-gap monetary-policy trade-off in two ways: its steepness and its resulting endogenous cost-push to the trade-off. The latter depends on an equilibrium combination of structural shocks and on agents' beliefs of future events. Thus, in comparison to its complete-markets and closed-economy limits, standard Taylor-type rules are less capable of inducing determinate rational expectations equilibrium in our environment. Despite the larger policy trade-off under incomplete markets, simple policies that also respond to exchange-rate growth are able to manage expectations that drive the endogenous cost-push term. However, policies that respond directly to expectations may turn out to exacerbate the cost-push trade-off further, and thus, to be more likely to fuel self-fulfilling multiple or unstable equilibria.

English

The underlying study focuses on assessing the real exchange rate in Egypt during the period 1999-2012. In particular, the paper estimates the Real Exchange Rate (RER) misalignments in Egypt during the period under investigation. This is implemented through carrying out two main steps: first, the observed real exchange rate is calculated. Then, the Equilibrium Real Exchange Rate (ERER) is estimated using three different techniques from the methodology spectrum of the empirical literature. These methodologies are widely used to estimate the ERER in both developing and developed countries alike; namely, the Purchasing Power Parity (PPP) approach; the Fundamental Equilibrium Exchange Rate (FEER) approach and Edwards Model (1989). Fortunately, the three techniques yield consistent results concerning the undervaluation and overvaluation episodes. Evidently, the REER appears to be misaligned during the period 2001-2009: undervalued during 2003-2007, overvalued 2001-2002 and 2008-2012. The paper concludes that the Egyptian Pound is recently overvalued; although all the applied approaches indicate different misalignment magnitudes, they all show a growing trend in the relative prices in favor of our trading partners. It is recommended to narrow down these deviations; the REER has to be devaluated by a range of 9 to 13 percent in order for the Egyptian products not to lose their competitiveness in the international markets.   Key words: Exchange rate, misalignments, Egypt.&nbsp

Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia

This paper examines the equilibrium real exchange rate and real exchange rate misalignments in developing Asian countries during the period 1995-2008. In addition, the relationship between real exchange rate misalignment and export performance is investigated. In the lead-up to the 1997-1998 financial crisis, real exchange rate exhibited persistent overvaluation in the crisis-affected countries. After the crisis, real exchange rate undervaluation was evident in many Asian countries such as People’s Republic of China (PRC), Malaysia, and Thailand. This study also shows that real exchange rate misalignment could have a negative impact on export performance in developing Asia. With its implications on economic activity, monitoring real exchange rate equilibrium and misalignment is a useful tool for governments/central banks to ensure balance in the economy.

Real Exchange Rate and Real Economic Fundamentals in Transition Economy of Bosnia and Herzegovina (BH)

Abstract: The paper estimates Equilibrium Real Exchange Rate (ERER) using co-integration methodology to observe relationship between Real Exchange Rate (RER) and selected economic fundamental variables over two different sample periods. Time period of observation influences results and we observe change in signs and direction of relationship between fundamentals and RER suggesting that fundamentals and RER do not have a stable relationship and direction of influence. The findings suggest that RER is not a significant transmission mechanism for real economy towards achieving external balance as RER depreciation is not associated with an improvement in resource balance. Therefore, RER does not have a postulated relationship with resource balance variable. More appreciated RER is associated with an improvement in the external balance of the BH economy which is opposite of an expected role of RER depreciation in brining economy towards external equilibrium. However, pressures on RER sustainability exist due to negative resource balance. Potential disequilibria therefore could not be caught with the existing data which cover the post-war period only, and were marked by continuous negative resource balances.