Real Exchange Rate Misalignment Research Articles

Estimating the real exchange rate misalignment of the Algerian dinar during the period (1980-2019) : an empirical study (Arabic)

The aim of this study is to estimate the long-run Equilibrium Real Exchange Rate (ERER) and to assess the degree of misalignment of the Algerian Dinar for the period (1980-2019) using ARDL approach. Considering that the equilibrium exchange rate of the Algerian dinar is determined by a set of fundamentals of the national economy, the study reached the following main results: In the long run, there are positive relationships between the real effective exchange rate and the differential productivity, real oil price and net capital flows. Whereas, there are inverse relationships between the dependent variable and each of the trade openness, General government final consumption expenditure (% of GDP). The second result is that the REER registered a number of deviations from its equilibrium level, that vary between overvaluation and undervaluation. The third result is that the exchange rate cannot be the only adjustment variable, given the extent of macroeconomic imbalances (internal and external). Parallel efforts at fiscal consolidation and deep structural reforms to diversify the economy and accelerate growth are also essential.

Real effective exchange rate misalignment and currency crisis in Iran

This study aimed to examine real effective exchange rate (REER) misalignment in Iran and its relation to the currency crisis. The behavioral equilibrium exchange rate was employed to calculate the equilibrium exchange rate (EER), and misalignment was obtained using the exchange rate deviation from the equilibrium value. Using the autoregressive distributed lag (ARDL) method and data from 1986 to 2019, the long-run relationship between macroeconomic fundamentals and REER was estimated. The results show that trade openness, rate of productivity growth in tradable good production, net foreign assets of the central bank, oil exports, and terms of trade significantly affected the EER. Estimation of misalignment and its relationship with the currency crisis show that in the years before the crisis, there was generally a significant overvaluation in several consecutive years; hence, exchange rate misalignment serves as a leading index to predict the probability of a currency crisis.

Modelling the real exchange rate misalignment in the presence of outliers for developing countries

Modelling the real exchange rate misalignment in the presence of outliers for developing countries

Modelling the real exchange rate misalignment in the presence of outliers for developing countries

Modelling the real exchange rate misalignment in the presence of outliers for developing countries

The demand for money and the real exchange rate misalignments in emerging European countries: A nonlinear approach

AbstractThis paper investigates the extent to which domestic and foreign money balances in emerging European countries are influenced by foreign exchange considerations. A well‐specified and stable relationship between real money demand and the exchange rate can be perceived as an important part of a successful monetary policy. This study examines the long‐run determinants of real exchange rates (RERs) associated with the behavioral equilibrium exchange rate (BEER) approach and identifies currency misalignments in these countries. The misalignment is later used to test the nonlinear behavior of the demand for money. The results indicate that the RER misalignments have a significant impact on domestic money demand. When the currencies are overvalued, there is a reduction in domestic money demand, and when they are undervalued, there is an increase in domestic money demand. Furthermore, it can be concluded that overvaluation causes an increase in foreign money demand indicating a shift of preference from domestic to foreign currency.

Exchange Rate Pass-through to Consumer Prices in Pakistan: Does Misalignment Matter?

This study investigates the impact of exchange rate changes on consumer prices (commonly known as exchange rate pass-through (ERPT)) in Pakistan for the period 1995M1 to 2009M3. The study estimates short-run and long-run ERPT in Pakistan while taking into account the existing real exchange rate misalignment (RERM). The results suggest that the ERPT to consumer price inflation in Pakistan is very low (close to zero). The impact of the previous periods’ misalignment on inflation is found significant in managed exchange rate regime. However, the overall sample misalignment does not affect inflation. The impact of foreign inflation on domestic inflation is positive and statistically significant. JEL classification: F31, F41, E31 Keywords: Pass-through, Misalignment, Inflation

Measuring real exchange rate misalignment: an industry-level analysis of Pakistan using ARDL approach

Measuring real exchange rate misalignment: an industry-level analysis of Pakistan using ARDL approach

