Real Exchange Rate Misalignment Research Articles

Assessing the Impact of Real Exchange Rate Misalignments on Economic Growth in Arab Countries

Assessing the Impact of Real Exchange Rate Misalignments on Economic Growth in Arab Countries

Impact of Real Exchange Rate Misalignment on Economic Growth in Nigeria

Impact of Real Exchange Rate Misalignment on Economic Growth in Nigeria

Inflation targeting, exchange rate and output gap in Central and Eastern European countries

This paper aims at empirical assessment of monetary policy relationships in Central and Eastern European countries (Czechia, Hungary, Poland, Romania), which practise the monetary regime of inflation targeting. Using quarterly data for the period of 2004-2019, the authors examined the relationship between the output gap, nominal and real exchange rate misalignment, consumer price inflation and the central bank policy rate, using the panel vector autoregression (PVAR) model. According to estimates, the central banks of the CEE-4 countries react with an increase of their policy rate to the output gap and inflation, as implied by the Taylor rule. At the same time, a monetary reaction to nominal (real) exchange rate misalignment is lost in the estimates for the post-crisis period of 2010-2019. An increase of the central bank rates does not seem to have unfavourable output effects, while the nominal exchange rate is likely to depreciate with three to five quarter lags. However, there is evidence of the price puzzle when monetary tightening is followed by a counterintuitive increase in the inflation rate. In full accordance with the New Keynesian framework, inflation depends on the output gap, while being expansionary in the real sector. Evidence of the exchange rate pass-through (ERPT) to inflation is mixed. This article provides insights into the average monetary policy reaction function and its macroeconomic effects in the CEE-4 countries, with the value added in that following the Taylor rule does not guarantee effectiveness in tackling inflation in the presence of the price puzzle. Based on the estimated exchange rate effects on the output gap and inflation, deliberate currency appreciation resulting from the central bank foreign exchange interventions and/or fiscal austerity measures can be helpful for such a disinflation that minimises output losses.

Civil Conflicts and Exchange Rate Misalignment: Evidence from MENA and Arab League Members

Abstract For more than a decade, civil conflicts intensity has been high in the Middle East and North Africa, yet the monetary and financial impacts of such episodes have received relatively little attention. Using macroeconomic and conflict panel data for Arab League members, Iran and Turkey during the period 1970–2018, this paper constructs a country-specific real exchange rate misalignment index and adopts an instrumental variable approach to show that civil conflicts lead to real exchange rate overvaluations in the region: a 1 unit increase in civil conflict intensity leads to a 0.24 unit increase in the RER misalignment index. The results suggest that upward pressures on the real exchange rate, such as inflation resulting from physical capital and output loss, dominate. Economic policy during post-conflict transitions should mitigate this effect by incorporating a strategy to realign the currency.

The asymmetric impact of real exchange rate misalignment on growth dynamics in Turkey

Earlier empirical studies examining the impact of exchange rate misalignment on economic growth were based on a symmetric approach, assuming that undervaluation and overvaluation affect economic growth symmetrically. However, recent empirical studies have shown that exchange rate misalignments asymmetrically affect economic growth. This study, therefore, examines the asymmetric effects of real exchange rate misalignments on economic growth in Turkey. The asymmetric effects of the non-linear autoregressive distributed lag model show that both overvaluation and undervaluation impede economic growth in Turkey. The study recommends that Turkey should maintain a market-based exchange rate policy to reduce currency misalignment. The study also recommends that the central bank of Turkey should intervene in the foreign exchange market for a short-term to mitigate the excessive distortions in exchange rates and avoid inefficiencies in resource allocation.

Export concentration in developing countries: do real exchange rate misalignments matter?

Export concentration in developing countries: do real exchange rate misalignments matter?

Will Substantial Revaluation of Chinese Currency Be Helpful in Attenuating the United States’ Trade Deficit with China? New Evidence from the Dynamic Threshold Kink Model

ABSTRACT This study explores the possible existence of threshold kink effects in the impact of the real dollar-renminbi exchange rate misalignment on the bilateral trade flows between the United States and China. Empirical results show a significant threshold effect, with differential effects of undervaluation and overvaluation. Specifically, our findings suggest that while an overvaluation of the Chinese currency over 2.83% will attenuate the United States’ trade deficit with China, an undervaluation greater than 4.04% will deepen it. This suggests that a revaluation of the renminbi against the dollar would be helpful in improving the United States trade balance with China.

