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Article
Publication date: 7 January 2019

Hock Tsen Wong

The purpose of this paper is to examine the impact of real exchange rate misalignment on economy and economic sectors, namely construction, manufacturing and mining and…

Abstract

Purpose

The purpose of this paper is to examine the impact of real exchange rate misalignment on economy and economic sectors, namely construction, manufacturing and mining and quarrying in Malaysia.

Design/methodology/approach

The equilibrium real exchange rate and economic models are estimated using the autoregressive distributed lag approach.

Findings

An increase in productivity differential or reserve differential will lead to an appreciation of real exchange rate in the long run. An increase in positive (negative) real exchange rate misalignment will lead to an increase (decrease) in economy. An increase in long-run real exchange rate misalignment will lead to a decrease in economy. Real exchange rate misalignment or long-run real exchange rate misalignment can influence the manufacturing sector in Malaysia. More specifically, undervaluation will promote whereas overvaluation will hurt the manufacturing sector.

Originality/value

Real exchange rate misalignment can be a policy to influence economy but may not be the best choice.

Details

Journal of Economic Studies, vol. 46 no. 1
Type: Research Article
ISSN: 0144-3585

Keywords

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Article
Publication date: 6 November 2017

Vaseem Akram and Badri Narayan Rath

The purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014.

Abstract

Purpose

The purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014.

Design/methodology/approach

First, misalignment is measured, which is defined as the deviations of the actual real exchange rate (RER) from its equilibrium level. The equilibrium real exchange rate (ERER) is estimated using the auto-regressive distributed lag (ARDL) model by considering key macroeconomic fundamentals of the determinants of RER. Zivot and Andrews’ unit root with structural break is used to test the stationarity property of data. The impact of exchange rate misalignment on economic growth has been examined using ARDL and variance decomposition techniques.

Findings

Our results find an overvaluation of the exchange rate till 2000, and thereafter, an undervaluation of the exchange rate prevails in India. Further, the result indicates that an increase in exchange rate misalignment leads to a decrease in economic growth and vice versa. Moreover, a positive misalignment (overvaluation) hurts the economic growth and a negative misalignment (undervaluation) promotes the economic growth.

Research limitations/implications

From the policy perspective, the results highlight that India needs to maintain an appropriate exchange rate which can reduce the RER misalignment. It is better for the Reserve Bank of India (RBI)’s intervention to smoothen the fluctuations of the exchange rate to avoid the inefficiency in the allocation of resources. However, to minimize the RER misalignment, the intervention should be conducted only in the short run.

Originality/value

The study contributes to the existing literature by estimating the exchange rate misalignment for India and its impact on economic growth.

Details

Journal of Financial Economic Policy, vol. 9 no. 4
Type: Research Article
ISSN: 1757-6385

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Article
Publication date: 5 August 2019

Muhammad Ali Nasir and Karen Jackson

In the context of debate on competitive devaluation and trade imbalances, the purpose of this paper is to investigate the role of exchange rate misalignment as a…

Abstract

Purpose

In the context of debate on competitive devaluation and trade imbalances, the purpose of this paper is to investigate the role of exchange rate misalignment as a determinant of trade imbalances in selected major trade surplus (Germany, China, Japan, Russia and KSA) and major trade deficit countries (USA, UK, France, India and Turkey).

Design/methodology/approach

The authors used a structural vector auto-regressive model on data from ten countries with the highest trade deficit and surplus. The period of analysis is from 2000 Q1 to 2016 Q1.

Findings

The key findings suggest that although exchange rate misalignment from equilibrium may have some implications for the current account balance for surplus and deficit countries, the effects observed were rather very mild and transitory. There was a heterogeneity in the response of the current account position to exchange rate misalignment in each country, concomitantly; the exchange rate misalignment shall not be seen as the sole responsible factor in the debate on global trade imbalances.

Research limitations/implications

The research has profound implications in terms of exploring the notion of competitive devaluation and exchange rate misalignment as a cause of major global trade imbalances.

Practical implications

This study has important practical implications for the trade policy of major economies in the world. These are twofold. First, this study has analysed and reported on the degree of misalignment of exchange from its equilibrium values in the major trade surplus and deficit countries. Second, it has investigated the implications of any misalignment for the trade balance or respective economies.

Social implications

There are important social implications as the notion of competitive devaluation and exchange rate–trade balance nexus has been heavily politicised. This study provides an empirical insight and an answer to these claims which have social and political implications.

Originality/value

There is a significant element of originality and contribution to the existing body of knowledge on the subject. In the context of debate on competitive devaluation this is the first study which has investigated whether the exchange rate has been misaligned from its equilibrium values (competitive devaluation) and whether there is some nexus between the real exchange rate misalignment and trade imbalances in under-analysis economies.