Real Exchange Rate Misalignments in Tanzania

The study uses a real exchange rate equilibrium (REER) technique to examine real exchange rate misalignments in Tanzania, through the cointegration technique. The empirical findings reveal that the real exchange rate misalignment has decreased significantly over recent years, and the real effective exchange rate has been evolving close to the long-term equilibrium. The findings strongly suggest that the underlying monetary and exchange rate policies were crucial in bringing the real exchange rate back to equilibrium in line with medium-term fundamentals recently. As a result, it is suggested that the existing monetary and exchange rate policies be maintained. While the monetary policy will contribute to real exchange rate stability through low inflation, flexible exchange rate policy will contribute to real exchange rate stability through nominal exchange rate adjustment.

Financial development and real exchange rate misalignments effects on environmental pollution

The research examined the influence of the fundamental exchange rate misalignment and Least Developed Countries (LDCs) in Asia and Africa’s financial development on CO2 emissions in Asian countries using panel data from 1970 to 2021. The methodology consists of ARDL bound testing and PMG/ARDL estimators with dynamic OLS estimators. The results reveal that the long-run real exchange rates for least developed countries (LDCs) are expected to rise in CO2 emissions in Asian and African countries with improved trade and net foreign asset positions. The relative productivity and trade openness also increase the exchange rate, which also plays a vital role in the growth of CO2 emissions. Except for Egypt, all least developed countries (LDCs) currencies are overpriced throughout the research period at the same time; it would be harmed by increased openness, foreign direct investment inflows, and currency misalignment. Overvaluation harms Bahrain’s economic growth. In comparison, undervaluation helps Egypt that currency misalignment does not affect financial growth in any LDCs over the long run. In the short-run, more real investment, net foreign assets, and official assistance inflows would enhance financial growth in Qatar, Bahrain, Singapore, and South Korea. In contrast, trade openness would slow it down in Egypt and Kuwait. The study suggested that the poor economic performance is due to RER misalignment, which occurs when exchange rate policies are improper and causes a rise in CO2 emissions in many developing countries.

Real exchange rate misalignment and economic growth in East African least developed countries

The behavior of real exchange rate remained an important policy concern for small open economies as its poor management adversely affects their economy with substantial welfare losses. This study examined the main drivers of real effective exchange rate (REER) misalignment and its effect on the economic growth of East African least developed countries (LDCs). The study applied Pooled Mean Group (PMG) and dynamic OLS estimators for panel and ARDL Bound testing for time series data over the period 1980–2019. The panel results revealed that the REER of LDCs were significantly misaligned for the study period. The REER appreciates for an improved terms of trade and net foreign asset position, while it depreciates for an increased trade openness and broad money supply in the long-run. The panel results also confirmed that the GDP per capita would improve for an increase in real investment and human capital, while it decline for an increase in openness, net foreign aid inflows and REER misalignment in the long-run. The ARDL bound testing results generally support the panel estimation results. In the short-run, the REER misalignment would impede growth of Ethiopia while it promotes growth of Kenya. Thus, the central banks and policy makers of East African LDCs should initiate a consistent macroeconomic policies and regulatory frameworks focusing on the main drivers of equilibrium REER to correct currency misalignment and to support their promising economic growth.

Real exchange rate undervaluation, regional integration and services sector performance: evidence from the East African Community

We undertake to estimate the effects of real exchange rate misalignment and regional integration on the service sector performance in selected countries from East Africa during the period of 1991–2017. The main findings, based on the traditional Pooled Mean Group ARDL technique as well as the alternative panel Cross-Sectional Autoregressive distributed lag (CS-ARDL) approach render support for an undervaluation-led services sector performance as well as the importance of regional integration in the observed linkage. Additional evidence reveals that both the monetary policy and the fiscal policy are key channels via which currency undervaluation impacts on the services sector output. The existence of non-linearities in an inverted U-shaped curve is equally confirmed in the data, where small and moderate undervaluations spur service sector performance just as large undervaluations after some threshold hinder it. Exchange rate volatility is found detrimental to the services sector in the long run. Policies that would help promote the underlying catalysts of undervaluation, curtail exchange rate volatility as well as those that promote deeper regional integration should be strengthened. Likewise, undervaluation policies would yield optimal benefits to the services sector once they are accompanied by well-calculated monetary and fiscal policies.

