scholarly journals Decomposition of the Sources of Real Exchange Rate Misalignment in Egypt: Evidence from the ARDL Model

2021 ◽  
Vol 12 (2) ◽  
pp. 305-331
Author(s):  
Rana Hosni
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Real Exchange Rates ◽  
Influential Factors ◽  
Economic Policies ◽  
Equilibrium Exchange Rate ◽  
Local Currency ◽  
Equilibrium Exchange ◽  
Equilibrium Level ◽  
Bound Test

This paper examines the behavior of the real exchange rate in Egypt over the period 1965–2018 by attempting to pursue three interrelated purposes. The first is to investigate the extent of deviations between the actual exchange rate and its equilibrium level and illustrate the magnitude of any currency misalignments. The second is to search for the different phases of over- and undervaluation of the local currency and explain the accompanying economic policies and/or factors leading to them. The third and ultimate purpose is to explore the role of transitory and permanent factors in deviating the actual real exchange rate from its equilibrium level. Understanding these factors should help in the design of economic policies directed to address the misalignment of the local currency. An autoregressive distributed lag (ARDL) bound test approach is used and conducted for both the bilateral and effective real exchange rates to achieve these three purposes during the selected period. To derive the equilibrium exchange rate estimate, the behavioral equilibrium exchange rate (BEER) approach is adopted. The findings reveal that the Egyptian pound was misaligned from its equilibrium value during most of the examined period. The results confirm the relative importance of the terms of trade and degree of openness variables in determining the equilibrium real exchange rate in Egypt followed by investment ratio and government consumption variables. The local currency witnessed a recent phase of overvaluation, which began in 2009, until the free float of the local currency in November 2016, after which, the Egyptian pound was found to have experienced a new phase of undervaluation till the end of the period examined. The findings show a considerable relative impact of fundamental-based factors over a prolonged period spanning from 1986 to 2003 and at the end of the period examined as well. Moreover, the documented results lend general support to the fact that both permanent or fundamental-based factors and short-run shocks prove to be important influential factors impacting currency misalignment in Egypt.

The real equilibrium exchange rate in a commodity­exporting economy: the experience of Azerbaijan

2021 ◽  
pp. 25-38
Author(s):  
Vusal Gasimli ◽  
Vusala Jafarova
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Oil Prices ◽  
Exchange Rate Policy ◽  
Current Account Balance ◽  
Equilibrium Exchange Rate ◽  
Long Run ◽  
Equilibrium Exchange ◽  
Rate Policy ◽  
Relative Productivity

The case of Azerbaijan serves to study the adequacy of exchange-rate policy in a resource-rich economy. This paper analyses the behavior of Azerbaijan’s external accounts over the past twenty years. Declining oil prices made an existing exchange-rate peg unsustainable and led to a large devaluation in 2015. Since then, the current account balance has improved, but by less than expected. We use the EBA-Lite method to derive regression-based estimates of the equilibrium real exchange rate, and relate misalignments to measures of “policy gaps”. Our findings suggest that only a few years after the devaluation, Azerbaijan’s currency has once more become overvalued. Moreover, the equilibrium real exchange rate is volatile and hardly compatible with a long-run exchange rate peg. Exchange rate policy should try to accommodate shifts in the fundamental determinants such as relative productivity and real oil prices.

Properties of the fundamental equilibrium exchange rate in the Treasury model

1999 ◽  
Vol 169 ◽  
pp. 96-104 ◽  
Author(s):  
Keith B. Church
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Nominal Exchange Rate ◽  
Equilibrium Exchange Rate ◽  
Natural Rate ◽  
The Real ◽  
Long Run ◽  
Equilibrium Exchange ◽  
The Uk ◽  
Fundamental Equilibrium Exchange Rate

This article calculates the equilibrium real exchange rate for the UK economy. The long-run trade and supply side relationships from HM Treasury's model are used to estimate the level of the real exchange rate consistent with the UK economy growing at its ‘natural’ rate while achieving a sustainable current account position. The model shows that the real exchange rate associated with macroeconomic equilibrium lies well below the actual rate for most of the 1990s. This result has important implications for possible UK participation in the single European currency as, once the nominal exchange rate is fixed, overvaluation can only be corrected by holding UK inflation lower than that elsewhere. Achieving this may be costly in terms of jobs and output.