Details

Journal of Economic Studies, vol. 46 no. 4
Type: Research Article
ISSN: 0144-3585

Keywords

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Article
Publication date: 26 July 2013

Hock Tsen Wong

The purpose of this study is to examine real exchange rate misalignment and economic growth in Malaysia.

Abstract

Purpose

The purpose of this study is to examine real exchange rate misalignment and economic growth in Malaysia.

Design/methodology/approach

The result of the autoregressive distributed lag (ARDL) approach and the generalized forecast error variance decomposition.

Findings

The result of the ARDL approach shows an increase in the real interest rate differential, productivity differential, the real oil price or reserve differential will lead to an appreciation of the real exchange rate in the long run. The result of the generalized forecast error variance decomposition shows that the real interest rate differential, productivity differential, the real oil price, and reserve differential are generally important to the real exchange rate determination. Moreover, the result of the ARDL approach shows that an increase in real exchange rate misalignment will lead to a decrease in economic growth. More specifically, devaluation will promote economic growth and appreciation will hurt economic growth. Exchange rate can be a policy variable to influence economic growth. Real exchange rate misalignment should be avoided to enable the allocation of resources in the economy according to fundamentals.

Originality/value

A managed floating exchange rate regime could be a choice of exchange rate regime in other developing countries to achieve rapid economic growth.

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Article
Publication date: 20 October 2020

Abdulla Hil Mamun, Harun Bal and Shahanara Basher

The study mainly aims to examine the currency misalignment of Turkish lira and evaluate if it has an impact on economic growth of Turkey.

Abstract

Purpose

The study mainly aims to examine the currency misalignment of Turkish lira and evaluate if it has an impact on economic growth of Turkey.

Design/methodology/approach

It relies on Johansen cointegration technique for measuring currency misalignment relying on single-equation approach and the autoregressive distributed lag (ARDL) approach to evaluate how misalignment affects economic growth. The sample period covers from 1980 to 2016.

Findings

The study identifies that terms of trade, relative productivity differences, net foreign asset, investment and trade openness determine the equilibrium REER of Turkey, and the degree of currency misalignment is observed at a substantial level. The outcome of the ARDL approach suggests that higher currency misalignment reduces economic growth. Turning to the separate impacts of undervaluation and overvaluation, while the former falters economic growth, the later promotes it, a finding contrary to the conventional expectation. Therefore, the use of exchange rate as a policy variable is a critical concern to avoid misalignment for sustained economic growth.

Practical implications

The anti-growth effect of undervaluation and misalignment is an indication of redistribution of income which could be verified by examining the aggregate consumption behavior of the economy in response to RER movements.

Originality/value

The impacts of currency undervaluation and overvaluation on economic growth of Turkey have been studied in a number of time-series studies. But there is no documented study on the role of currency misalignment on Turkish economic growth. This study is the first that examines how the economic growth of Turkey is influenced by currency misalignment together with the impact of undervaluation and overvaluation.

Details

EuroMed Journal of Business, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1450-2194

Keywords

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Book part
Publication date: 11 August 2016

Salima Ben Ezzeddine and Kamel Naoui

The aim of this chapter is to assess the real exchange rate misalignments. A smooth transition autoregressive model (STAR) is used for Tunisian exchange market. This model…

Abstract

The aim of this chapter is to assess the real exchange rate misalignments. A smooth transition autoregressive model (STAR) is used for Tunisian exchange market. This model allows us to see whether these differences are temporary or persistent over the period 1975–2012. We start by defining the exchange rate’s fundamental determinants to provide the equilibrium exchange rate value. Then, we study the observed exchange rate adjustment toward its equilibrium level. Vector autoregressive model and vector error correction model are applied to characterize the joint dynamics of variables in the long run. The results indicate a long-run relationship between variables. In order to consider the nonlinearity for better results, we will move to nonlinear smooth transition model. We found there is a high degree of exchange rate misalignment. We recognized that this difference decreases in the long run and disappears at the end.

Details

The Spread of Financial Sophistication through Emerging Markets Worldwide
Type: Book
ISBN: 978-1-78635-155-5

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Book part
Publication date: 8 March 2011

Antonia López-Villavicencio and Valérie Mignon

The aim of this chapter is to provide equilibrium exchange rates values for a large set of currencies and to study the adjustment process of observed exchange rates toward…

Abstract

The aim of this chapter is to provide equilibrium exchange rates values for a large set of currencies and to study the adjustment process of observed exchange rates toward these levels by paying special attention to emerging Asian countries. Relying on panel smooth transition regression models, we show that real exchange rate dynamics in the long run are nonlinear for emerging Asian countries, and linear for the G7 currencies. Especially, there exists an asymmetric behavior of the real exchange rate when facing an over- or undervaluation, the adjustment speed being higher in the case of undervaluation in Asia. Although this result may be explained by the international pressure to limit undervaluation, the undervaluation may still persist over time, as has been observed since the beginning of 1990s.

