Exchange rate flexibility, the real exchange rate, and adjustment to terms‐of‐trade shocks

2021 ◽  
Author(s):  
Yan Carrière‐Swallow ◽  
Nicolás E. Magud ◽  
Juan F. Yépez
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Terms Of Trade ◽  
Exchange Rate Flexibility ◽  
The Real ◽  
Trade Shocks

scholarly journals DETERMINANTS OF REAL EXCHANGE RATE IN ETHIOPIA

2016 ◽  
Vol 4 (6) ◽  
pp. 183-210
Author(s):  
Nandeeswara Rao ◽  
TassewDufera Tolcha
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Impulse Response ◽  
Variance Decomposition ◽  
Capital Inflow ◽  
Terms Of Trade ◽  
Nominal Exchange Rate ◽  
The Real ◽  
Long Run ◽  
Short Run

Real exchange rate has direct effects on trade particularly on international trade and has indirect effects on productions and employments, so it is crucial to understand the factors which determine its variations. This study analyses the main determinants of the real exchange rate and the dynamic adjustment of the real exchange rate following shocks to those determinants using yearly Ethiopian time series data covering the period 1971 to 2010. It begins with a review of literatures on Exchange rate, real exchange rate, determinants of the real exchange rate and provides an updated background on the exchange rate system in Ethiopia. An empirical model linking the real exchange rate to its theoretical determinants is then specified. This study had employed the cointegration and vector autoregression (VAR) analysis with impulse response and variance decomposition analyses to provide robust long run effects and short run dynamic effects on the real exchange rate. Share of investment, foreign exchange reserve, capital inflow and government consumption of non-tradable goods were the variable that have been found to have a long run relationship with the real exchange rate. The estimate of the speed of adjustment coefficient found in this study indicates that about a third of the variation in the real exchange rate from its equilibrium level is corrected within a year. The regression result of VECM reveals that terms of trade, nominal exchange rate, and one period lag of capital flow were the variables significantly affects the real exchange rate in the short run. However, the impulse response and variance decomposition analysis shows a better picture of the short run dynamics. The their analysis provided evidence that the Shocks to terms of trade, nominal exchange rate, capital inflow and share of investment have persistent effects on the real exchange rate in the short run. In general the regression results of both long run and short run models mostly suggest that the fluctuations of real exchange rates are predominantly responses to monetary policies shocks rather than fiscal policy shocks.

The Determinants of Long-run Real Exchange Rate in South Africa: A Fundamental Equilibrium Approach

2015 ◽  
Vol 15 (3) ◽  
pp. 319-336 ◽  
Author(s):  
Bernard Njindan Iyke ◽  
Nicholas M. Odhiambo
Keyword(s):  
South Africa ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Trade Openness ◽  
Commodity Prices ◽  
Testing Procedure ◽  
Terms Of Trade ◽  
Bounds Testing ◽  
The Real ◽  
Long Run

In this paper, we identify the fundamental determinants of the long-run exchange rate in South Africa. We then estimate the equilibrium real exchange rate for this country using a dataset covering the period 1975–2012. In order to account for possible short-run fluctuations in the real exchange rate, we conducted a cointegration test using the ARDL bounds testing procedure. First, we found terms of trade, trade openness, government consumption, net foreign assets and real commodity prices to be the long-run determinants of the real exchange rate in South Africa. Second, we found that nearly 68.06% of the real exchange-rate disequilibrium is corrected annually. Overall, the estimated equilibrium rate indicates that the Rand has been depreciating in real terms over the years. Tightening trade openness is not an option, given international agreements; on the other hand, terms of trade and real commodity prices are determined by the world market. The obvious policy alternative is for South Africa to increase government spending and moderately decrease her net foreign asset position.

scholarly journals Estimating Namibias Equilibrium Real Exchange Rate

2014 ◽  
Vol 13 (3) ◽  
pp. 561
Author(s):  
Joel Hinaunye Eita ◽  
Moses Muse Sichei
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Substitution Effect ◽  
Terms Of Trade ◽  
Income Effect ◽  
Quarterly Data ◽  
The Real ◽  
Speed Of Adjustment

This paper estimates the equilibrium real exchange rate for Namibia for the post independence period (1998 to 2012) using quarterly data. Increases in the ratio of investment to GDP and resource balance are associated with an appreciation of the real exchange rate. The terms of trade causes the real exchange rate to depreciate, which suggests that the substitution effect was dominant over the income effect. The real exchange rate adjusts to equilibrium rate while the speed of adjustment indicates that it takes about 4.4 quarters or 1.1 years for 50 percent of the deviation from the equilibrium to be corrected. There were periods of undervaluation and overvaluation of the real exchange, which means that the real exchange rate experienced misalignment.

scholarly journals CADANGAN DEVISA, FINANCIAL DEEPENING DAN STABILISASI NILAI TUKAR RIIL RUPIAH AKIBAT GEJOLAK NILAI TUKAR PERDAGANGAN

2009 ◽  
Vol 11 (2) ◽  
Author(s):  
Priadi Asmanto ◽  
Sekar Suryandari
Keyword(s):  
Hong Kong ◽  
Exchange Rate ◽  
South Korea ◽  
Real Exchange Rate ◽  
Shock Absorber ◽  
Terms Of Trade ◽  
Buffer Stock ◽  
International Reserves ◽  
Financial Deepening ◽  
The Real

These papers analyze the influence of the international reserves and the financial deepening on the real exchange rate stabilization due to the terms of trade shock. The analysis covers 6 countries with quarterly data (Indonesia, United States, Japan, Hong Kong, Singapore and South Korea during the period of 2000.1 to 2006.4). This research utilizes the international reserves mitigation and the financial deepening mitigation model.This result shows that the reserves mitigation terms variable plays important role as the real exchange rate stabilization regarding the terms of trade shock in a common sample, but not in specific country. The mitigation effect associated with international reserves (buffer stock effect) applies only in South Korea. While for United State and Indonesia mitigation effect associated with international reserves opposite way. Even for Hong Kong, Japan and Singapore, the mitigation effect does not have significant induces real exchange rate stability.Furthermore, the financial deepening mitigation terms variable cannot be treated as the real exchange rate stabilization in a common sample, but not specific country. The mitigation effect associated with financial deepening (shock absorber effect) applies only in United States and Indonesian economic, while for South Korea the mitigation effect associated with the financial deepening works in opposite way. Even for Hong Kong, Japan and Singapore, the mitigation effect of financial deepening does not have significant induces real exchange rate stability.In Indonesian economic, the financial deepening is more effective than the international reserve to create the real exchange rate stability. The shock absorber effect in Indonesia is more effective than the buffer stock effect to stabilize the real exchange rate due to the terms of trade shock.JEL Classification: E44, F31, F32Keywords:International reserves, buffer stock, financial deepening, shock absorber, terms of trade shock, real exchange rate.

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