scholarly journals A New Method of Estimating Equilibrium Real Exchange Rate in Developing Countries

2016 ◽  
Vol 8 (3) ◽  
pp. 171
Author(s):  
Renhong Wu
Keyword(s):  
Developing Countries ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Purchasing Power Parity ◽  
New Method ◽  
Power Parity ◽  
Equilibrium Exchange Rate ◽  
Goods And Services ◽  
Equilibrium Exchange ◽  
The Exchange Rate

How to assess the misalignments of real exchange rate in developing countries has been a difficult and unresolved issue. Over the decades, researchers have not found desirable methods to estimate the “Equilibrium Exchange Rate”. The Purchasing Power Parity (PPP) approach has limitations, and the fixed or managed floating exchange rate regimes in developing countries make the estimating more difficult. The purpose of this paper is to discuss the limitations of the Macroeconomic Balance approach and the existing PPP approach for estimating equilibrium exchange rate in developing countries, and introduce a new method–the Adjusted PPP method to assess exchange rate in developing countries. The new method includes the Human Development Index (HDI) to adjust the traditional PPP estimates. By introducing the adjustments of HDI, the big quality differences in non-tradable goods and services between developed and developing countries are adjusted for the exchange rate estimates. Also, as a case study, the paper estimated the exchange rate in China of 1991-2013.

scholarly journals On equilibrium real exchange rates in euro area: Special focus on behavioral equilibrium exchange rates in Ireland and Greece

2012 ◽  
Vol 60 (2) ◽  
pp. 261-270
Author(s):  
Klára Plecitá ◽  
Luboš Střelec
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Euro Area ◽  
Real Exchange Rates ◽  
Special Focus ◽  
Equilibrium Exchange Rate ◽  
Macroeconomic Imbalances ◽  
Long Run ◽  
Equilibrium Exchange ◽  
Behavioral Equilibrium Exchange Rate

This paper focuses on the intra-euro-area imbalances. Therefore the first aim of this paper is to identify euro-area countries exhibiting macroeconomic imbalances. The subsequent aim is to estimate equilibrium real exchange rates for these countries and to compute their degrees of real exchange rate misalignment. The intra-area balance is assessed using the Cluster Analysis and the Principle Component Analysis; on this basis Greece and Ireland are selected as the two euro-area countries with largest imbalances in 2010. Further the medium-run equilibrium exchange rates for Greece and Ireland are estimated applying the Behavioral Equilibrium Exchange Rate (BEER) approach popularised by Clark and MacDonald (1998). In addition, the long-run equilibrium exchange rates are estimated using the Permanent Equilibrium Exchange Rate (PEER) model. Employing the BEER and PEER approaches on quarterly time series of real effective exchange rates (REER) from 1997: Q1 to 2010: Q4 we identify an undervaluation of the Greek and Irish REER around their entrance to the euro area. For the rest of the period analysed their REER is broadly in line with estimated BEER and PEER levels.

REAL EXCHANGE RATE BEHAVIOUR UNDER HONG KONG'S LINKED EXCHANGE RATE SYSTEM: AN EMPIRICAL INVESTIGATION

2002 ◽  
Vol 05 (01) ◽  
pp. 55-78 ◽  
Author(s):  
ZHICHAO ZHANG
Keyword(s):  
Hong Kong ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Cointegration Analysis ◽  
Currency Board ◽  
Equilibrium Exchange Rate ◽  
Rate System ◽  
Equilibrium Exchange ◽  
Exchange Rate System ◽  
Rate Behaviour