Details

The Evolving Role of Asia in Global Finance
Type: Book
ISBN: 978-0-85724-745-2

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Article
Publication date: 3 October 2016

Mulatu Fekadu Zerihun, Martinus C. Breitenbach and Francis Kemegue

This paper explores the possibilities for policy coordination in the Southern African Development Community (SADC) as well as real effective exchange rate (REER) stability…

Abstract

Purpose

This paper explores the possibilities for policy coordination in the Southern African Development Community (SADC) as well as real effective exchange rate (REER) stability as a prerequisite towards sensible monetary integration. The underlying hypothesis goes with the assertion that countries meeting optimum currency area conditions face more stable exchange rates.

Design/methodology/approach

The quantitative analysis encompasses 12 SADC member states over the period 1995-2012. Correlation matrixes, dynamic pooled mean group (PMG) and mean group (MG) estimators and real effective exchange rate (REER) and real exchange rate (RER) equilibrium and misalignment analysis are carried out to arrive at the conclusions.

Findings

The study finds that the structural variables used in the PMG model show that there are common fiscal and monetary policy variables that determine REER/RER in the region. However, the exchange rate equilibrium misalignment analysis reveals that SADC economies are characterised by persistent overvaluation at least in the short term. This calls for further sustained policy coordination in the region.

Practical implications

The findings in this paper have important policy implications for economic stability and for the attempt of policy coordination in SADC region for the proposed monetary integration to proceed.

Originality/value

This study is the first attempt that relates the exchange rate as a policy coordination instrument among SADC economies.

Details

Studies in Economics and Finance, vol. 33 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

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Article
Publication date: 21 October 2020

Krittika Banerjee and Ashima Goyal

After the adoption of unconventional monetary policies (UMPs) in advanced economies (AEs) there were many studies of monetary spillovers to asset prices in emerging market…

Abstract

Purpose

After the adoption of unconventional monetary policies (UMPs) in advanced economies (AEs) there were many studies of monetary spillovers to asset prices in emerging market economies (EMEs) but the extent of contribution of EMEs and AEs, respectively, in real exchange rate (RER) misalignments has not been addressed. This paper addresses the gap in a cross-country panel set-up with country specific controls.

Design/methodology/approach

Fixed effects, pooled mean group (Pesaran et al., 1999) and common correlated effects (Pesaran, 2006) estimations are used to examine the relationship. Multiway clustering is taken into account to ensure robust statistical inferences.

Findings

Robust evidence is found for significant monetary spillovers over 1998–2017 in the form of RER overvaluation of EMEs against AEs, especially through the portfolio rebalancing channel. EME RER against the US saw significantly more overvaluation in UMP years indicating greater role of the US in monetary spillovers. However, in the long-run monetary neutrality holds. EMEs did pursue mercantilist and precautionary policies that undervalued their RERs. Precautionary undervaluation is more evident with bilateral EME US RER.

Research limitations/implications

It may be useful for large EMEs to monitor the impact of foreign portfolio flows on short-run deviations in RER. Export diversification reduces EME mercantilist motives against the US. That AE monetary policy significantly appreciates EME RER has implications for future policy cooperation between EMEs and AEs.

Originality/value

To the best of the author's knowledge such a comparative analysis between AE and EME policy variables on RER misalignment has not been done previously.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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Book part
Publication date: 2 March 2011

Martín Grandes, Marcel Peter and Nicolas Pinaud

The currency premium is one of the three components of the differential between local and foreign interest rates. Emerging economies such as South Africa typically face…

Abstract

The currency premium is one of the three components of the differential between local and foreign interest rates. Emerging economies such as South Africa typically face positive interest rate differentials, that is, a higher cost of capital than developed economies. In this chapter we aim at identifying the determinants of the South African rand–U.S. dollar currency premium using monthly data over the period 1997–2008. We carry out an empirical analysis using dynamic time series econometric techniques to estimate the determinants of the one-month and one-year currency premia. Our findings show that the currency premia at both horizons are driven by long-run movements in the expected inflation differential between South Africa and the United States, risk aversion as a proxy for the price of rand exchange risk, and the volatility of the rand exchange rate as an indicator of the quantity of that risk. Misalignments in the real effective or rand–U.S. dollar bilateral exchange rates display mixed results in terms of their impact and statistical significance on both currency premium. Our parameter estimators overall are stable and robust to sample variations. Monetary policy is an important determinant of currency premia at both one-month and one-year horizons, but risk aversion is equally important to determine its time fluctuations.

Details

The Impact of the Global Financial Crisis on Emerging Financial Markets
Type: Book
ISBN: 978-0-85724-754-4

Keywords

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