Bilateral real exchange rates and migration

Migrants who move across borders are, to a large extent, motivated by the prospect of earning higher incomes at destination, which can be partly transferred back to their countries of origin via remittances. This suggests that the real exchange rate can influence the incentives to migrate, as it determines the purchasing power of expected income in terms of the currency of the origin country. This article investigates empirically how bilateral real exchange rate fluctuations influence international migration flows. To do so, we build a dataset of 30 OECD destination countries and 165 origin countries over the period 1980–2011 and estimate an equation derived from a micro-founded random utility maximization model that allows for unobserved heterogeneity between migrants and non-migrants. Our results show that migration flows are highly responsive to bilateral real exchange rates: A 10% real appreciation of the currency of the destination country is associated with an 18.2–19.4% increase in migration flows.     

Comparisons of robust tests for shifts in trend with an application to trend deviations of real exchange rates in the long run

We study the finite sample properties of tests for structural changes in the trend function of a time series that do not require knowledge of the degree of persistence in the noise component. The tests of interest are the quasi-Feasible Generalized Least Squares (FGLS) procedure by Perron and Yabu (2009b Perron, P and Yabu, T. 2009b. Testing for shifts in trend with an integrated or stationary noise component. Journal of Business and Economic Statistics, 27: 369–96. [Taylor &; Francis Online], [Web of Science ®] , [Google Scholar]) and the weighted average of the regression t-statistics by Harvey et al. (2009 Harvey, DI, Leybourne, SJ and Taylor, AMR. 2009. Simple, robust, and powerful tests of the breaking trend hypothesis. Econometric Theory, 25: 995–1029. [Crossref], [Web of Science ®] , [Google Scholar]), both of which have the same limit distribution whether the noise component is stationary or has a unit-root. We analyse the finite sample size and power properties of these tests under a variety of Data-Generating Processes (DGPs). The results show that the Perron–Yabu test has greater power overall. With respect to the size, the Harvey–Leybourne–Taylor test exhibits larger size distortions unless a moving-average component is present. Using the Perron and Yabu procedure to test for structural changes in the trend function of long-run real exchange rates with respect to the US dollar indicates that for 17 out of 19 countries, the series have experienced a shift in trend since the late nineteenth century.     

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.     

Nonlinearity and stationarity of inflation rates: evidence from the euro-zone countries

Earlier studies hardly reject the hypothesis of a unit root in inflation. Few studies have examined the possibility of nonlinearity in inflation and tested nonlinear stationarity of the inflation rates. This study thus intends to fill the gap. This study utilizes the tests for nonlinearity along with the unit root tests that allow for nonlinearity in the variables to examine the stationarity of inflation rates of 12 European countries that formed the Euro Zone (EZ) later in the sample period. The results suggest that the majority of these countries’ inflation rates can be characterized by mean reversion during the floating exchange rate period. Many of them appear to be nonlinear stationary. This finding is essential in conducting applied economic studies for these countries, when constructing models whose validity relies on whether or not inflation is stationary. The results of this study also imply that shocks to inflation have a transitory effect on inflation in the euro area. Therefore, it would be less costly in exercising the policies of disinflation for the monetary authorities of the euro area than for those of the countries with nonstationary inflation.     

Re-examination of convergence hypothesis among Indian states in panel stationarity testing framework with structural breaks

This article examines the conditional income convergence hypothesis for 17 major states in India for the period of 1960–2012. Univariate stationarity tests without structural breaks provide evidence against the convergence hypothesis. However, when two or more structural breaks are applied in per capita income series, the incomes of around 11–13 states are found to stochastically converge to the national average. This finding supports the convergence hypothesis for the panel as a whole after accounting for two data features, cross-sectional dependence and structural breaks in incomes, using a unified panel stationarity testing framework.     

The relationship between stock prices and exchange rates in South Africa and Nigeria: structural breaks analysis

The relationship between stock prices and exchange rates has continued to generate interest from both the academia and financial industry players for many years. This study conducts an empirical investigation into the relationship between stock prices and exchange rates for the two largest economies in Sub-Saharan Africa – South Africa and Nigeria. Our methodology accounts for structural breaks in the data and the long-run relationship between stock and foreign exchange markets. The results of multivariate causality tests with structural breaks showed that causality runs from exchange rates to domestic stock prices in Nigeria (flow channel) while in South Africa, no causality exists between domestic stock prices and exchange rates. The results also reveal that there is causality from the London stock market to both countries’ stock markets, thus showing that international stock markets are driving both the Nigerian and South African stock markets.     

The monetary approach to exchange rates in the CEECs1

A panel dataset for six Central and Eastern European countries (Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) is used to estimate the monetary exchange rate model with panel cointegration methods, including the Pooled Mean Group estimator, the Fully Modified Least Square estimator and the Dynamic Least Square estimator. The monetary model is able to convincingly explain the long‐run exchange rate relationships of a group of CEECs, particularly when this is supplemented by a Balassa–Samuelson effect. Our estimated long‐run monetary equations are used to compute equilibrium exchange rates. Finally, we discuss the implications for the accession of selected countries to the European Economic and Monetary Union.     

On the predictability of daytime and night-time yen/dollar exchange rates

This article first shows that the yen/dollar rate tended to appreciate in Japan daytime but to depreciate in Japan night-time in the 2000s. The result is very paradoxical because the asymmetry implies that the intra-daily yen/dollar rate had predictable stochastic trends in the 2000s. The article then investigates whether lagged dependent variables and various external shocks were responsible to the asymmetric feature. We find that once we control the effects of lagged dependent variables and external shocks, the daytime yen/dollar rate tended to appreciate when it had appreciated on the day before, while the night-time yen/dollar rate tended to depreciate when it had depreciated on the day before.     

