Real Exchange Research Articles

Impact of Energy Prices and Macroeconomic Variables on GDP Prediction UK: Machine Learning Approach

Gross Domestic Product (GDP) is one of the critical indicators of an economy. This study aims to predict the GDP of the United Kingdom using vital macroeconomic variables from 1990 to 2018 as predictors, which include energy prices, unemployment rate, Real Effective Exchange Rate (REER) inflation and net migration. Several machine learning models, namely Support Vector Regression (SVR), Random Forest (RF) and Gradient Boosting Machines (GBM), were implemented, analysed and compared. The models were trained on both scaled and unscaled data, with hyperparameter tuning applied to optimise performance. The models’ performances and accuracy were analysed by employing evaluation metrics Root Mean Squared Error (RMSE), Mean Absolute Error (MAE), and Mean Absolute Percentage Error (MAPE). As per the findings, after hyperparameter tuning, the SVR model performed best in GDP prediction, followed by GBM. The results of this study underscore the critical role of macroeconomic variables in GDP prediction while highlighting the potential of machine learning models to produce valuable and reliable insight into economic forecasting.

Exchange Rate Pass-Through into Import Prices: Evidence from Türkiye during 2010-2020 Period

This article analyses pass through of exchange rates into the import prices for an emerging economy, Türkiye, which faced severe fluctuations in the nominal exchange rate in the recent years, and experienced significant increases in domestic prices. The Turkish economy continues to struggle due to high inflationary pressures and a steep Turkish Lira (TL) devaluation particularly after 2017. This study aimed at examining the relationship between exchange rate and import prices using quarterly data for the period of 2010q1-2019q1, while the empirical methodology is framed in the multivariate cointegration analysis, along with the application of the Johansen cointegration test and the development of an autoregressive error correction vector for the determination of the pass-through in the long term. Our findings show that 85.6% of the fluctuations of the nominal exchange rate are transmitted to the import prices in the mentioned period, slower than the findings of the study by Akgunduz and his colleagues as the difference of import prices from its long-run relationship implied by the real exchange rate is likely dominated by energy prices in a strong manner. Second significant finding derives from the parameter that measures the speed of the pass-through, whose estimate has been found as -0.0125, inferring that the adjustment in short-term imbalances between import prices and the nominal exchange rate through changes in import prices is rather slow.

Explaining the Nexus Among Government Spending, Real Exchange Rate and Private Sector Investment in Cameroon

The main objective of this study was to investigate the nexus between government spending, real exchange rate, and private investments in Cameroon. The autoregressive distributed lag (ARDL) model was used to address issues of cointegration a time series data drawn from the World Bank WDIs spanning the period 1985-2020. The results reveal that the effect of government spending on consumption has a positive and significant effect on real exchange rate in the short run and a negative and significant effect on real exchange rate in the long run. Military expenditures as a proxy for government spending, have a positive and significant effect on real exchange rate in the long-run and a negative and significant effect in the short-run. More so, real exchange has a negative and significant effect on private sector investments in the long-run. Government consumption spending reinforces the negative effect of the exchange rate on private sector investments in the long-run and mitigates it in the short-run. The implication of these findings is that government consumption spending is key in managing the overall macroeconomic competitiveness of the Cameroon economy, which can incentivise or disincentives private sector investments.

Manufacturing and the real exchange rate: natural resource rents matter when measuring misalignments

ABSTRACT We analyse the relationship between the share of manufacturing in GDP and real exchange rate misalignments based on the purchasing power parity criterion (PPP) and a sample of 102 developing and transition economies (2003–2019). In a departure from usual practice, we subtract natural resource rents from GDP in order to correct misalignments for the productivity bias. A dynamic threshold panel model is used and we separate out the impact of undervaluation and overvaluation components in the same regression. Overvaluation has a negative linear effect, while undervaluation stimulates the manufacturing sector in a non-linear way. Above an 18% threshold, the marginal effect of undervaluation diminishes.

Do real exchange rate misalignments have threshold effects on economic growth? Asymmetric evidence from Pakistan

Do real exchange rate misalignments have threshold effects on economic growth? Asymmetric evidence from Pakistan

Global uncertainty and exchange rate conditions: Assessing the impact of uncertainty shocks in emerging markets and advanced economies

Economic and financial conditions respond significantly to increased measures of uncertainty, particularly in economic policy, monetary policy, and financial markets. This research employs the global vector autoregression (global VAR) model to assess the response of bilateral exchange rates, exchange rate volatility, exchange market pressure, and nominal and real effective exchange rates to shocks in global economic and financial uncertainty, along with U.S. monetary policy uncertainty, U.S. equity market volatility, and U.S. financial stress indicators. Spikes in uncertainty correspond to immediate increases in exchange rate volatility, buildup of exchange market pressure, and depreciation for emerging markets. The results are compared to advanced economies, China, and Russia separately, identifying key differences across markets.

