Is the Cyprus Pound Real Effective Exchange Rate Misaligned? A BEER Approach

Abstract

This paper investigates whether the real effective exchange rate of the Cyprus pound is misaligned by generating measures of the equilibrium rate using the Behavioral Equilibrium Exchange Rate (BEER) approach. Several measures of the equilibrium exchange rate were derived and used to check for the existence of exchange rate misalignment. The results suggest that, during the 1990s, the actual real effective exchange rate and the various equilibrium measures generated move closely together and there is no evidence of any significant and persistent misalignment. However, the empirical evidence suggests persistent overvaluation during the 1980s.     

Unwrapping some euro area growth puzzles: Factor substitution, productivity and unemployment

In this paper, we estimate a long run supply-side system incorporating a CES production function with time-varying factor-augmenting technical progress for the euro area over the period 1970–2005. We find that the elasticity of substitution lies below unity at 0.7, that labor-augmenting technical progress is dominant in the long run while capital-augmenting technical progress plays an important role in the interim period. Importantly, we also find evidence of a structural break in the pattern of biased technical progress towards the end of the 1990s. Our results help to solve two puzzles in Europe’s recent growth experience which differ markedly from the US experience. The first is related to the effects of the IT boom in the 1990s on productivity growth in Europe. The second puzzle concerns the changes in the “Okun’s law” relationship, linking growth to the reduction of unemployment, which are observable in Europe since the late 1990s.     

Stabilizations, crises and the “exit” problem – A theoretical model

Exchange-rate-based stabilizations, even if successful, usually lack credibility initially. This is reflected in high (ex post) real interest rates and some degree of real exchange rate appreciation. Empirical observation suggests that wage inflation declines smoothly over time whilst interest rates are volatile. Our model captures these features and provides insights into: the eruption of exchange rate crises after a long period of apparently successful stabilization; the potential advantages of a heterodox approach; when to delay a stabilization attempt; and the optimal date for “exit” to a floating exchange rate.     

Estimating an equilibrium exchange rate for the dollar and other key currencies

In this paper, we adapt the concept of fundamental equilibrium exchange rates ‘FEER’ in a complete model approach. We use it to determine the likely paths of the Dollar and other key currencies. The FEER is the (real) exchange rate that is consistent with internal balance and sustainable external balances. Here we examine the composition of a Dollar adjustment and hence the extent to which a FEER (for the US) depends on factors or rigidities elsewhere in the world, as well as at home. We find, the US still needs to accept an adjustment in her real exchange rate if the increase in her foreign liabilities is to come to an end. However, counterpart adjustments also have to be made in Canada, Mexico, and some Asian economies if this policy is to be successful. We also show that productivity growth differentials may act as a substitute for depreciation, and this provides an explanation for the failure of the dollar to depreciate in the 1990s.     

Explaining ERM realignments: Insights from optimising models of currency crises

This paper attempts to provide empirical evidence on the determinants of the realignments throughout the European exchange rate mechanism (ERM). Motivated by the implications of optimising currency crisis models, we relate the probability of “crises” to a set of macroeconomic fundamentals. By using a conditional binominal logit model we show that regime switches are strongly influenced by movements in industrial production, foreign interest rates, competitiveness and imports as well as in foreign exchange reserves. These findings are consistent with the general propositions of recent currency crises models.     

The optimal neglect of inflation: An alternative interpretation of UK monetary policy during the “Great Moderation”

This paper argues that UK monetary policymakers did not respond to the inflation rate during most of the “Great Moderation” that ran from the early 1990s to the mid-2000s. We derive a generalisation of the New Keynesian Phillips curve in which inflation is a non-linear function of the output gap and show that the optimal response of the policy rule to inflation depends on the slope of the Phillips curve; if this is flat, manipulation of aggregate demand through monetary policy does not affect inflation and so policymakers cannot affect inflation. We estimate the monetary policy rules implied by a variety of alternative Phillips curves; our preferred model is based on a Phillips curve that is flat when output is close to equilibrium. We find that policy rates do not respond to inflation when the output gap is small, a situation that characterised most of the “Great Moderation” period.     

Structural Change in Current Account and Real Exchange Rate Dynamics: Evidence from the G7 Countries

Previous studies decompose the current account and the real exchange rate into temporary and permanent shocks and argue that a temporary shock creates the combination of a current account surplus (deficit) and real exchange rate depreciation (appreciation). The present paper extends their framework by examining a possible structural break in current account and real exchange rate dynamics. Using G7 country data for 1980–2007, we find structural changes in two‐variable dynamics for all G7 countries during the 1990s. Temporary shocks have not been the main source of fluctuation in the current account since the 1990s. Our empirical results imply that the conventional mechanism has played a limited role in explaining the dynamics of the two variables.     

The real exchange rate in Brazil Mean reversion or random walk in the long run?

This paper studies the behavior of the real exchange rate in Brazil over the longest possible period for which data are available: 1855–1990. Does the real exchange rate follow a random walk or does it revert to its mean, possibly nonstationary, level? The evidence is mixed. Formal tests can not reject the hypothesis of nonstationary behavior, although the judgement is borderline. However, time-series identification favors a stationary interpretation, and simple autoregressive processes for the real exchange rate yield extremely robust and satisfactory estimates.     

Explaining the US–EU productivity growth gap: Structural change vs. intra-sectoral effect

This paper proposes a decomposition of labour productivity growth in the EU15 and the the US since the mid 1990s. The results suggest that the EU's relative slowdown is due to modest “pure” gains of productivity within sectors.     

Perpetual youth and endogenous labor supply: A problem and a possible solution

In the “perpetual youth” overlapping-generations model of Blanchard and Yaari, if leisure is a “normal” good then some agents will have negative labor supply. We suggest a solution to this problem by using a modified version of Greenwood, Hercowitz and Huffman’s utility function. The modification incorporates real money balances, so that the model may be used to analyze monetary as well as fiscal policy. In a Walrasian version of the economy, we show that increased government debt and increased government spending raise the interest rate and lower output, while an open-market operation to increase the money supply lowers the interest rate and raises output.     

The PPP hypothesis and structural breaks: the case of Mexico

We test the purchasing power parity hypothesis for the Mexican peso/US dollar real exchange rate using monthly data for 1969–2010. Results suggest that the real exchange rate reverts to a changing mean. These mean shifts can be explained by liberalization policies implemented during the 1980s and 1990s that reduced trade barriers in the Mexican economy. Such policies modified the tradable/non-tradable goods composition of the price index producing mean shifts in the real exchange rate associated with PPP.     

人民币实际汇率波动对中美贸易收支的影响——基于1990—2009年时间序列分析

基于协整理论、误差修正模型和格兰杰因果检验并根据中国和美国1990-2009年的季度数据,分析人民币实际汇率变动对中美贸易收支的影响.结果表明:影响中美贸易收支的主要因素包括美国的实际GDP、中国的实际GDP和人民币实际汇率,且三者的影响力次第减弱,中美贸易也存在明显的J曲线效应.因此,改善中美贸易失衡应扩大中国内需、调整业口结构和改革人民币汇率制度.     

The evidence of strategic pricing policies of Turkish textile exports

This paper examines the strategic pricing behaviour (Pricing to Market; PTM) policies of textile exports in the 1990s for a hyperinflation country, Turkey, whose currency has been depreciating continually for the last two decades. The findings show that Turkish textile export categories exhibit evidence of strategic pricing behaviour when the Turkish textiles export data is analysed for different frequencies. The results show that evidence of strategic pricing behaviour is observed in response to changes in real exchange rates for textile exports for closer lagging periods and strategic pricing behaviour diminishes with further lagging periods. Also, evidence of strategic pricing behaviour is observed in a more recurrent fashion with higher frequency data, three-month periods, than with relatively lower frequency data, six-month and 12-month periods. Another interesting finding is that Turkish textile exporters prefer to increase their prices as a reaction if they had adjusted their prices in an overshooting fashion in response to real exchange changes in the previous period. The most important finding of the paper is that while Turkish textile exporters prefer to adjust their export pricing without fully absorbing the real exchange depreciation and by increasing their relative markups for some textile categories, they prefer to adjust their export prices by lowering their markups in addition to fully absorbing the real exchange depreciation for some other textile categories in order to increase their market share overseas.     

Exchange rate changes and endogenous terms of trade effects in a small open economy

This paper shows that the small-country assumption of dependent-economy models is unlikely to hold for many of the cases in which this class of models is used, for example, in the analysis of a terms of trade shock in the “commodity currency” models. When a shock affects most or all of the small countries exporting a commodity, the combined exchange rate effects will result in endogenous terms of trade changes even for those countries too small to individually affect world markets. The paper also explores the possible implications of these secondary terms of trade changes for the dependent-economy models.     

Strategic planning in public R&D organizations for agribusiness: Brazil and the United States of America

There is increasing evidence that public organizations dedicated exclusively to research and development (R&D) in agribusiness need systematic management tools to incorporate the uncertainties and complexities of technological and nontechnological factors of external environments in its long-term strategic plans. The major issues are: “What will be the agribusiness science and technology (S&T) needs be in the future?” “How to prepare in order to meet these needs?” Both Empresa Brasileira de Pesquisa Agropecuária (Brazilian Agricultural Research Corporation, Embrapa), attached to the Brazilian Ministry of Agriculture and the Agricultural Research Service (ARS) of the US Department of Agriculture (USDA) have developed a comprehensive strategic and operational planning process in order to answer these key questions in the 1990s. The main objective of this article is to present a comparative and preliminary analysis of concepts, methodologies, and processes utilized, and some results obtained by these public organizations.     

State of the “life span revolution” between 1980 and 2000

Using data for 163 countries, state of the “life span revolution” over the period 1980–2000 is studied in terms of measures of cross-country inequality and through least-squares and quantile-regression estimation of simple convergence models. Four main points are noted. First, dynamics of the cross-country distribution of life expectancy during these 20 years seem markedly different from those for the preceding decades: instead of the sharp “convergence” noted until the 1980s, there is lack of convergence and an indication of “divergence”. Second, the divergence is particularly marked during the 1990s. Third, spread of HIV/AIDS has probably been a significant factor in generating divergence during the 1990s. Fourth, besides the sizable temporal heterogeneity, quantile-regression estimates of convergence models reveal a substantial heterogeneity across the top and the bottom quartiles within each period.     

Sources of real exchange rate fluctuations in China

This paper reviews the evolution of China's real effective exchange rate between 1980 and 2003 and uses a structural vector autoregression model to study the relative importance of different types of macroeconomic shocks for fluctuations in the real exchange rate between 1985 and 2003. The structural decomposition shows that relative real demand and supply shocks account for most of the variations in real exchange rate changes during the estimation period. The paper also finds that supply shocks are at least as important as nominal demand shocks in accounting for real exchange rate fluctuations. In contrast, other studies that show that nominal shocks are more important in explaining real exchange rate fluctuations in industrial countries. Journal of Comparative Economics 33 (4) (2005) 753–771.     

Monetary transmission mechanism in Turkey under free float using a small-scale macroeconomic model

This study analyzes the monetary transmission mechanism in the Turkish economy following the switch to free float under informal inflation targeting scheme in the aftermath of the February 2001 crisis. A small-scale macroeconomic model is simulated using equations for output gap, exchange rate, sub-items of inflation, short-term policy rate, government borrowing rate, “Embi+ Turkey” and inflation expectations. The preliminary results indicate that, despite some slight departures, both static and dynamic simulations capture the dynamics of the fundamental economic variables. The results also show that at a time of weak domestic demand, output gap has been seemingly less significant in determining inflation. Furthermore, risk premium as measured by “Embi+ Turkey” has a high explanatory power in shaping government borrowing rate and exchange rate. Finally, forward-looking component of inflation has been effective in determining non-administered prices.     

Macroeconomic Fragility and Exchange Rate Vulnerability: A Cautionary Record of Transition Economies

The interaction between the exchange rate regime and macroeconomic stabilization in several transition economies during 1990–1996 was influenced by the persistence of high inflation rates and the initial disequilibrium between the highly undervalued nominal exchange rates in relation to their purchasing power parity estimates. Policymakers generally adopted the flexible (nominal) exchange rate regimes for manipulating real exchange rates with a view to correcting the exchange rate disequilibrium and conveying inflation control signals. The rates of real appreciation were higher in the earlier years of high inflation rates. By 1996, lower inflation rates required less currency appreciations thereby reducing the negative impact of the latter on trade competitiveness. However, the persistence of unwarranted interest rate differentials, a consequence of the domination of monetary control over prudent fiscal management, and the associated inflows of foreign funds put an upward pressure on exchange rates exacerbating trade competitiveness. The transition record suggests that innovative exchange rate arrangements can provide only a brief interval during which sound fiscal discipline needs to be put in place for controlling inflation.J. Comp. Econom.,December 1998, 26(4), pp. 621–641. Columbia University, New York, New York 10027.     

Determinants of the real exchange rate in the long-run for developing and emerging countries: a theoretical and empirical approach

This paper presents a new framework for the determinants of real exchange in the long-run in developing and emerging countries (DECs). We assume that currencies should be regarded as an asset. In consequence, dealers in the foreign exchange market play a crucial role on its dynamics. To set our model, we connect the model developed by Kaltenbrunner, which is grounded on chapter 17 of the General Theory, with productivity’s differential effect. By doing so, it states that even short-run factors and monetary variables affect the long-run real exchange rate. Moreover, it points out that the hierarchical nature of the international monetary system is crucial to understand exchange rate movements in DECs. Besides presenting such theoretical approach, our contribution is to test it empirically for 45 DECs from 1990 to 2008 by applying econometric techniques appropriate for panel data. We use a new data-set, which comprises, among other variables, foreign portfolio flow, interest rate differential, external vulnerability measures, and international liquidity, on annual basis. The empirical results endorse this framework. Overall, it shows the primacy of financial factors as determinants of the long-run real exchange rate and points to the endogenous and self-perpetuating nature of international monetary system hierarchy.