Appraisal of Determinants of Real Exchange Rate Alignment in Kenya

2020 ◽  
Vol 03 (10) ◽  
Author(s):  
Evans Kipchumba Kipyatich ◽  
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Public Debt ◽  
Real Exchange Rates ◽  
Government Expenditure ◽  
Explanatory Variables ◽  
Long Run ◽  
Short Run ◽  
Productivity Differentials

Real exchange rate is an important indicator of competitiveness in the foreign trade of a country. Any changes in real exchange rates would therefore lead to fluctuations in capital flows. It is therefore important to align real exchange rates within the equilibrium levels to avoid negative consequences on the economy. This study sought to understand the determinants of real exchange rate alignment in Kenya using annual data from 1988 to 2019 using Autoregressive Distribution Lag (ARDL) model. The study estimated the long run and short run dynamics of real exchange rate alignment in Kenya. The ARDL bounds test confirmed that a long run relationship exists between real exchange rate and the explanatory variables. Real exchange rate was the dependent variable while the explanatory variables were external public debt, government expenditure, interest rate differentials and productivity differentials. The results revealed that external public debt, government expenditure and productivity differentials are significant determinants of real exchange rate alignment. Interest rate differential was found to be not significant. The Error Correction Model was found to be significant and having the right (negative) sign. This shows that Kenya’s real exchange rate adjusts to the long run equilibrium as a response short run shocks of previous periods. The speed of adjustment was found to be 86 percent per year. Both the long run and error correction models were found to be stable as per the CUSUM and CUSUMQ tests. The models also passed all the diagnostic tests including serial correlation, normality, heteroscedasticity, and multicollinearity.

scholarly journals EFFECT OF EXCHANGE RATE VOLATILITY ON UGANDA'S TRADE BALANCE

2021 ◽  
Vol 8 (5) ◽  
pp. 532-574
Author(s):  
Qianling Shen ◽  
Henry Orach ◽  
Pu Chen ◽  
Shiying Wei ◽  
Hassan Ssewajje ◽  
...  
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Trade Balance ◽  
Real Exchange Rates ◽  
Exchange Rate Volatility ◽  
Data Generation ◽  
Long Run ◽  
Short Run ◽  
Adf Test

This study examines the long-run and the short-run relationship between the real exchange rate, GDP, FDI, inflation (INF), gross capital formation (GCF), Net official's development assistance (NODA), GNI, and trade balance in Uganda for the period 1994-2018. We used an Augmented Dickey-Fuller (ADF) test for the stationarity test, and we use the Johannsen cointegration approach to prove the existence of cointegration. The ADF tests show that the series was non-stationary in level but became stationary after the first difference. The Johannsen cointegration test indicates the long and short-run relationship between all the explanatory and trade balance in Uganda. Under such circumstances, a Vector Error Correction Model (VECM) is employed since the results offer more information than other data generation processes. Our findings are as follows: Real exchange rates, FDI, GCF and have a positive relationship with Trade balance. It means that Uganda can depreciate the Exchange rate to improve its Trade balance. The results proved the J-Curve effect's existence (i.e., the long-term impact of exchange rate on trade balance). The recommendations from this study are - Uganda's monetary policy management should emphasize more efforts on the stability and minimization of the volatility of exchange rates of the shillings since its movements affect international prices both negatively and positively, leading to either a decline or trade boost. Keywords: Trade balance; Real exchange rate; Net official's development assistances; GNI; VECM model; Uganda

Oil revenue and agriculture value-added in oil-exporting countries: does the role of real exchange rate matter?