Küreselleşme sonrası Türkiye’de dış ticaret açığının reel efektif döviz kuru ve dış ticaret hadleriyle modellenmesi: NARDL yaklaşımı

Fluctuations in the real effective exchange rate and changes in the terms of trade can cause predictable or unpredictable changes in the overall economy. The most important consequences of these fluctuations and changes are the effects of regional or global economic crises on macroeconomic variables (employment, unemployment, inflation, GDP, balance of payments, foreign trade deficit). Anticipating the consequences of the dynamic effects of these changes is crucial for policymakers. This study analyzes the effects of changes in CPI-based real effective exchange rates and terms of trade on the trade deficit in 1994-2022. Since the impact of CPI-based real effective exchange rate and terms of trade changes on the trade deficit is likely to be asymmetric, the Nonlinear Auto Regressive Distributed Lag (NARDL) method is used in this study, and it is concluded that the factor that affects the trade deficit the most is the decline in the terms of trade. One of the most important reasons why the foreign trade deficit does not decrease at the desired level, even in periods of depreciation of the TL, is the decline in the country’s terms of trade.

Factors Affecting Traditional and Modern Services Imports in an Emerging Economy: The Role of Real Exchange Rate and Remittances Inflows

This study examines the effects of real exchange rate and remittance inflows on total, traditional and modern services imports in India using the autoregressive distributed lag (ARDL) bound testing approach from 1990 to 2020. Banking sector development, stock market development and net foreign direct investment inflows are controlled variables in the estimated services imports functions. The findings from the ARDL long-run model indicate that real exchange rate and remittance inflows inversely affect all service imports. Banking sector development and stock market development positively impact total and traditional services imports. In the case of modern services imports, the banking sector (stock market) inversely (positively) affects it. Net foreign direct investment inflows positively (negatively) affect modern services imports (traditional and total services imports). These findings suggest that policymakers in India should check the adverse effects of real effective exchange rates and remittance inflows on total, traditional and modern services imports. JEL Codes: F14, F31, F24, G21, G10, C32

Misalignment of the Algerian dinar's real effective exchange rate

misalignment of the Algerian dinar's real effective exchange rate

Does official development assistance (ODA) cause the Dutch disease in developing countries

PurposeThis paper aims to investigate whether official development assistance (ODA) inflows to developing countries (lower-middle and low income) can cause the symptoms of Dutch disease or not.Design/methodology/approachThis study applies the methodology of dynamic panel data estimation with a one-step system generalized methods of moment (GMM) for the sample of 59 developing countries from 2001 to 2019.FindingsThe results indicate that ODA (as a percentage of gross domestic product (GDP)) rises by 1%, the real effective exchange rate (REER) appreciates by 0.252%. This finding reveals that these selected developing countries have faced the symptoms of Dutch disease. The countries with the higher ODA ratio have a higher effect of the Dutch disease, and the managed floating exchange rate regime is the lowest impacted, when compared to the fixed and flexible exchange rate.Practical implicationsThe selected countries are recommended to use ODA inflows right and efficiently. These ODA inflows should be invested in productive sectors or support for production rather than in consumption. The managed float exchange rate regime is applied to reduce the symptom of Dutch disease for the selected countries. The good cooperation of monetary and fiscal policies is important to absorb the huge ODA inflow and sterilize the adverse effects of the disease.Originality/valueThe paper contributes to the literature and empirical of the Dutch disease. An adverse effect of the huge ODA inflow to the developing countries appreciated of the real exchange rate and caused the symptom of the dutch disease.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-12-2022-0777

Long-Run Trade Relationship between the U.S. and Canada: The Case of the Canadian Dollar with the U.S. Dollar

This study investigates the long-run relationship between the U.S. dollar and the Canadian dollar by analyzing the bilateral exchange rate induced by nominal and real shocks. The methodology centers on a structural vector autoregressive (SVAR) model, including the analysis of impulse response and variance decomposition to account for the impact of nominal and real shocks on exchange rate movements. This study also decomposes real shocks into demand and supply factors from both Canada and the U.S. and compares their impacts on the nominal and real exchange rates. The results are compared to shocks driven by country-specific nominal factors. This study uses quarterly data from December 1972 to December 2023. The findings suggest that real shocks have a permanent impact on both the nominal and real exchange rates, compared to nominal shocks, which have a temporary impact. Country-specific real supply-side factors have a more significant impact than country-specific real demand-side factors. Country-specific nominal factors barely impacted the nominal and real exchange rates between the U.S. and Canada.

