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.     

Agricultural productivity,the real effective exchange rate,and structural change: Some evidence from Africa

Agriculture is thought to play a number of roles in the early development process. All of these roles involve fostering non‐agricultural development, in particular manufacturing. It is argued in this paper that agriculture plays a role that has hitherto been ignored. Specifically, if agricultural labor productivity increases faster than manufacturing labor productivity, the real effective exchange rate will depreciate. This depreciation of real effective exchange rate occurs because in very poor countries agriculture makes up the dominant share of both GDP and employment. The depreciation also makes it easier for a country to expand the production of tradables relative to nontradables, with manufacturing being the main tradable. This proposition, which as agricultural labor productivity increases relative to manufacturing labor productivity the real effective exchange rate depreciates, is tested using data drawn from 10 sub‐Saharan African countries.     

Managing real exchange rate for economic growth: Empirical evidences from developing countries

Abstract

This article analyses macroeconomic policies capable of influencing the long-run real exchange rate (RER). In this vein, it identifies economic policy tools that can devalue RER, covering a theoretical issue neglected by the economic literature, which argues that competitive exchange rate enhances growth. After discussing the “Trilemma,” we identify those variables that could affect RER without constraining monetary policy or exchange rate regime choice. In what follows, we model the probability of achieving an undervalued (small or large) RER for a sample of 14 developing countries from 1980 to 2010 (30?years) by applying econometric techniques for discrete choice and censored data. Afterwards, we compare the results for Latin American nations with Asian ones. They suggest that competitive exchange rate requires different approaches depending on the region. Moreover, Latin American countries need to take on additional policies so that interventions in the foreign exchange market become effective.     

Trade openness effects on informality and the real exchange rate channel

The theoretical frameworks that explain the impact of trade openness on informal employment suggest an ambiguous effect. This has been verified in a few countries, based solely on microeconometric evidence. This study contributes to the literature by specifying a macroeconometric relationship for a panel of 17 Latin American countries.     

The equilibrium real exchange rate and macroeconomic performance in developing countries

This article presents first estimates of the growth impact of the equilibrium real exchange rate (ERER) for a sample of 63 developing countries over 1970–2007. The results suggest that real exchange rate misalignment, not the level of the ERER, matters for macroeconomic performance in these countries.     

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.     

Oil prices and the real exchange rate in Iran: an ARDL bounds testing approach

This article examines the impact of oil prices on the real exchange rate in Iran during the 1961–2014 period using the autoregressive distributed lag approach to cointegration as the estimation method. We find that higher oil prices lead to appreciation of the real exchange rate. The results reveal that oil prices have both short-run and long-run effects on the real exchange rate.     

Impact of oil price shocks on output,inflation and the real exchange rate: evidence from selected ASEAN countries

This article analyses the impact of oil price shocks on real output, inflation and the real exchange rate in Thailand, Malaysia, Singapore, the Philippines and Indonesia (ASEAN-5) using a Structural VAR model. The cointegration tests indicate that the macroeconomic variables of these countries are cointegrated and share common trends in the long run. The impulse response functions reveal that oil price fluctuations do not impact the ASEAN-5 economies in the long run and much of its effect is absorbed within five to six quarters. The variance decomposition results further assert that with a few exceptions oil price shocks do not explain a significant variation in any of the variables under consideration. We also identify a very unique pattern of response to oil price fluctuations between Malaysia and Singapore and between the Philippines and Thailand. The pairs exhibit a high degree of similarity in their responses; they do not share any commonalities across the group.     

Capital flows,real exchange rate,and growth constraints in Mexico

Besides its well‐known problem of slow economic growth, Mexico’s recent evolution features both a sharp rise in the import‐intensity of economic activity – which may have tightened an external constraint on growth – and a persistent real appreciation of the peso – which may have created a profitability constraint. Adopting the approach of gap models and growth diagnostics, the paper contrasts the relevance of the external and the profitability constraints in Mexico after trade liberalization in the mid‐1980s. Although the trade deficit was pro‐cyclical, the three recent episodes of GDP growth acceleration were not accompanied by pressures in the foreign exchange market. Moreover, error correction models show that investment was highly responsive to the real exchange rate but largely unresponsive to foreign capital flows. The evidence supports the conclusion that investment was deterred by the low profitability of an uncompetitive real exchange rate, rather than by the external constraint.     

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.     

The effects of exchange rate volatility on exports: evidence from Armenia

The article examines how the volatility of exchange rate affected Armenia’s export to its main trading partner, Russia, in the period from January 2007 to February 2016. Along with real foreign income and competitiveness, the exchange rate volatility is considered as a determinant of real export. The estimation results indicate that the exchange rate volatility has negative significant effects on real export both in the long run and in the short run.     

More evidence on the asymmetric effects of exchange rate changes on the demand for money: evidence from Asian

We try to assess the impact of exchange rate changes on the demand for money in eight Asian countries. When we followed the previous literature and the standard linear Autoregressive Distributed Lag (ARDL) approach, we found exchange rate changes had no long-run significant effects in five out of the eight countries in our sample. However, when we applied the nonlinear ARDL approach and separated appreciations from depreciations, at least one of them or both had significant effects on the demand for money in India, Indonesia, Korea, the Philippines, and Singapore, supporting asymmetric effects of exchange rate changes. There was also evidence of short-run asymmetric effects.     

