Does Real Exchange Rate Depreciation Boost Capital Accumulation? An Intertemporal Analysis

Pham, Dai; Delpachitra, Sarath

doi:10.1111/1467-8454.12031

Cited by 3 publications

(2 citation statements)

References 15 publications

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“…The variable LNCAPITAL holds a positive coefficient (0.0462), which signals that a high level of capital accumulation in Botswana increases expenditure on non-tradable goods, which appreciates the REER. This result is inconsistent with the findings of Pham and Delpachitra (2015), who argue that capital stock and investment cause a depreciation of the REER. Improvements in accumulated capital are more likely to increase productivity.…”

Section: Model: Sbic-contrasting

confidence: 99%

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

Bosupeng

Dzator

Nadolny

2019

JRFM

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This study investigates the impact of exchange rate misalignment on outward capital flight in Botswana over the period 1980–2015. The study uses the autoregressive distributed lag (ARDL) approach to cointegration and the Toda and Yamamoto (1995) approach to Granger causality. Botswana’s currency misalignment was caused by current account imbalances. The most important determinant of capital flight from Botswana is trade openness, which indicates that exportable commodities are misinvoiced leading to net capital outflows. Our main findings show that in the long-run, when the currency is overvalued, the volume of capital flight through trade misinvoicing declines and increasing foreign reserves does not reduce outward capital flight. However, when the currency is undervalued, the volume of capital flight through trade misinvoicing increases and foreign reserves reduce outward capital flight. Investors respond more to prospects of devaluation than to inflation. Botswana should tolerate overvaluation of the pula of only up to 5%. When the pula is overvalued beyond 5%, capital flight increases substantially. The government has to formulate trade regulations and monitor imported and exported commodities. Botswana should also implement capital controls to limit capital smuggling and maintain monetary autonomy.

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Section: Model: Sbic-contrasting

confidence: 99%

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

Bosupeng

Dzator

Nadolny

2019

JRFM

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“…Edwards (1988) proposes that exchange rate fundamentals in developing economies are terms of trade, government consumption, technological progress and capital inflows. However, further research on exchange rate misalignment shows that other macroeconomic factors, such as external debt, trade openness and capital formation are important determinants of the REER (Gouider and Nouira 2014;Hossain 2011;Pham and Delpachitra 2015;Salim and Shi 2019). Following Edwards (1988) and Hossain (2011), the relative impact of the exchange rate fundamentals for Botswana is specified as follows:…”

Section: Methodsmentioning

confidence: 99%

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

Bosupeng

Dzator

Nadolny³

2019

SSRN Journal

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This study investigates the impact of exchange rate misalignment on outward capital flight in Botswana over the period 1980-2015. The study uses the autoregressive distributed lag (ARDL) approach to cointegration and the Toda and Yamamoto (1995) approach to Granger causality. Botswana's currency misalignment was caused by current account imbalances. The most important determinant of capital flight from Botswana is trade openness, which indicates that exportable commodities are misinvoiced leading to net capital outflows. Our main findings show that in the long-run, when the currency is overvalued, the volume of capital flight through trade misinvoicing declines and increasing foreign reserves does not reduce outward capital flight. However, when the currency is undervalued, the volume of capital flight through trade misinvoicing increases and foreign reserves reduce outward capital flight. Investors respond more to prospects of devaluation than to inflation. Botswana should tolerate overvaluation of the pula of only up to 5%. When the pula is overvalued beyond 5%, capital flight increases substantially. The government has to formulate trade regulations and monitor imported and exported commodities. Botswana should also implement capital controls to limit capital smuggling and maintain monetary autonomy. ). This study evaluates the impact of exchange rate misalignment on capital flight from Botswana over the period 1980-2015. The country aims to attract capital inflows to develop economic sectors other than mining. Botswana is unique because unlike other developing economies, it used only the fixed exchange rate regime since 1976. There has been no exchange rate regime change and the country has experienced significant undervaluation and overvaluation of the currency. It is conceivable that such misalignment has an impact on outward capital flight in Botswana. Botswana needs capital inflows for economic diversification, therefore, it is imperative to determine the impact of misalignment on capital flight from Botswana.This study empirically investigates the impact of exchange rate misalignment on capital flight from Botswana. The examination contributes to the literature in two important ways. First, previous studies posit that the pula is overvalued but there is no study that evaluates the impact of exchange rate misalignment on capital flight from Botswana. The present study aims to fill this gap. The results of this study are important for implementing macroeconomic policies that support capital inflows for economic diversification in Botswana. Further, the World Bank (2019) indicates that Botswana's diamond mines will be depleted by 2030. In the absence of diamonds, Botswana's economic growth will decline drastically. Correcting exchange rate misalignment is necessary for early economic diversification and sustainable economic growth without diamonds.Second, this investigation extends Gouider and Nouira (2014) methodological approach to misalignment. Gouider and Nouira (2014) defined overvaluation and underva...

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Assessing the effects of exchange rate depreciation on the US economy

Sun

Kim

2018

JES

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Purpose The purpose of this paper is to examine the effects of exchange rate shock on the broad spectrum of the US economy using a factor-augmented VAR model (FAVAR). Design/methodology/approach The authors developed a two-factor FAVAR model and estimated it with the single-step Bayesian likelihood approach using the Gibbs sampling technique. The two factors represented, respectively, the economic activity and price pressures. The exchange rate shock was identified with the Choleski decomposition method for VARs. The authors used the data of 117 time series for the period from 1973:02 to 2007:12. Impulse responses and variance decompositions were computed as the main results. Findings The authors found that exchange rate shock has pervasive effects on the US economy as the following: depreciation does not appear to help reduce the US trade deficit as both import and export rise with the depreciation shock; in the short run, depreciation appears expansionary as industrial production, manufacturing and employment all increase within a year; in the medium run, depreciation appears inflationary, as consumer price, producer price, import price and export price all increase; and in the medium run, depreciation appears contractionary as personal consumption, consumer confidence, stock price and housing start tend to fall. Research limitations/implications Some caveats remain: first, our simple model symmetrically estimates depreciation shock and appreciation shock and, hence, cannot draw inferences for how exchange rate appreciation and depreciation may affect the US economy asymmetrically. Second, the simple model used did not distinguish the different possible sources of exchange rate depreciation shock, the knowledge of which may lead to richer policy implications and is the direction of research for the future. Originality/value This research contributes to the literature of whether exchange rate is expansionary or contractionary to the US economy using the FAVAR model. This is the first comprehensive study in the literature studying the pervasive effects of the exchange rate on the broad spectrum of the US economy in one integrated model.

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Does Real Exchange Rate Depreciation Boost Capital Accumulation? An Intertemporal Analysis

Cited by 3 publications

References 15 publications

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

Exchange Rate Misalignment and Capital Flight from Botswana: A Cointegration Approach with Risk Thresholds

Assessing the effects of exchange rate depreciation on the US economy

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