The Real Equilibrium Exchange Rate of the Czech Koruna – the BEER Approach

The aim of this paper is to develop a model of the real equilibrium CZK/EUR exchange rate with all relevant explanatory variables. Emphasis will be placed on examining the longest possible time horizon, with a period of real convergence, but also economic stagnation. The model is based on the theoretical BEER approach using a cointegration or error correction model that distinguishes between short-term and long-term relationships. The results show that the Czech koruna strengthens when the productivity differential, terms of trade differential or gross fixed capital formation increase, while the koruna weakens when the VIX index representing global risk aversion increases. For the real interest rate differential, the hypothesis that the koruna strengthens in the short run during the improvement but weakens in the long run probably due to the country's risk premium, was confirmed. Moreover, it turned out that the start of the European Central Bank's quantitative easing led to strengthening of the Czech koruna, while the start of the CNB's foreign exchange interventions in 2013 led to weakening of the Czech koruna.

Vietnam's exports to Korea and the real exchange rate: Post-crisis evidence from the multiple threshold nonlinear autoregressive distributed lag model

In this study, the asymmetric effects of the real exchange rate on Vietnam's exports to Korea were investigated using the multiple threshold nonlinear autoregressive distributed lag (MTNARDL) model. As a result, the MTNARDL model exhibited enhanced estimation accuracy compared to the single-threshold nonlinear autoregressive distributed lag (NARDL) model. Furthermore, the aggregate bias problem was solved using individual export data for 16 major industries instead of relying on the overall export value data. The results revealed the substantial asymmetric impact of real exchange rate fluctuations in the short and long run. Fluctuations in the real exchange rate boosted Vietnam's exports to the Republic of Korea in the long run, with minimal negative influence. This indicates that the depreciation of the Vietnamese dong against the United States (US) dollar encouraged exports in some industries but limited exports in others. However, the short-term effect of the real exchange rate remains uncertain, as it could be either negative or positive depending on the industry and threshold level. The diverse impacts of the real exchange rate fluctuations on exports across industries were attributed to factors such as the capacity to absorb foreign exchange risks, product heterogeneity, and the ease of adjusting inputs and production for each sector. Therefore, these findings may help policymakers develop Vietnam-specific policies to address long- and short-term changes in the threshold levels of real exchange rate fluctuations.

The Determinants of Indonesian Paper Export to the ASEAN Market with the Gravity Model Approach

The study aimed to analyze the determinant variables that affect the value of Indonesian paper exports (HS. 4802) to the export destination countries in the ASEAN market. The study used secondary data in the form of panel data. The data were the values of Indonesian paper exports, real GDP, export price, economic distance, real exchange rate, and population growth in the ASEAN Market from 2010 to 2019. The analytical method used was panel data regression analysis with a gravity model approach. The study results show that all independent variables significantly affect the value of Indonesia's paper exports by 95%. The increase in real GDP, real exchange rate, and population growth positively affect the export value of Indonesian paper products, with the coefficient of elasticity of each being 4.24, 0.40, and 0.70, respectively. Conversely, the increase in export price and economic distance harms the export value of Indonesian paper products, with the coefficient of elasticity of each being -5.61 and -2.74, respectively.

Market Regulation, Cycles, and Growth Dynamics in a Monetary Union

AbstractWe build a two‐country currency union dynamic stochastic general equilibrium (DSGE) model with endogenous growth to assess the role of product market regulation (PMR) and labor market regulation (LMR) for growth and the adjustment to shocks. We show that with endogenous growth, there is no reason to expect real income convergence. Large shocks can lead to permanent changes of output and real exchange rates. Differences are exacerbated by different PMR and LMR. Less regulated economies have higher trend growth and recover faster from negative shocks. Results are consistent with higher inflation, lower employment, and disappointing total factor productivity (TFP) growth rates experienced in more regulated euro area members.