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Rizgar Abdlkarim Abdlaziz ◽  
N.A.M. Naseem ◽  
Ly Slesman
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Real Exchange Rates ◽  
Value Added ◽  
Content Type ◽  
Agriculture Sector ◽  
Oil Revenue ◽  
Long Run ◽  
Short Run

Purpose This study aims to investigate the contingent roles real effective exchange rates (REERs) play in mediating the effects of oil revenue on the agriculture sector value-added in 25 major and minor oil-exporting (MIOEC) countries during the period of 1975–2014. Design/methodology/approach The panel autoregressive distributed lag (ARDL) estimator proposed by Pesaran et al. (1999) was relied upon to achieve the objectives of the study. This estimator involves a pool of small cross-sectional units over a long-time span that covers for 25 oil-exporting countries over 39 years (1975–2014). Findings This paper reveals the following findings. Firstly, oil revenue has a direct negative effect on agricultural value-added in the short- and long-term. This finding holds for full sample and subsamples of major oil-exporting (MAOEC) and MIOEC countries. Further assessment reveals that the magnitude of the impact is larger for MAOEC than that of the MIOEC. Secondly, the finding for the long-run effect shows that the contingent effect of real exchange rate on the nexus between oil revenue and agricultural value-added is negative and statistically significant at the conventional level for the full sample. This suggests that, in the long-run, the appreciation in real exchange rates exacerbate the negative marginal effects of oil revenue on agricultural value-added in all oil-exporting countries. However, when sub-samples of MAOEC and MIOEC are considered, the contingent effect disappeared (become insignificant) in MAOEC while it is positive and statistically significant in MIOEC. Thus, in the long-run, the appreciation in real exchange rates diminishes the negative marginal effects of oil revenue on agricultural value-added in MIOEC. While oil revenue has a direct negative effect, its effect is also moderated by the variations in REERs in MIOEC in the long-run. Finally, in the short-run, fluctuations in the real exchange rate do not matter for the nexus of oil revenue and agriculture sector in these countries whether minor or MAOEC countries. Originality/value This study contributes to the debate in the empirical literature on the Dutch disease effect and “oil curse”. Using the appropriate panel ARDL empirical framework, it provides evidence on how exchange rate variations in the oil-exporting countries influence the nature of the effects of the oil revenue on agricultural sectors in the long-run but not in the short-run. Contingent effects of REERs only appear to exist in MIOEC in the long-run.

scholarly journals The Long-run Relationship between Real Exchange Rate and Real Interest Rate in Asian Countries: An Application of Panel Cointegration

2001 ◽  
Vol 40 (4II) ◽  
pp. 577-602 ◽  
Author(s):  
Shaista Alam ◽  
Muhammad Sabihuddin Butt ◽  
Azhar Iqbal
Keyword(s):  
Exchange Rate ◽  
Interest Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Real Interest Rate ◽  
Real Exchange Rates ◽  
Panel Cointegration ◽  
The Real ◽  
Long Run ◽  
Interest Rate Differentials

The role of exchange rate policy in economic development has been the subject of much debate and controversy in the development literature. Interest rates and exchange rates are usually viewed as important in the transmission of monetary impulses to the real economy. In the short run the standard view of academics and policy-makers is that a monetary expansion lowers the interest rate and rises the exchange rate, with these price changes then affecting the level and composition of aggregate demand. Frequently, these influences are described as the liquidity effects of monetary expansion, viewed as the joint effect of providing larger quantities of money to the private sector. Popular theories of exchange-rate determination also predict a link between real exchange rates and real interest rate differentials. These theories combine the uncovered interest parity relationship with the assumption that the real exchange rate deviates from its long-run level only temporarily. Under these assumptions, shocks to the real exchange rate—which are often viewed as caused by shocks to monetary policy—are expected to reverse themselves over time. This study investigates the long-run relationship between real exchange rates and real interest rate differentials using recently developed panel cointegration technique. Although this kind of relationship has been studied by a number of researchers,1 very little evidence in support of the relationship has been reported in the case of developing countries. For example, Meese and Rogoff (1988) and Edison and Pauls (1993), among others, used the Engle-Granger cointegration method and fail to establish a clear long-run relationship in their analysis.

scholarly journals THE RESPONSE OF ZIMBABWE TOBACCO EXPORTS TO REAL EXCHANGE RATES VOLATILITY

2020 ◽  
Vol 56 (2) ◽  
Author(s):  
Knowledge Mutodi ◽  
Tinashe Chuchu ◽  
Eugine Tafadzwa Maziriri
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Real Exchange Rates ◽  
Exchange Rate Volatility ◽  
Response Model ◽  
The Real ◽  
Long Run ◽  
Exchange Rates Volatility ◽  
Real Exchange Rate Volatility