The nexus between real exchange rate misalignment and US–China trade: evidence from post RMB regimes

This paper investigates the impact of real exchange rate volatility and misalignment on exports and imports between China and the United States. Our empirical analysis used the quarterly time series data over the 1994Q:1–2019Q:4 period. We used the ARDL-bound testing approach for the short- and long-run relationship. The empirical results reveal that China’s real exchange rate volatility and misalignment significantly impact China’s real exports and imports over the sample period. In the short-run, the relationship between real exchange rate misalignments and China’s exports is positive, whereas negative with imports from the United States. In the long run, the real exchange rate misalignment positively affects exports and negatively affects imports. The evidence suggests that both higher real exchange rate volatility and misalignment directly affect the relative price of goods and encourage China exports to United States.

Economic Transformation and Security Analysis of RMB Integration Based on CNN.

Due to the productivity shocks, there exist inherently systemic biases when using purchasing power parity as the equilibrium real exchange rate measure standard. In this paper, based on the characteristic of Chinese economic transformation, considering demographic and weakened Balassa–Samuelson effect, we reestimate the equilibrium level of the real exchange rate of RMB with the quarterly frequency data since 1994 and measure the misalignment of the RMB real exchange rate. The empirical results show that the improved convolutional neural network (CNN) model is a reasonable analytical framework for the RMB equilibrium real exchange rate, and in the sample period, the real exchange rate of RMB is robust, and demographic is an important variable affecting the RMB equilibrium exchange rate. The real exchange rate of RMB is closely related to China's economic development strategy.

Measuring the Real Exchange Rate Misalignment and the Factors Affecting it in the OPEC Member Countries (Emphasizing on the Capital Account Openness and Exchange Rate Flexibility)

Measuring the Real Exchange Rate Misalignment and the Factors Affecting it in the OPEC Member Countries (Emphasizing on the Capital Account Openness and Exchange Rate Flexibility)

Exchange rate regimes, structural change and capital mobility in a developing economy

This paper proposes to develop a balance-of-payments-constrained growth model to analyse the importance of the relationship between real exchange rate misalignment and the share of industry in output. Building on the work of Gabriel, Jayme and Oreiro (2016), the model is expanded to address: (i) the influence of price competitiveness on net exports; (ii) capital mobility; (iii) nominal exchange rate flexibility; (iv) the nominal wage as a fraction of the value of labour productivity; and (v) a quadratic relationship between the growth rate of the share of industry in output and exchange-rate misalignment. An important result is that both flexible and fixed exchange rate regimes are compatible with a balanced growth path.

The Impact of Exchange Rate Misalignments on Agricultural Export in Nigeria

Real effective exchange rate (REER) misalignment leads to severe disruptions which negatively affects the tradeable sector and other sectors of an economy. However, the extent to which it affects agricultural export performance has not gained much attention. This paper, therefore, examined the effect of maintaining the REER at its equilibrium value on agricultural export (cotton and palm kernel) in Nigeria and how its misalignment also affects agricultural export using the VECM and ARDL model. The effects of trade openness, terms of trade, capital inflows and government expenditure on agricultural export were also investigated. The study employed a behavioural equilibrium exchange rate approach to determine the equilibrium path and estimate the REER misalignment. The results revealed that misalignment in the REER reduced the volume of agricultural exports thereby worsened its performance. While keeping the REER at equilibrium had a positive influence on the volume of agricultural export in Nigeria. Furthermore, the macroeconomic variables such as trade openness positively affected agricultural export while the term of trade had a negative effect on agricultural export. Thus, more trade openness, an improved term of trade and maintaining the REER at equilibrium value will improve the agricultural export performance in Nigeria.

