Real Exchange Rates and Fundamentals: A Cross-Country Perspective

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the CPI-based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets and in government consumption tend to be associated with appreciating real exchange rates. JEL Classification Numbers: F31; F41

China’s rise, asymmetric trade shocks and exchange rate regimes

“…where REER it is the logarithm of the real effective exchange rate, unit labor costs deflated, for country i in time t (an increase means appreciation). I augment the standard real effective exchange rate regression, where X it are standard controls from Ricci et al (), with China’s GDP as a share of world GDP in PPP terms ( ChinaShare t ) and the index of export similarity ( ESI it ). Since the focus of the analysis is the asymmetric dimension of the China Shock owing to different levels of exposure to Chinese competition, I include an interaction between the index of export similarity and the China Shock .…”

“…To study the effect of the rise of China on advanced economies’ relative prices, I augment a real effective exchange rate regression with the share of China’s GDP in world GDP. I use unit labor costs (ULC) deflated real effective exchange rates and, as controls, the variables from Ricci, Milesi‐Ferretti, and Lee (). The regression identifies the asymmetric dimension of the China Shock by exploiting differences in trade specializations.…”

Estimating long-run equilibrium real exchange rates: short-lived shocks with long-lived impacts on Pakistan

“…The alterations compulsory are in the array of 27.3 to 46.6% depreciations for the Chinese Renminbi, for US dollar 5-11%, Japanese yen need 6% adjustment while no adjustment is required for Euro. Ricci et al 2008) used panel data for 48 industrial countries to estimate cointegrating link between real exchange rate and set of variables i.e., commodity terms of trade, productivity differential and external imbalances. Result shows significant positive relationship between the CPI-based real exchange rate and terms of trade, while significantly small impact of productivity growth differential between tradable and no tradable goods is found.…”

Does Euro or Dollar Pegging Impact the Real Exchange Rate? The Case of Oil and Commodity Currencies

“…Cashin et al (2004) examine 58 commodity‐exporting countries and find that commodity terms of trade affect the real exchange rate in about a third of them. Ricci et al (2008) estimate a panel cointegration relationship between fundamentals and REER in a sample of 48 countries, industrialised or emerging. Among their explanatory variables, they include commodity terms of trade 5 .…”

“…Commodity terms of trade are generally found to drive real exchange rate fluctuations particularly in commodity‐exporting countries (Chen and Rogoff, 2003; Cashin et al, 2004). Hence, econometric models of real equilibrium exchange rates often include this series among their explanatory variables (Isard, 2007; Ricci et al, 2008). Oil prices are also considered to affect exchange rates, in advanced countries (Chen and Chen, 2007; Bénassy‐Quéré et al, 2007; Coudert et al, 2007), as well as in oil‐exporting countries themselves.…”