Median-unbiased estimation of structural change models: an application to real exchange rate persistence

Measuring deviations from purchasing power parity has been the subject of extensive investigation. The most common practice in empirical research for measuring real exchange rate persistence is to estimate univariate autoregressive (AR) time series models and calculate the half-life, defined as the number of periods for a unit shock to a time series to decay by 50%. In the presence of structural change, there are two potential biases in the parameter estimates of AR models: (1) a downward small sample median-bias and (2) an upward bias, which occurs when structural change is present and ignored. We conduct a variety of Monte Carlo simulations and demonstrate that the existence of structural change causes a substantial increase in the small sample bias documented in Andrews (1993). We then propose an extension of median-unbiased estimation, which explicitly accounts for structural change, and apply these methods to estimate half-lives of several long-horizon real exchange rates analysed by Lothian and Taylor (1996) and Taylor (2002). The upward bias from neglecting structural change dominates the downward median-bias for these real exchange rates. When structural change is present and accounted for, the median-unbiased half-lives towards a changing mean decrease and the confidence intervals tighten.     

International trade and factor productivity as determinants of the real effective exchange rate

Using panel time-series models that deal with the problems of potential endogeneity and cross-sectional dependence, while also allowing for cross-country heterogeneity in the parameters of interest, we demonstrate that trade openness produces a depreciation of the real effective exchange rate.     

The effects of government spending shocks on the real exchange rate and trade balance in Turkey

The aim of this study is to investigate the effects of government spending shocks on the real exchange rate and foreign trade balance in Turkey for the period of 2002:01–2012:04 within a structural VAR framework. The analysis shows that a positive shock to the government spending tends to induce real exchange rate appreciation and deterioration in trade balance. We also find that the composition of the government spending matters. Although shocks to the government nonwage consumption generate an appreciation in the real exchange rate and worsening of the trade balance, the effects of government investment shocks remain insignificant. Furthermore, the analysis demonstrates that shocks to government spending are associated with a rise in taxes, which is indicative of a spending-driven tax adjustment process in Turkey.     

Spatial panel data analysis with feasible GLS techniques: An application to the Chinese real exchange rate

Recent panel data approaches stress the importance of the location interdependence. Little has been done in the Balassa-Samuelson literature accounting for spatial dependence in the panel data context that allows for spatial autocorrelation. By utilising the recently developed Kapoor et al. (2007) spatial panel feasible GLS methods, we find that the Balassa-Samuelson effect in the Chinese economy during 1985 until 2000 generally does not appear to hold. However, the black market exchange rate tends to be more compatible with the theory.     

Parity reversion in the Asian real exchange rates: new evidence from the local-persistent model

This article investigates the time-series properties of 13 Asian real exchange rates (RERs) vis-à-vis the US dollar. The half-life point estimates drawn from the local-persistent model are all less than 2 years, with a finite upper bound. There is no evidence to indicate that the Asian financial crisis has altered the speed of the purchasing power parity (PPP) adjustments. We find that the persistence of RERs over the last three decades remains unchanged in majority of the cases. Given the fairly rapid speed of adjustments and their corresponding confidence intervals, we conclude that the PPP puzzle does not exist in these countries.     

Autoregressive conditional durations: An application to the Surinamese dollar versus the US dollar exchange rate

The parallel market nominal exchange rate of the United States dollar vis-à-vis the Surinamese dollar (USD/SRD) exhibited periods of severe volatility which were often followed by episodes of stability, usually at a cost of sharp depreciations. This study seeks to model this exchange rate using autoregressive conditional duration models. These models are suitable for modelling events occurring with irregular intervals. Exchange rates in developing countries have distinct features compared to exchange rates in countries with well-established and accessible financial markets. A key feature is that for these developing countries, exchange rates only occasionally experience jumps. Our findings suggest that past exchange rate changes appear to be a significant driver of future exchange rate jumps. Furthermore, our results show that money, international reserves, and commodity prices can explain jumps in the market USD/SRD exchange rate.     

Real exchange rates and job flows: evidence from Turkey

This study investigates the effects of the real exchange rate on job flows in Turkish manufacturing industries between 2006 and 2015 using data at the four-digit NACE Revision 2 level. Using dynamic panel data models, we find that a real appreciation increases gross and net job creation rates, and that the effect of appreciation is magnified as the exposure to international competitiveness of industries increases. We think that this is because Turkish manufacturing firms import a greater share of their inputs compared to the firms in developed countries. Hence, an appreciation creates more jobs because lower imported input costs enable firms to outcompete foreign producers.     

Hyperinflation in Zimbabwe: money demand,seigniorage and aid shocks

Zimbabwe experienced record hyperinflation of 80 billion per cent per month in 2008. This article uses new data from Zimbabwe to investigate money demand under hyperinflation using an autoregressive distributed-lag model for the period 1980–2008. The results produce plausible convergence rates and long-run elasticities, indicating that real-money balances are cointegrated with the inflation rate and signifying an equilibrium relationship between the two series. Evidence is also presented suggesting prices were driven by increases in the money supply rather than by changes in price setting behaviour. The article uses the estimated elasticity on the inflation variable to calculate the maximum level of seigniorage revenue that could be raised in the economy. Actual seigniorage levels increased dramatically after 2000, with inflation eventually exceeding the rate required to maximize this revenue stream. This is discussed in relation to international financing constraints and the collapse of the domestic tax base.