How Equilibrium Exchange Rate Misalignments Influence on Economic Growth? Evidence for European Countries

Abstract The determination of the equilibrium real exchange rate is one of the most important issues in open economy since the policymakers are concerned about predicting and monitoring misalignments and they are usually associated with current account problems and currency crises. To the best of my knowledge, this is the first time a study provides empirical evidence on the impact of deviations from the long-run sustainable real exchange rate equilibrium on real economic growth rate applying panel ARDL model (pooled mean group, mean group and dynamic fixed effect estimators) for the 27 European countries during the 2000–2016 period. This study applies the EQCHANGE database developed by Couharde et al. (2017) to obtain the real effective exchange rate (REER) misalignments according to the behavioral equilibrium exchange rate approach for each country. One of the main objectives is to determine the relationship between REER misalignments and economic growth trying to differentiate between short- and long-run effects. To this purpose, a neoclassical growth model is considered controlling for several economic variables such as gross capital formation, degree of openness, human capital, inflation rate, and population rate.

The Impacts of the Dollar-Renminbi Exchange Rate Misalignment on the China-United States Commodity Trade: An Asymmetric Analysis

Contrary to most existing studies of the literature that assumed that the effects of real exchange rate (RE) misalignment on trade flows are symmetric, this paper considers a more general and realistic framework allowing for possible asymmetric effects. We use monthly time-series data over the January 2002–October 2020 period from 66 two-digit industries that trade between China and the U.S. in order to avoid the well-known aggregation bias. Estimates of symmetric error-correction models (ECM) revealed that real dollar-renminbi rate misalignment has short-run effects on 35 US exporting and 53 US importing industries. These short-run effects translated into the long run in 18 and 17 industries, respectively. The numbers increased considerably when estimating asymmetric ECM. Indeed, short-run asymmetric effects were then found in 47 US exporting and 62 US importing industries, which translated into long-run asymmetric effects in 20 US exporting and 21 US importing industries. Our analysis highlights the importance of separating currency overvaluation from currency undervaluation in assessing the effects of the RE misalignment on trade flows between the US and China, and confirms that the impacts are industry specific. Our findings (robust to possible structural breaks) are useful for trading industries, and policymakers, and advocate accounting for asymmetries when examining the RE misalignment-trade flows nexus.

External competition flattens the Phillips Curve

In this paper we elaborate an open economy Phillips curve (OEPC) with micro-founded analysis, in which external competition significantly impacts the domestic inflation rate. This influence is transmitted through two channels: a) the gap between the current and potential growth of imports, and b) real exchange-rate misalignment. We estimate this OEPC by applying two econometric techniques, panel regressions and PVAR accompanied by impulse/response analysis. A sample of 15 advanced economies is used with data for the period 1994-2017. The results from both methodologies endorse the validity of this theoretical relationship and suggest that international competition reduces the pricing power of domestic firms, thereby curbing inflationary pressures. We also find that the slope of the OEPC has significantly declined in the years after the Great Recession.

Current-Account Imbalances, Real Exchange-Rate Misalignments, and Output Gaps

Abstract This study analyzes the relationships between domestic and foreign output gaps, current-account imbalances, and real effective exchange-rate (REER) misalignments. We first set up a theoretical framework based on the elasticities and absorption approaches of the balance of payments to derive and clarify these relationships. Next, we perform panel VAR estimates in a sample of 18 advanced economies between 1986 and 2017. We find an inverse relationship between domestic output gaps and current accounts with reciprocal influences between the two variables. Moreover, we observe that increases in current accounts generally boost both temporary and structural growth. Additionally, our results indicate that REER misalignment shocks cause reactions of the opposite sign on the current account and on cyclical economic growth. We also find evidence of higher growth resulting in a real exchange-rate appreciation, which supports the Balassa–Samuelson hypothesis.