A comparative analysis of exchange rate fluctuations and economic activity: The cases of Egypt and Turkey
International Journal of Development Issues
ISSN: 1446-8956
Article publication date: 10 October 2008
Abstract
Purpose
The paper aims to examine the effects of exchange rate fluctuations on real output, the price level, and the real value of components of aggregate demand in Egypt and Turkey.
Design/methodology/approach
Building on a theoretical model that decomposes movements in the exchange rate into anticipated and unanticipated components, the empirical investigation traces the effects through demand and supply channels.
Findings
In Turkey, anticipated exchange rate appreciation has significant adverse effects, contracting the growth of real output and the demand for investment and exports, while raising price inflation. Random fluctuations in Turkey have asymmetric effects that highlight the importance of unanticipated depreciation in shrinking output growth and the growth of private consumption and investment, despite an increase in export growth. In Egypt, anticipated exchange rate appreciation decreases export growth. Given asymmetry, the net effect of unanticipated exchange rate fluctuations, in Egypt, decreases real output and consumption growth and increases export growth, on average, over time.
Research limitations/implications
In light of the country‐specific evidence, future research should extend the investigation using panel estimation, incorporating various demand and supply shocks along with exchange rate fluctuations, to establish the relative importance of various shocks on macroeconomic performance across MENA countries.
Practical implications
While adhering to a flexible exchange rate policy to boost competitiveness, managing fundamentals to reduce excessive volatility impinging on the economic system over time should top the policy agenda.
Originality/value
Excessive volatility in the real effective exchange rate could be detrimental to real growth, over time, as the evidence for Turkey and Egypt illustrates.
Keywords
Citation
Kandil, M. and Nergiz Dincer, N. (2008), "A comparative analysis of exchange rate fluctuations and economic activity: The cases of Egypt and Turkey", International Journal of Development Issues, Vol. 7 No. 2, pp. 136-159. https://doi.org/10.1108/14468950810909114
Publisher
:Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited