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

Zimbabwe 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.     

Structural Breaks and the Equilibrium Chinese Yuan/US Dollar Real Exchange Rate: A FEER Approach

This paper examines the equilibrium Chinese yuan/US dollar (CNY/USD) real exchange rate within the framework of the fundamental equilibrium exchange rate (FEER) model. Endogenous structural breaks are allowed for in all cointegration relationships. Macroeconomic fundamentals that affect medium‐term savings and investment and hence, the sustainable current account, are also highlighted. A unique set of quarterly data for the post‐reform period (1982–2009) is constructed. This paper finds structural breaks in all trade and the sustainable current account equations. The misalignment rates show that the real exchange rate was overvalued in most years until 2003, followed by undervaluation during 2004–09. However, the average misalignment rates and revaluation required to correct this undervaluation are not as large as suggested by previous studies, with the undervaluation rate declining sharply in 2009. Further, misalignment rates are computed using a sustainable current account of 3%. The findings suggest such exogenous input leads to results biased towards larger undervaluation.     

Exchange rate regime,real misalignment and currency crises

Based on 69 sample countries, this paper examines the effect of macroeconomic fundamentals on real effective exchange rates (REER) in these sample countries. Using the misalignment of actual REER from its equilibrium level, we have estimated the factors explaining the extent of currency over- or under-valuation. Overall, we find that the higher the flexibility of the currency regime, the lower is the misalignment. The estimates are robust to different sub-samples of countries. We then explore the impact of such misalignment on the probability of a currency crisis in the next period, indicating the extent to which misalignment could be used as a leading indicator of a potential crisis. This paper thus makes a new contribution to the debate on the choice of exchange rate regime by bringing together real exchange rate misalignment and currency crisis literature.     

人民币均衡汇率与汇率失调:1991-2004

本文运用行为均衡汇率模型对人民币均衡实质汇率和汇率失调程度进行了实证研究,样本区间为1 991年1季度—2 0 0 4年3季度。本文的主要发现是:( 1 )从1 994年4季度起人民币均衡实质汇率处于不断升值的状态,其背后的主要驱动力量是我国制造业劳动生产率的快速上升和经常项目盈余导致的净对外资产余额的不断增加;( 2 ) 2 0世纪90年代以来,人民币实际实质汇率在大部分时期偏离均衡实质汇率轨迹,表现为人民币汇率的失调。其中,1 992年2季度—1 994年4季度为人民币汇率低估时期,1 995年1季度—1 999年2季度为人民币汇率高估时期,而1 999年3季度往后的时期人民币汇率重新转为低估,并且低估程度有进一步扩大的趋势。本文对人民币汇率失调的原因分析表明1 997年以来硬钉住美元的汇率政策是造成人民币汇率失调的一个主要宏观政策因素。因此,本研究的政策含义是,从应对人民币汇率失调的角度,更为灵活的汇率政策将更有利于中国经济的稳定健康发展     

How do currency misalignments’ threshold affect economic growth?

Based on panel smooth transition regressions, this paper determines for a large sample of developed and emerging countries, the value of currency misalignments from which we observe a regime shift in economic growth, over the 1980–2009 period. Misalignments, defined as the difference between the current real exchange rate and its equilibrium counterpart, are derived from the behavioural equilibrium exchange rate (BEER) approach. Our estimate relies on recent panel cointegration techniques that allow for heterogeneity and cross-sectional dependencies. We also control for the presence of structural breaks. Our findings show that our misalignments index plays a key role in the reversal of trend growth. Although the undervaluation of their currency acts positively on their growth, emerging countries cannot base their strategy on this finding to promote growth. We relate this result to the adverse effects of depreciation, as in “original sin”. The implications of our findings, in terms of economic policy, clearly emphasise the economic leverage role of undervaluation: it remains a powerful cyclical instrument but has to be, nevertheless, employed with precautionary to be globally and internationally consistent.     

人民币实际汇率错位的经济效应实证研究

本文运用行为均衡汇率模型和协整理论,测算1984—2004年人民币实际汇率错位的季度状况,结果表明,人民币实际汇率在此期间经历了三个阶段的币值低估和两个阶段的币值高估。结合这21年间中国主要经济指标的增长率,划分阶段研究人民币实际汇率错位的经济效应,可以发现:较大幅度的实际汇率错位对涉外经济变量产生了比较明显的影响;而低幅度的实际汇率错位,不会对经济产生较大危害,经济系统本身可自动调节;另外,实际汇率错位对涉外经济变量的变动有非常好的解释作用,这反过来证明,对人民币实际汇率错位状况的测算是准确的。通过建立计量模型,从1984—2004年整体时段来研究人民币实际汇率错位的经济效应,结果表明,实际汇率错位对出口和进口都产生了显著的负面影响。     

China’s equilibrium exchange rate dynamics 1994–2004: A cointegration analysis

Motivated by the global debate on the possible revaluation of the Chinese currency, the RMB, in recent years, the objective of this paper is to measure the equilibrium value of the RMB exchange rate through the macroeconomic balance approach in order to produce an assessment of the RMB in terms of periods of misalignment. The empirical evidence indicates that although there turns out to be an increasing degree of the RMB undervaluation in these measures from 2003 to 2004, the RMB is not substantially undervalued in both measures of real effective exchange rates and nominal bilateral exchange rates against the US dollar over the full period 1994–2004.     