Volatility Transmission between Oil Price and Exchange Rate

This article presents a study on the transmission of oil price volatility to the exchange rates of 14 countries (net oil exporters and importers) during the period from 02/01/2000 to 31/11/2022. The aim is to compare the effect of oil price fluctuations on exchange rate volatility based on the country's nature. Using ARCH, GARCH, and GARCH-BEKK models, our results reveal that the real effective exchange rate is significantly linked to fluctuations in the real oil price for both categories of countries: oil importers and exporters. These findings have important implications for monetary, fiscal, inflationary, and trade policies for these countries.

Exchange Rates and Prices in the Netherlands and Britain over the Past Four Centuries

AbstractThe paper studies the long‐term stability of the purchasing‐power‐parity (PPP) relation using data for the Netherlands and Great Britain (earlier the Dutch Republic and England) from 1590 until 2020. We begin by investigating the behavior of the real exchange rate in rate‐of‐growth form finding strong evidence supporting long‐run relative PPP. Turning to price levels, we find evidence of mean‐reverting behavior over the whole period with one long‐lived shift in mean between 1788 and 1931. The myriad other factors that varied over this long period that might have affected the stability of the PPP relation do not appear to have mattered.

Revisiting the Money Supply and Real Output Nexus in Nigeria: Test of Neutrality Proposition?

This study investigates the money supply-real output nexus while examining the neutrality hypothesis for Nigeria utilizing data from 1980 to 2022. The study used the autoregressive distributed lag (ARDL) technique and the discrete threshold regression model. The finding supports the money neutrality hypothesis in the long run but non-neutrality in the short run. In order words, money supply does not have a significant influence on real output growth in the long-term but does in the short-term. Inflation was found to have a reducing consequence on real output growth in the long and short term, while real effective exchange rates have a reducing effect on real output in the long run but advance in the short run. Structural breaks before the year 2000 have a significant influence on GDP growth in both the long and short run. Sequel to these outcomes, the study suggests an optimum fiscal policy mix with modest monetary policy should be adopted in Nigeria with more attention on the fiscal responsibility of the government to influence changes in real variables. More so, the CBN should urgently begin to announce specific inflation targets for the country since it has a reducing impact on GDP growth in the long run while ensuring the attainment of a more realistic exchange rate for the naira by increasing domestic production for export in the long run.

Effects of Transmission Mechanism of Monetary Policy Channels on Economic Growth in Ethiopia: Cointegration and Causality Analysis Approach

The study aimed at investigating and analyzing factors those effects of transmission mechanism of monetary policy channels on economic growth in Ethiopia using a 36 years’ time series data. To this end, variables such as economic growth (dependent variable), and other regress variables such as real lending rate, real effective exchange rate, credit for private sector, consumer price index, trade of opens, gross capital formation, and money supply are considered. An empirical model linking the real GDP to its theoretical effects is then specified. This study had employed the co-integration and vector error correction model (VECM) analysis with impulse response and variance decomposition analysis to provide robust long run effects and short run dynamic effects on the real GDP. All variables under consideration are integrated of order one I (1) and also co-integrated. Vector Error Correction Model/VECM/ results show that real GDP was positively and significantly affected by the real effective exchange rate, money supply, gross capital formation (investment), credit for private sector, trade of openness over a period of long-run; while real leading interest rate and consumer price index (inflation) have significant negative effect. The estimate of the speed of adjustment coefficient found in this study indicates that about a 31 percent of the variation in the real GDP from its equilibrium level is corrected within a year. The study suggests that lowering the lending interest rate can encourage more private investment because it will encourage private investors to borrow more, which will increase investment in Ethiopia. Since investment is one of the factors that determine the gross domestic product, this will result in an increase in the GDP.

Fiscal spillover in emerging economies: Real versus financial channels

Fiscal policy is an important tool for business cycle stabilization and has significant spillover through real and financial channels. This paper estimates the spillover of US fiscal policy shock in emerging economies which is distinct from US monetary policy spillover. We find that - similar to its effect in advanced economies as documented in the literature - the shock lowers both the nominal and real policy rates in emerging economies. Results suggest a disconnect between long-term and policy rates that leads to the steepening of the yield curve in emerging economies in the medium term due to the shock. Most of these effects of US government expenditure shock on the policy rate and the yield curve in emerging economies are direct effects (financial channel) and not indirectly driven by the effect of this shock on GDP growth and inflation (real channel). Contrary to its effect in the US, we find that this shock leads to a prolonged appreciation of real effective exchange rates in emerging economies, hurts their external competitiveness, and leads to a contraction in output in emerging economies. As expected, countries having higher exports and trade-to-GDP ratio experience a bigger decline in output.