The focus of this study was on investigating the response of tobacco exports to real exchange rates and real exchange rate volatility and other factors in Zimbabwe using secondary data spanning from 1980 to 2019. Bilateral nominal exchange rates and time-variant weights of Zimbabwe’s 10 major trading partners were calculated and used to compute the real exchange rate index. The time-dependent weighting system was used to better represent the evolution of trade patterns in the index. The arithmetic method was employed for computing the index. Generalized autoregressive conditional heteroskedasticity (GARCH) and autoregressive conditional heteroscedasticity (ARCH) models were used to generate the real exchange rate volatility index. The export response function was adopted as the tobacco exports response model. The variables in the tobacco exports response model were the realworld Gross Domestic Product (GDP), real exchange rate, terms of trade, real exchange rate volatility and dollarization. A vector error correction model (VECM) was used to estimate the response of tobacco exports to real exchange rate, real exchange rate volatility and other factors. The VECM results indicated that real world GDP was insignificant in both the short and long run. In the long run, the real exchange rate appreciation had a negative impact on tobacco exports. Conversely, in the short run, the depreciation of real exchange rate had a positive impact on tobacco exports. Hence, the government has to adopt other mechanisms that reduce uncertain movements of exchange rates.

Real Exchange Rates and Currency Risk Premiums

2019 ◽  
Vol 10 (1) ◽  
pp. 94-121 ◽  
Author(s):  
Pierluigi Balduzzi ◽  
I-Hsuan Ethan Chiang
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Predictive Power ◽  
Real Exchange Rates ◽  
Currency Risk ◽  
Risk Premiums ◽  
The Real ◽  
Long Run ◽  
Long Run Risks

Abstract Standard finite horizon tests uncover only weak evidence of the predictive power of the real exchange rate for excess currency returns. On the other hand, in long-horizon tests, the real exchange rate strongly and negatively predicts future excess currency returns. Conversely, we can attribute most of the variability in real exchange rates to changes in currency risk premiums. The “habit” and “long-run risks” models replicate the predictive power of the real exchange rate for excess currency returns, but substantially overstate the fraction of the volatility of the real exchange rate due to risk premiums. Received December 14, 2017; Editorial decision October 14, 2018 by Editor: Raman Uppal. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Real Exchange Rate Determinants in Nigeria: An Application of Cointegration and Error Correction Model

2021 ◽  
Vol 3 (1) ◽  
pp. 55-77
Author(s):  
Chukwuemeka Lawrence Ani ◽  
Lawal Olumuyiwa Mashood
Keyword(s):  
Exchange Rate ◽  
Interest Rates ◽  
Real Exchange Rate ◽  
Government Expenditure ◽  
Exchange Rate Volatility ◽  
Stable State ◽  
Ordinary Least Squares ◽  
Explanatory Variables ◽  
Stochastic Trends ◽  
Long Run

The study examines the elements of real exchange rate in Nigeria. The ADF and KPSS stationarity tests were employed to examine the stationary process of each series and it shows that the macroeconomic variables under study have no stochastic trends, hence, are stationary in leves. The result from Johansen cointegration showed a long-run relationship between real exchange rate and the five explanatory variables. R2 of the estimated Fully Modified Ordinary Least Squares (FMOLS) model shows that about 73.39% of the total variability in real exchange rate has been explained by the independent variables and it further revealed that inflation rate and government expenditure contribute more to exchange rate volatility. Our model adjust its prior periods dis-equilibrium at a speed of 56.98% annually with the ec(-1) coefficient value -0.5698; also to achieve long term equilibrium stable state, the VECM shows a significant speed of correction of about 56.98% for adjusting dis-equilibrium annually. The VECM is well specified and its parameter coefficients are not biased because the ARCH test indicates that it is free from serial correlation and heteroscedasticity. Finally, the strong forces that influence real exchange rate fluctuations in Nigeria as revealed bythe Granger causility test are: government expenditure, money supply growth, inflation and real interest rates.

