Non-linearity versus non-normality in real exchange rate dynamics

We distinguish non-normality from non-linearity in G7 real exchange rate dynamics by correcting the critical values of the Kapetanios et al. [Kapetanios, G., Shin, Y., Snell, A., 2003. Testing for a unit root in the non-linear STAR framework. Journal of Econometrics, 112, 359–379] test for non-normality using the wild bootstrap. Our findings validate non-linear Purchasing Power Parity net of non-normality effects.     

New evidence on the output-inflation trade-off from developing economies: the case of the CFA Franc zone

This aim of this paper is to give a contribution to the debate on whether output-inflation trade-offs are negatively influenced by the mean of inflation (as postulated by new-Keynesians) or by the variability of inflation (as postulated by neo-classical economists). To remove any concerns about the arbitrariness of the choice of the sample, the analysis will focus on a group of countries belonging to the same currency union, the Franc Zone. The results do not provide conclusive evidence on either theory as it was found that there existed a negative relation between the output-inflation trade-offs and the mean of inflation on the one hand, and the variability of inflation, on the other.     

Financial development and poverty: evidence from the CFA Franc Zone

The financial liberalization in the 1980s and early 1990s led the CFA Franc Zone countries to deepen reforms in their financial systems. These reforms fostered financial development, which in turn may have reduced income poverty, as emphasized by several theoretical arguments in the literature. This study aims at estimating the contribution of financial development to poverty alleviation in the CFA Franc Zone. Results based on a panel of CFA Franc Zone countries show that financial development is associated with a drop in the proportion of poor population. Next, financial development reduces the extent to which the income of individuals falls below the poverty line. Moreover, in some cases, the effect of financial development on poverty may be subject to nonlinearities. Finally, financial instability or unstable financial development leading to crises may mitigate the favourable effect of financial development on poverty reduction. These findings are robust to the use of alternative measures of financial development and hold after controlling for a potential simultaneity and a small sample biases.     

Convenience yield and real exchange rate dynamics: A present-value interpretation

In this paper, we empirically investigate the relationship between the convenience yield of government bonds and the real exchange rates using monthly data from 1999 to 2018. We extend the conventional models, based on the present-value relationship between the real exchange rate and economic fundamentals, while explicitly considering the role of the convenience yield. Empirical results suggest that our present-value models can capture the dynamic properties of the real exchange rate documented in the literature, including high persistence, excess volatility and excess co-movement compared with real interest rate differentials. We also find that the sum of expected convenience yields significantly drives real exchange rate movements. Moreover, we find that foreign exchange swap market friction also plays a role in explaining real exchange rates. Finally, we find that monetary policy at the zero lower bound may be essential in real exchange rate modelling.     

Fertility and the real exchange rate

Abstract .  We use a quinquennial data set covering 87 countries between 1975 and 2005 to investigate empirically the relationship between fertility and the real effective exchange rate. Theoretically, a country experiencing a decline in its fertility rate can be expected to experience a real depreciation. We test and confirm this hypothesis, controlling for a number of other potential determinants. We find a statistically significant and robust link between fertility and the exchange rate. Our point-estimate is that a decline in the fertility rate of one child per woman is associated with a depreciation of approximately 15% in the real effective exchange rate.     

Deforestation and the real exchange rate

Deforestation is a phenomenon that has largely been concentrated in the developing world. We construct a theoretical model of deforestation that focuses on the factors affecting the incentives to transform forested land into agricultural land. We show that: (i) lower discount rates and stronger institutions decrease deforestation; (ii) a depreciation in the real exchange rate increases deforestation in developing countries whereas the opposite obtains in developed countries; (iii) paradoxically, better institutions may exacerbate the deleterious impact of a depreciation in developing countries. These hypotheses are tested on an annual sample of 101 countries over the 1961–1988 period, and are not rejected by the data. Our results suggest that short-term macroeconomic policy, institutional factors, and the interaction between the two, are potentially important determinants of environmental outcomes.     

Choice of exchange rate regime and currency zones

We investigate the choice of exchange rate regimes in different currency zones (the US dollar, Euro and the CFA zones), and geographic regions (Latin America and Caribbean, East Asia and Pacific, Europe, core Europe, and the CFA countries). We control for country and regional heterogeneity, time dummies, endogeneity and perform various robustness checks. Results from regional analysis substantially differ from the aggregate analysis despite controlling for random effects. Even at the regional level controlling for currency zones affects our findings. Regional results are generally robust to regime measurement, and sample changes (number of observations).     

The real exchange rate and the black market exchange rate in developing countries

This article tests for the validity of the Purchasing power parity (PPP) theory using both the black market and the official exchange rates for panels with cross sectional dependency. The test is conducted using a newly developed, nonlinear IV panel unit root test that properly handles cross-sectional dependency for thirty-seven developing countries. We find that the null of joint unit root hypothesis is rejected for the whole panel, using the black market exchange rate, and for sub-panels of African and high inflation countries, using either exchange rate. The black market-based real exchange rates are, therefore, shown to provide stronger evidence for the purchasing power parity theory than do the official rates. This finding is consistent with the observation that black market exchange rates better represent market forces and thus are more relevant when testing for the validity of the PPP theory in developing countries.     