Role of the choice of exchange rate regime on real exchange rate misalignments in South Sahara African countries

Role of the choice of exchange rate regime on real exchange rate misalignments in South Sahara African countries

Real exchange rate misalignment and business cycle fluctuations in the Asia‐Pacific

AbstractReal exchange rate (RER) misalignment, which is the deviation between the actual real exchange rate from its equilibrium, occurs frequently among developing countries. Studies have shown that RER misalignment may have negative economic implications, such as a decline in economic growth, exports, and export diversification and an increased risk of currency crises and political instability. Using quarterly data for 22 sample countries from 1990 to 2018, this paper investigates the impact of RER misalignment on business cycles in the Asia‐Pacific by employing a panel vector autoregression involving consumer price index (CPI) inflation, output gap, short‐term interest rates, and RER misalignment. We find that RER overvaluation may reduce CPI inflation and short‐term interest rates. We also find that the Asia‐Pacific region is highly heterogeneous in that the output gaps of some countries, particularly from the Southeast Asian region, are more susceptible to RER misalignment shocks.

The behavior of the real effective exchange rate of Ethiopia: does misalignment exist?

ABSTRACT This study examined the main drivers of real effective exchange rate (REER) misalignment for Ethiopia over the period 1970–2020. Based on the behavioural equilibrium exchange rate concept, the study used the dynamic OLS and Markov regime switching model (MSM). The cointegration results revealed that the REER appreciates for an increase in relative productivity, government spending and net remittances, but it depreciates for more trade openness and real investment in the long-run. The MSM results also suggested a distinct misalignment episodes of under- and overvaluation with significant variability for the Ethiopia’s Birr over the study period.

Real exchange rate misalignments and economic growth in Tunisia: New evidence from a threshold analysis of asymmetric adjustments

Real exchange rate misalignments and economic growth in Tunisia: New evidence from a threshold analysis of asymmetric adjustments

Revisiting the real exchange rate misalignment‐economic growth nexus via the across‐sector misallocation channel

AbstractThis study assesses whether the component of across‐sector labor and capital misallocation induced by real effective exchange rate (REER) misalignments in turn significantly affects economic development. REER imbalances are derived from a Behavioral Equilibrium Exchange Rate model; labor and capital misallocation is measured according to indicators in Ando and Nassar (IMF Working Papers, 2017, 17, 1) and Aoki (Journal of the Japanese and International Economies, 2012, 26, pp. 473–494), on a unique cross‐country cross‐sector national account dataset of 54 countries and 12 sectors over 1980–2015. Both REER over‐ and undervaluations are found to lead to rising across‐sector labor (but not capital) misallocation and, uniquely via this channel, significantly hamper real growth.

Investigating the Short- run and Long-run Causality Relationship between the Exchange Rate Regime and the Real Exchange Rate Misalignment in the OPEC Countries

Investigating the Short- run and Long-run Causality Relationship between the Exchange Rate Regime and the Real Exchange Rate Misalignment in the OPEC Countries

Investigate the Real Effective Exchange Rate Misalignment in OPEC Member Countries

The effective real exchange rate is one of the variables that can Misalignment from equilibrium values, Performance affects macroeconomic indicators and creates an unstable and uncertain environment in the economy. Therefore, in order to investigate the factors affecting the real effective exchange rate Misalignment in OPEC member countries during the period 1980-1980, first, in the framework of the least dynamic ordinary squares method (DOLS), the effective factors for determining the effective equilibrium effective exchange rate have been investigated and the results confirm the estimation of the positive effects of oil shocks on the intensification of exchange rate Misalignment. Then, the effect of institutional quality indicators and financial development index on exchange rate Misalignment is investigated using the generalized panel method (GMM). The results of estimation at this stage indicate that the financial development index has a positive impact and institutional quality indicators, including; The stability of the state (rule of law), the ability to account democratically (democracy), social and economic conditions (political rights and civil liberties) have had a significant negative effect on the real effective exchange rate Misalignment. Therefore, programs and policies in the countries under study should focus on improving the quality of market regulation, government accountability for its performance, and ensuring political and economic stability.

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