Exchange rate misalignments and the external balance under a pegged currency system

This paper analyzes the link between the exchange rate misalignments and the external balance under a pegged currency system focusing on the former French colonies of Africa (the CFA zone). Having discussed and chosen an appropriate analytical framework, it addresses the issue of model uncertainty regarding the equilibrium exchange rate model before estimating currency misalignments. The results show that misalignments have a negative and asymmetric impact on the current account. While overvaluation of the CFA franc deteriorates the current account, undervaluation does not improve it. Finally, our results highlight that the export concentration tends to exacerbate the overall negative impact of currency misalignments.     

The Penn Effect revisited: New evidence from Latin America

In this paper, we examine the role of relative productivity growth in real misalignment of exchange rates in Latin American countries. Specifically, we verify the validity of the Penn Effect for selected countries in this region. Our sample consists of 15 countries for the period 1951 to 2010. We employ both short‐ and long‐panel data techniques, which allow us to experiment with estimators suitable for short and long time dimensions of panel data. The Penn Effect is found to be supported for the entire sample, and for subsamples. Relative productivity growth is dominant in the real exchange rate movement during periods of mild or weak speculative attacks, as compared with periods of severe speculative attacks. To correct for real misalignment of currencies in Latin America under speculative attacks, relative productivity growth must be sizeable.     

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

This 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.     

The Minimum Economic Dividend for Joining a Currency Union

A two‐country model is developed to show how the optimality of a currency union depends on whether it brings an economic dividend in terms of potential growth and the Balassa–Samuelson (BS) effect (the steady appreciation of the real exchange rate due to cross‐country differences in intersectoral productivity gaps). The model shows that such dividend needs to be larger, the higher the BS effect, the smaller the size of the economy, the larger the cross‐country difference in the standard deviation of the supply shocks, the smaller their correlation and the larger the standard deviation of real exchange rate shocks. We calibrate the model to quantify such dividend as a function of plausible ranges of the parameter values. The results suggest that both the BS effect and the size of real exchange rate shocks play a key role in evaluating the optimality of accessing the currency union.     

Productivity Trends in Europe: Implications for Real Exchange Rates, Real Interest Rates, and Inflation

The paper examines a long–run (neoclassical) framework in which differences in productivity growth across sectors and countries lead to inflation differentials. In a currency union, these inflation differentials imply cross–country differentials in real interest rates. The authors estimate the likely size of these differentials for European Union countries, discuss the potential costs of persistent inflation differentials, and comment on the conflicts they may cause within Economic and Monetary Union (EMU). The analytical framework is a variant of the Balassa–Samuelson "productivity hypotheisis," which relates sectoral productivity trends to trends in the relative price of home goods.     

货币冲击的动态效果

基于一个发展了的允许货币冲击存在短期真实效应的货币数量论框架,以及以此为基础的结构性向量自回归模型(SVAR)来考察货币冲击对我国一般价格水平和实际产出的动态效果的理论和经验分析结果表明,货币冲击在长期内是中性的,但对短期产出水平具有真实效应。不过,与实际冲击的作用比较起来,货币冲击对于解释我国实际变量的波动并不重要;然而,货币冲击能够解释一般价格水平变化的实质性部分。数量历史分析还显示,货币冲击能够很好地解释我国一般价格水平变化的时间轨迹以及历史上发生的通货膨胀和通货紧缩。     

The influence of fiscal policy uncertainty on corporate total factor productivity: Evidence from Chinese public companies

This paper uses China's public companies to test the influence of fiscal policy uncertainty on corporate total factor productivity. The study finds that fiscal policy uncertainty has a negative impact on the total factor productivity, and the effect of conservative tax avoidance, a mediating variable between the two, is found more significant for non-state-owned and non-recession-stage enterprises. The study further finds that facing fiscal policy uncertainty, companies reduce R&D investment, which will deteriorate productivity. The overall results show that if the government maintains relatively stable fiscal policies, it will positively improve corporate total factor productivity, even in a longer period.     