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.     

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.     

Commodity currencies and the real exchange rate

This paper shows that a change in the terms of trade of a commodity-exporting country could cause the relative price of nontraded goods to rise or fall, depending on the strength of income and substitution effects.     

Remittances and the real effective exchange rate

We examine the long-run relationship between remittances and the real exchange rate for less-developed countries. In a key departure from the literature, we employ a panel cointegration approach using an innovative method for the measurement of the multilateral real effective exchange rate and we focus on high-remittance economies. We find a small inelastic, but significant, long-run relationship which confirms a Dutch disease type effect. The short-run relationship is explored using a panel vector error correction model which confirms that short-run causality is unidirectional running from remittances to the exchange rate. Potential asymmetries in this relationship are identified using quantile regression analysis.     

Exchange rate dynamics and currency unification: The Ostmark-DM rate

This paper estimates a simple model of the exchange rate between the East and West German Mark immediately preceding German monetary union. Although there is a theoretical literature on exchange rate dynamics when the introduction of a fixed exchange rate is anticipated, the absence of data has limited empirical work on the subject. We show that in the first part of the sample, the DM-Ostmark exchange rate behaves as a random walk. In the second half, when monetary union appeared more likely, the exchange rate behaves as a weighted average of fundamentals and the expected “terminal” exchange rate.     

Invoice currency choice,nonlinearities and exchange rate pass-through

ABSTRACT

Estimating time-varying thresholds as a proxy for exporter’s predicted exchange rates, this study proposes a new approach to analyse possible asymmetric behaviour of exchange rate pass-through (ERPT) or pricing-to-market (PTM) in Japanese exports between yen appreciation and depreciation periods. Constructing the industry-specific nominal effective exchange rate on a contract (invoice) currency basis, we perform the multivariate threshold near-vector autoregressive (near-MTVAR) estimation and reveal a strong tendency of symmetric ERPT in the short-run, between yen appreciation and depreciation periods. From the 2000s, however, Japanese machinery exporters increased the degree of PTM even in the long-run, while other industries raised the degree of long-run ERPT, reflecting the difference of product differentiation across industries. This evidence has significant implications for the recent unresponsiveness of the Japanese trade balance to the large depreciation of the yen.     

Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation

Within the context of a small open economy model, this paper examines the repercussions of induced currency depreciation. The results presented in this paper are based on a model with firm microeconomic foundations and which takes into account both the supply and demand-side effects of exchange rate variations. The distinguishing feature of the model is the role of exchange rate expectations. We consider three kinds of expectations; adaptive, extrapolative, and regressive expectations. We also perform several sensitivity tests based on these expectations. Our simulation exercise shows that the effect of induced currency depreciation depends largely on supply-side effects. In most cases, we find that currency depreciation results in (i) a fall in output, (ii) an increase in prices and (iii) an improvement in the balance of trade. In the absence of weak supply-side effects of exchange rates, we find that, if the Marshall-Lerner conditions hold, then depreciation of the home currency has a favorable effect on output but its effect on the balance of trade is negative.     

The effects of exchange rate regimes on real exchange rate misalignment

The literature on exchange rate regimes has paid little attention to the effects of exchange rate policies on real exchange rate misalignments. This paper contributes to filling that gap by exploring such relation empirically. Because the underlying model is probably not linear and the treated individuals differ from non-treated individuals, we rely on Matching models rather than on standard regressions. Our main finding is that pegs are associated with more overvaluation. The results are robust to different exchange rate regime classifications, misalignment indexes, and matching estimators. The evidence presented suggests that policy-makers concerned with overvaluation should avoid sticking with rigid arrangements for too long.     

The real exchange rate and economic development

Recent empirical studies have found a robust correlation between competitive exchange rates and economic growth in developing economies. This paper presents (i) a formal model to help explain these findings and (ii) econometric evidence on the relation between investment and the real exchange rate. The model emphasizes the existence of (hidden) unemployment as a source of endogenous growth, even under constant returns to scale. Growth promoting policies, however, affect the external balance, and two instruments are needed in order to achieve targets for both the growth rate and the trade balance. The real exchange rate can serve as one of those instruments. The implications of the model for the relation between real exchange rates and the rate of capital accumulation find support in our econometric analysis.     

Long-run determinants of the Irish real exchange rate

Smooth adjustment to real exchange rate shifts is one of the major challenges facing the Irish economy under EMU. Rather than assume purchasing power parity, the long-run real exchange rate is modelled as time-varying, being determined by relative output levels, the terms of trade and the net foreign asset position. It is shown that these factors account for a large proportion of the long-run movement in the Irish real exchange rate.