scholarly journals Determining Real Exchange Rates

1995 ◽  
Vol 34 (3) ◽  
pp. 263-276 ◽  
Author(s):  
Usman Afridi
Keyword(s):  
Exchange Rate ◽  
Empirical Study ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Rate Equation ◽  
Real Exchange Rates ◽  
Government Expenditure ◽  
Terms Of Trade ◽  
The Real ◽  
Domestic Credit

The paper re-examines the determinants of the real exchange rate equation, and suggests alternative determinants where appropriate, as well as improvements in proxies from those conventionally used. The paper emphasises the weaknesses of the multicountry approach to empirical study of the real exchange rate. While real exchange rates are determined for Pakistan, the terms-of-trade variable is found to be insignificant. Excess demand for domestic credit, capital flow, and the "opinions" variable are all found to be inversely related to the RER. Thus government expenditure on non-tradable is positively related; and better specification of the technological change variable shows support for the balance effect.

scholarly journals Exchange Rates and Monetary Fundamentals: What Do We Learn from Linear and Nonlinear Regressions?

2014 ◽  
Vol 2014 ◽  
pp. 1-14 ◽  
Author(s):  
Guangfeng Zhang
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Correction Model ◽  
Exchange Rate Dynamics ◽  
Long Run ◽  
Exchange Rate Movements ◽  
Short Run ◽  
Us Dollar ◽  
Linear And Nonlinear ◽  
Japanese Yen

This paper revisits the association between exchange rates and monetary fundamentals with the focus on both linear and nonlinear approaches. With the monthly data of Euro/US dollar and Japanese yen/US dollar, our linear analysis demonstrates the monetary model is a long-run description of exchange rate movements, and our nonlinear modelling suggests the error correction model describes the short-run adjustment of deviations of exchange rates, and monetary fundamentals are capable of explaining exchange rate dynamics under an unrestricted framework.

The Effect of Real Exchange Rate on Trade Balance in a Resource-Rich Economy: The Case of Mongolia

2018 ◽  
Vol 53 (4) ◽  
pp. 211-224 ◽  
Author(s):  
Gan-Ochir Doojav
Keyword(s):  
Exchange Rate ◽  
Real Exchange Rate ◽  
Trade Balance ◽  
Developing Economies ◽  
Jel Classification ◽  
Vector Error Correction ◽  
Vector Error ◽  
Long Run ◽  
Short Run ◽  
Exchange Rate Depreciation

For resource-rich developing economies, the effect of real exchange rate depreciation on trade balance may differ from the standard findings depending on country specific characteristics. This article employs vector error correction model to examine the effect of real exchange rate on trade balance in Mongolia, a resource-rich developing country. Empirical results show that exchange rate depreciation improves trade balance in both short and long run. In particular, the well-known Marshall–Lerner condition holds in the long run; however, there is no evidence of the classic J-curve effects in the short run. The results suggest that the exchange rate flexibility may help to deal effectively with current account deficits and exchange rate risk. JEL Classification: C32, C51, F14, F32

scholarly journals Boom Goes the Price: Giant Resource Discoveries and Real Exchange Rate Appreciation

2020 ◽  
Vol 130 (630) ◽  
pp. 1715-1728 ◽  
Author(s):  
Torfinn Harding ◽  
Radoslaw Stefanski ◽  
Gerhard Toews
Keyword(s):  
Exchange Rate ◽  
Exchange Rates ◽  
Real Exchange Rate ◽  
Direct Evidence ◽  
Oil And Gas ◽  
Real Exchange Rates ◽  
Labour Productivity ◽  
Dutch Disease ◽  
The Real ◽  
Traded Goods

Abstract We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. A giant discovery with the value of 10% of a country’s GDP appreciates the real exchange rate by 1.5% within ten years following the discovery. The appreciation starts before production begins and the non-traded component of the real exchange rate drives the appreciation. Labour reallocates from the traded goods sector to the non-traded goods sector, leading to changes in labour productivity. These findings provide direct evidence on the channels central to the theories of the Dutch disease and the Balassa–Samuelson effect.

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