Large real exchange rate movements, firm dynamics, and productivity growth

Abstract.  This paper examines the influence of large real exchange rate movements on firm turnover and production scale, and the contribution of these decisions to productivity growth. Our theoretical model predicts that home currency appreciations cause firm closure and reduce surviving firms' exports while boosting domestic sales. The net effect on sales and productivity therefore depends on changes in domestic sales and exports. Taiwanese firm-level data are used to test these predictions. The results show that real currency appreciations lead to scale expansion of surviving firms which in turn raises productivity. Our findings suggest the existence of a significant scale effect.     

Currency Boards in the Baltic Countries: What Have We Learned?

Straightforward exchange rate arrangements known as currency boards have gained popularity during the past decade. Among transition economies, Estonia first introduced a currency board in 1992, followed by Lithuania in 1994 and Bulgaria in 1997. Currency boards have been useful in achieving macroeconomic stabilisation, and they may have helped the Baltics become the first countries of the former Soviet Union (FSU) to achieve economic growth after the slump in production of the early 1990s. Moreover, Baltic inflation performance has been substantially better than in other FSU countries. Both in Estonia and Lithuania the present exchange rate system has been accompanied by strong real appreciation of the currency, although it is widely accepted that the currencies were very much undervalued when they were initially pegged. However, if rapid real appreciation is accompanied by increases in labour productivity, the present pegs can be maintained. Banking crises in Estonia and Lithuania have not been particularly severe, so apparently rigid currency pegs have not been accompanied by excessive financial sector instability. The tight fiscal policies pursued in both countries, especially Estonia, have been instrumental to the success of these currency board arrangements.     

人民币升值是紧缩性的吗?

中国经济近年来呈现出比较明显的外部失衡和内部失衡,这与人民币汇率低估不无关系。我国政府对是否允许人民币升值保持非常谨慎的态度,主要原因是担心人民币升值如传统宏观经济理论所言是紧缩性的,从而造成中国经济增长放慢和失业上升。本文运用向量自回归模型实证考察了人民币实质汇率冲击对中国产出的影响,实证分析表明:(1)在控制了可能导致人民币实质汇率与中国产出之间伪相关的来源后,人民币实质汇率升值仍会导致中国产出一定程度的下降,因此货币升值在中国确实是紧缩性的,“紧缩性贬值”文献揭示的升值扩张性效应在中国不是支配性的;(2)一旦考虑了中国经济的国际金融联系,实质汇率冲击对中国产出变动的解释力和影响程度明显变小,而美国利率冲击对中国产出变动有更大的影响,其影响超过了人民币实质汇率冲击的影响。本文进一步分析了实证结果背后的可能原因,并且指出并不能从本文的结论引出中国应该继续维持人民币汇率低估的政策建议。     

Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach

This paper presents an empirical analysis of the medium–term determinants of the euro effective exchange rate. The empirical analysis builds on synthetic quarterly data from 1975 to 1998, and derives a Behavioural Equilibrium Exchange Rate (BEER) and a Permanent Equilibrium Exchange Rate (PEER). Four different specifications are retained, due to the difficulties encountered in specifying an encompassing model. The results indicate that differentials in real interest rates and productivity, and (in some specifications) the relative fiscal stance and the real price of oil, have a significant influence on the euro effective exchange rate. Assessing the existence and the extent of the over– or undervaluation of the exchange rate is not straightforward, since these different specifications often lead to contrasting findings. However, all four specifications point unambiguously to the undervaluation of the euro in 2000, although the extent of this undervaluation largely depends on the specification chosen.     

Linking investment spikes and productivity growth

We investigate the relationship between productivity growth and investment spikes using Census Bureau’s plant-level dataset for the U.S. food manufacturing industry. There are differences in productivity growth and investment spike patterns across different sub-industries and food manufacturing industry in general. Our study finds empirical support for the learning-by-doing hypothesis by identifying some cases where the impact of investment spikes on TFP growth presents a U-shaped investment age–productivity growth pattern. However, efficiency and the learning period associated with investment spikes differ among plants across industries. The most pronounced impact of investment age on productivity growth (5.3 % for meat products, 4% for dairy products, and 2.8 % in all food manufacturing plants) occurs during the fifth year of post-investment spike. Thus, in general, the productivity gains tend to be fully realized with a 5-year technology learning period for this industry.     

Nonlinear adjustment in the real dollar–euro exchange rate: The role of the productivity differential as a fundamental

In this paper we analyze the influence of productivity differentials in the dynamics of the real dollar–euro exchange rate. Using nonlinear procedures for the estimation and testing of ESTAR models during the period 1970–2009 we find that the dollar–euro real exchange rate shows nonlinear mean reversion towards the fundamentals represented by the productivity differential. In addition, we provide evidence about the ability of this variable to capture the overvaluation and undervaluation of the dollar against the euro.