In a behavioural equilibrium exchange rate model, this study investigates the movements of the real exchange rate of the Hong Kong dollar under the currency board arrangement from 1984 to 1998. Cointegration analysis based on Johansen approach is applied to derive the equilibrium real exchange rate in behavioural sense for the Hong Kong dollar. Evidence shows that during the period under investigation, the Hong Kong dollar was initially undervalued when the currency board arrangement was installed. It moved in closer line with the equilibrium rate after 1985 and generally remained moderately undervalued until 1993. Then the currency became overvalued following the upsurge of domestic demand and lingered into 1995 before an adjustment took place latter that year. But except for a few quarters, the overvaluation was not substantial and chronic. On the whole, the Hong Kong dollar seemed to have performed well in the period under examination. In most cases, the currency was actually undervalued. When the Asian financial crisis broke out, the currency was in effect already in a process of adjustment, depreciating form an overvalued level.

scholarly journals Determinants of the Real Equilibrium Exchange Rate in Albania: An Estimation Based on the Co-Integration Approach

2019 ◽  
Vol 8 (1) ◽  
pp. 84-94
Author(s):  
Natasha Ahmetaj ◽  
Merita Bejtja
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Exchange Rate Regime ◽  
Nominal Exchange Rate ◽  
Equilibrium Exchange Rate ◽  
Net Foreign Assets ◽  
The Real ◽  
Long Run ◽  
Equilibrium Exchange ◽  
Foreign Assets

Problem/Relevance: Investigation of exchange rate behaviour has been an important topic in international monetary economics because of the impact of exchange rates on economies. One strand of the literature has focused on explaining the observed movement of the nominal or real exchange rate in terms of macroeconomic variables. Another strand of the literature has evaluated the behaviour of the real exchange rates in relation to the equilibrium exchange rate, which is the real exchange rate that is consistent with macroeconomic balances. Albania implements a free floating exchange rate regime; therefore, evaluating whether the actual real exchange rate is too strong or too weak compared with the real equilibrium exchanges rate has great relevance for the Albanian economy. Research Objective/Questions: Generally, the real exchange rate is defined as the nominal exchange rate adjusted for the relative price differential between domestic and foreign goods and services. So, an appreciation of the nominal exchange rate or higher inflation at home relative to other countries may lead to an appreciation of the real exchange rate. Such appreciation weakens the competitiveness of a country, widens the current account deficit and increases vulnerability to financial crises. The opposite holds true when the real exchange rate depreciates. The aim of this paper is, first, to estimate the equilibrium real exchange rate for the Albanian currency against the euro and, second, to assess the total exchange rate misalignment during the period of 2001Q1-2017Q1. Thus, the equilibrium real exchange rate is used as a benchmark for evaluating the misalignment of the actual real exchange rate. Methodology: This paper explores the determinants of the real exchange rate for Albania, during the period of 2001Q1-2017Q1, based on the stock-flow approach, the so called Behavioural Equilibrium Exchange Rate (BEER), which effectively employs reduced-form modelling of the exchange rate based on standard co-integration techniques. The stock of net foreign assets and productivity changes has been considered fundamental for the real exchange rate. We have used the Johansen co integration technique to test the existence of long-run relationships between our main variables and to evaluate the path of the equilibrium real exchange rate based on vector error correction model (VECM) results. Then the analysis is completed by calculating the degree of misalignment as the difference between the actual real exchange rate and the equilibrium real exchange rate. Major Findings: Based on the Johansen co-integration approach, we find one long-run relationship between the real exchange rate of the Albanian lek against the euro, relative productivity and net foreign assets during the period of 2001Q1 to 2017Q1. The model implies that the real exchange rate is affected, as we expected, by relative productivity and net foreign assets, confirming that an increase in both variables leads to an appreciation of the real exchange rate in the long run. Our results show that the behaviour of the actual real exchange rate is similar to the path of the equilibrium exchange rate and that the degree of misalignment throughout the period is estimated to be moderate. Implications: Our empirical results confirm that the degree of misalignment is reasonable, suggesting a consistency between macroeconomic (especially monetary) policies and the free floating exchange rate regime. Assessing real exchange rate misalignment is a very important issue for policy makers because of the severe welfare and efficiency costs that such misalignment can have for an economy.

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