Real Exchange Rate Misalignment and Business Cycle Fluctuations in Asia and the Pacific

Ambaw, Dessie Tarko; Pundit, Madhavi; Ramayandi, Arief; Sim, Nicholas

doi:10.2139/ssrn.4052165

Cited by 4 publications

(6 citation statements)

References 23 publications

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“…To save space, we summarize our robustness checks below. Details can be found in our working paper (Ambaw et al, 2022).…”

Section: Robustness Checksmentioning

confidence: 99%

“…10 In this section, we briefly describe how the RER misalignment index is constructed. The full discussion can be found in the online Appendix S1 of our working paper (Ambaw et al, 2022). We follow Elbadawi et al (2012) to construct the RER misalignment index as the difference between the RER in logs ( ln RER it ð Þ) and its equilibrium level ( g ln RER it ð Þ):…”

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confidence: 99%

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Real exchange rate misalignment and business cycle fluctuations in the Asia‐Pacific

Ambaw

Pundit²,

Ramayandi³

et al. 2023

Asian Economic Journal

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Real exchange rate (RER) misalignment, which is the deviation between the actual real exchange rate from its equilibrium, occurs frequently among developing countries. Studies have shown that RER misalignment may have negative economic implications, such as a decline in economic growth, exports, and export diversification and an increased risk of currency crises and political instability. Using quarterly data for 22 sample countries from 1990 to 2018, this paper investigates the impact of RER misalignment on business cycles in the Asia‐Pacific by employing a panel vector autoregression involving consumer price index (CPI) inflation, output gap, short‐term interest rates, and RER misalignment. We find that RER overvaluation may reduce CPI inflation and short‐term interest rates. We also find that the Asia‐Pacific region is highly heterogeneous in that the output gaps of some countries, particularly from the Southeast Asian region, are more susceptible to RER misalignment shocks.

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“…To save space, we summarize our robustness checks below. Details can be found in our working paper (Ambaw et al, 2022).…”

Section: Robustness Checksmentioning

confidence: 99%

mentioning

confidence: 99%

Real exchange rate misalignment and business cycle fluctuations in the Asia‐Pacific

Ambaw

Pundit²,

Ramayandi³

et al. 2023

Asian Economic Journal

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“…The effect of real exchange rate on economy may seem ambiguous. While some works argue that movements in the real exchange rate (RER) have negative repercussions on the economy (Sekkat, 2016;Ambaw and Sim, 2021), others, show that the RER can be a powerful instrument for improving trade balance (Sastre, 2012;Piskin, 2014;Yazgan and Ozturk, 2019), reducing inflation and interest rate (Ambaw and al., 2022). In a case of the trade balance, the economic theory states that a nominal appreciation/depreciation of the currency has a direct effect on trade balance (Himarios, 1989;Arize, 1994;Bahmani-Oskooee, 2001).…”

Section: Introductionmentioning

confidence: 99%

Can national productions replace imports in West African countries? Estimation of the Marshall–Lerner–Robinson condition (MLRC)

Oloukoi

2023

AJEMS

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PurposeThis article examines if the national productions of West African Economic and Monetary Union (WAEMU) countries can be substituted for the imports by testing MLRC in these countries.Design/methodology/approachThe Mundell–Fleming model (MMF) is the analytical framework adopted in this paper with import demand and export supply functions estimation borrowed to Thirlwall (1979). This study covers four countries in West Africa from 1990 to 2021. The estimation procedure used is an Autoregressive Distributed Lag (ARDL) approach to cointegration.FindingsThe findings reveal that there is a strong marginal propensity to import in the WAEMU countries. The hypothesis of a non-significant price effect on imports in the short-term is confirmed for several countries while only Togo satisfies the MLRC in the short and long run.Originality/valueThis study presents several originalities: (1) it evaluates MLRC with a clear analytical framework; (2) unlike other studies, this article quantifies the MLRC from a theoretical, econometric and empirical point of view; (3) this article presents the results country by country in order to reveal heterogeneity between countries; (4) this study adds to the Marshall–Lerner condition for the derivation of Robinson by considering a situation where initially the trade balance is not in equilibrium.

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“…Real exchange rate misalignment from its long-run equilibrium is a much-debated policy issue of international macroeconomics and finance [1]. The term 'misalignment' implies real exchange rate demonstrating a trend departure from its (underlying) long-run ideal or equilibrium level(s), that otherwise would have prevailed in the nonexistence of various factors including inward-looking monetary policy, persistent imbalances in current and capital account, nominal price rigidities, and many others.…”

Section: Introductionmentioning

confidence: 99%

Another Prospective on Real Exchange Rate and the Traded Goods Prices: Revisiting Balassa–Samuelson Hypothesis

Ishaq

Ghouse

Bhatti³

2022

Sustainability

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This paper proposes a new variant and reinvestigates the validity of the Balassa–Samuelson (BS) hypothesis for nine East and South Asian countries under new specifications. The BS hypothesis is often criticized for one of its fundamental, but oversimplified assumptions related to Purchasing Power Parity (PPP) holding which can be confirmed for cronss-country tradables’ prices, implying nontraded-sector prices are solely responsible for inducing trend deviations in real exchange rate. The assumption, when empirically tested, does not always hold valid, revealing a price difference in tradables for Asian countries against the world (U.S.), a potential driver of their trend in real exchange rate deviations (appreciation). A new approach based on Fully Modified OLS (FMOLS) and Dynamic OLS (DOLS) is used to estimate the long-run BS coefficients, while the error correction mechanism is employed to estimate the short-run estimates. These results motivated us to allow for the inexistence of PPP for cross-country tradables; the standard form of the BS model is then tested in its relaxed form using time-series and panel data econometric tests. Despite a relaxing of the BS model in favor of tradables’ price deviation from PPP, the results are not sufficiently supportive of the BS hypothesis. These findings hold strong economic implications for Asia, suggesting that intercountry sectoral productivity bias of regional economies with the world does not necessarily exert substantial effects on their long-run real exchange rates. Additionally, contrary to the core belief of the BS model, intercountry tradables’ price differentials are found to substantially explain real exchange rate movements away from their long-run equilibrium.

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Real Exchange Rate Misalignment and Business Cycle Fluctuations in Asia and the Pacific

Cited by 4 publications

References 23 publications

Real exchange rate misalignment and business cycle fluctuations in the Asia‐Pacific

Real exchange rate misalignment and business cycle fluctuations in the Asia‐Pacific

Can national productions replace imports in West African countries? Estimation of the Marshall–Lerner–Robinson condition (MLRC)

Another Prospective on Real Exchange Rate and the Traded Goods Prices: Revisiting Balassa–Samuelson Hypothesis

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