Long memory and mean reversion in real exchange rates in Latin America

This article examines the long-run Purchasing Power Parity (PPP) hypothesis for 12 Latin American Real Effective Exchange Rates (REERs) using fractional integration techniques. The empirical results, applying parametric approaches, provide evidence of mean reversion in the REERs in the cases of Nicaragua, Belize, Costa Rica, Guyana and Paraguay and lack of it for the remaining seven countries. Employing semiparametric methods, the evidence of mean reversion covers the following countries: Belize, the Dominican Republic, Ecuador and Mexico. Thus, only for Belize and Guyana do we obtain consistent evidence of mean reversion in the real exchange rates. At the other extreme, lack of mean reversion, and thus, lack of PPP, is obtained with both methods in Bolivia, Brazil, Colombia and Venezuela. For the remaining six countries, the results are ambiguous. The results for the PPP theory in Belize and Guyana may show the importance of promoting policies based on exchange rate flexibility and economic liberalization to reach a long-run stability scenario that leads to greater international competitiveness and lower external vulnerability.     

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.     

On the joint Fourier–ESTAR testing of PPP

The purchasing power parity (PPP) is the hypothesis that the real exchange rate series are stationary. This study briefly reviews and applies six competing unit root test procedures to test PPP. Reflecting the existing literature, the results are mixed. The Kiliç test is the most favourable while the Kapetanios, Shin, and Snell (KSS) test is the least favourable to PPP and the standard ADF test lies in between. The same conclusion applies to the Fourier extensions of those three tests. The results support a recently suggested F-test for the significance of Fourier terms in unit root test equations.     

On real interest rate persistence: the role of breaks

The role of structural breaks in long spans of ex-post real interest rates for 10 industrialized countries is studied. First, the persistence of the real interest is assessed with newly proposed low-frequency tests of Müller and Watson (2008). Second, the test of Leybourne et al. (2007) for a change in persistence of a time series is applied to the real interest rate. The results show that real interest rates over the full sample period do not fit a covariance-stationary or unit-root model, nor a fractionally integrated, near-unit-root or local-level model. Instead, the persistence of real rates changes over time and there are periods when the real rate is covariance-stationary and other periods when it follows a unit-root process.     

Drivers of the real effective exchange rates in high and upper‐middle income countries

This paper revisits the nexus between real effective exchange rate (REER) and total factor productivity (TFP) by controlling for trade openness, financial development and natural resources rents. We use a sample of 60 high‐income and upper‐middle income countries over the period 1995–2015 and employ the GMM estimation framework. Our results advance the empirical knowledge on the drivers of REER by providing robust evidence that the impact of TFP is not uniform across different country clusters. We find that in high‐income countries, increasing productivity causes the REER to depreciate hence becoming more trade competitive while the opposite is true for upper‐middle income countries. Furthermore, financial development and natural resources rents have no meaningful impact in the case of upper‐middle income countries but retain a significant effect in high‐income countries. Trade openness plays a key role in explaining the variation in REER in both country clusters.     

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.     

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.     

Nonlinearities in the real exchange rates: new evidence from developed and developing countries

This paper investigates nonlinearities in the dynamics of real exchange rates. We use Monte Carlo simulations to establish the size properties of the Teräsvirta-Anderson test, when the dynamics of the real exchange rate is influenced by an exogenous process. In addition, we show that a modified nonlinearity test, which includes additional right-hand-side variables, performs much better than the original in both Monte Carlo exercises and in the actual data on 1431 bilateral real exchange rate series. Finally, we investigate the dynamics of the real exchange rate for both developed and developing countries using the modified test for the recent floating period. In general, the results find a greater incidence of nonlinear dynamics for developing country real exchange rates.     

On the asymmetric effects of the real exchange rate on domestic investment in G7 countries

Two studies have assessed the symmetric and asymmetric effects of exchange rate changes on domestic investment. One included six emerging countries and the other one, 18 African nations. Both revealed that using nonlinear models to assess the asymmetric effects yield a more significant outcome compared to symmetric and linear models. We add to this small literature by showing the same using quarterly data from each of the G7 countries. Indeed, nonlinear models produced relatively more short-run and long-run effects of changes in the real effective exchange rate on domestic investment, though in an asymmetric manner.     

The Polish exchange rate system: A unit root and cointegration analysis

In October 1991 Poland has established a crawling peg regime in which the zloty is tied to a currency basket and devalued with a monthly rate of crawl. If the monetary authorities are successful in defending the crawling peg the basket rate measured in Polish zloty is supposed to be stationary. Furthermore, a stable long-run relationship between the zloty-U.S. dollar rate and the basket's value expressed in U.S. dollar is expected to exist. The results of the unit root and cointegration analysis indicate that the monetary authorities have been able to defend the crawling peg for the sample periods under study, although it seems that not all requirements of the exchange rate regime have been met. The foreign exchange markets, however, have not supported the relationships derived from the crawling peg system after the introduction of the free floating system in April 2000.The final version of this paper has been prepared while I was a Jean Monnet Fellow at the European University Institute. I would like to thank the EUI for the award of the Fellowship and its hospitality. Moreover, I am grateful to Helmut Lütkepohl, Anja Schulz, Ralf Brüggemann, and two anonymous referees for many helpful comments and suggestions. I also thank the Deutsche Forschungsgemeinschaft, SFB 373, for financial support.     

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.     

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.