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Article
Publication date: 31 May 2011

Jacques A. Schnabel

This paper seeks to argue that any competitive advantage realized by a firm that produces domestically and exports to a foreign market due to a real depreciation…

Abstract

Purpose

This paper seeks to argue that any competitive advantage realized by a firm that produces domestically and exports to a foreign market due to a real depreciation (appreciation) of the domestic (foreign) currency is purely transitory and thus not sustainable. Diversification of manufacturing operations across a number of countries and appropriate production rescheduling in light of real exchange rate changes are required to transform the character of this competitive advantage from merely transitory to sustainable.

Design/methodology/approach

Analytic proof is provided of the dependence of an exporting firm's real profit margin on the real exchange rate. A simple contemporaneous and one‐period lagged model of the current account balance is then posited to argue that real exchange rates exhibit mean‐reversionary behavior.

Findings

The Marshall‐Lerner condition, which is a mainstay of balance‐of‐payments models is shown to imply that real exchange rates exhibit mean‐reversionary behavior. Extensive empirical evidence is cited that accords with this theoretical conclusion. Thus, any gain in competitive advantage due to a change in real exchange rates that accrues to a firm with a single manufacturing operation is merely transitory and not sustainable.

Practical implications

To position itself to achieve sustainable competitive advantage from changes in real exchange rates, a firm must maintain a global supply chain diversified across many countries. With the flexibility provided by such disparate plant locations, production schedules can be adjusted in response to real exchange rate changes, to wit, increased (reduced) manufacturing should be programmed in countries whose currencies have experienced real depreciations (appreciations). Owing to oscillating real exchange rates, these requisite production schedule adjustments are expected to be perpetual.

Originality/value

The algebraic formulation of the firm's inflation‐adjusted profit margin's dependency on the real exchange rate and the analytical proof that the Marshall‐Lerner condition implies mean‐reversionary behavior in real exchange rates are both novel. The implications with regard to competitive advantage are likewise original.

Details

Competitiveness Review: An International Business Journal, vol. 21 no. 3
Type: Research Article
ISSN: 1059-5422

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Article
Publication date: 27 June 2008

Yu Hsing

The purpose of this paper is to examine movements of the Singapore dollar exchange rate against the US dollar.

Abstract

Purpose

The purpose of this paper is to examine movements of the Singapore dollar exchange rate against the US dollar.

Design/methodology/approach

An extended open macroeconomic model with the IS, LM, and AS functions and comparative static analysis are employed and applied. The Newey‐West method is employed to estimate consistent estimates for the standard error and covariance when the forms of both autocorrelation and heteroskedasticity are unknown.

Findings

The real exchange rate in Singapore is negatively associated with real M1, country risk, the real US treasury bill rate, and a binary variable for the period since the Asian financial crisis, and positively influenced by the real stock price, world output, and the amount of foreign exchange reserves. Real government deficit spending is statistically insignificant.

Research limitations/implications

Other exchange rate models may be considered and compared.

Practical implications

The Reserve Bank of Singapore may use the outcomes of this paper as a reference in monitoring exchange rate movements. Among others, changes in country risk, stock values, foreign exchange, the world interest rate, and world output are expected to influence the exchange rate.

Originality/value

Several important variables such as country risk, the Asian financial crisis, stock values, and the amount of foreign exchange are included to find their impacts on the exchange rate.

Details

International Journal of Development Issues, vol. 7 no. 1
Type: Research Article
ISSN: 1446-8956

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Article
Publication date: 1 April 2021

Hiluf Techane Gidey and Naser Yenus Nuru

Government spending has inconclusive effect on real exchange rate. From the very beginning neoclassical economists argued that a rise in government spending brings…

Abstract

Purpose

Government spending has inconclusive effect on real exchange rate. From the very beginning neoclassical economists argued that a rise in government spending brings depreciation in real exchange rate while neo-Keynesians claimed that government spending appreciates real exchange rate. Hence, the main purpose of this paper is to examine the effect of government spending shock and its components' shocks, namely government consumption and government investment on real exchange rate over the period 2001Q1–2016Q1 for Ethiopia.

Design/methodology/approach

To examine the effects of government spending shocks on real exchange rate, Jordà's (2005) local projection method is employed in this study. The exogenous shocks, however, are identified recursively in a vector autoregressive model.

Findings

The impulse responses show that government spending shock leads to a statistically significant appreciation of real exchange rate in Ethiopia. This evidence supports the neo-Keynesian school of thought who predicts an appreciation of real exchange rate from a rise in government spending. While government investment shock depreciates real exchange rate on impact insignificantly, government consumption shock appreciates real exchange rate in this small open economy.

Originality/value

This research contributes to the scarce literature on the effect of fiscal policy shock on real exchange rate in small open economies like Ethiopia.

Details

Journal of Economic and Administrative Sciences, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1026-4116

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Book part
Publication date: 13 May 2019

Rosaria Rita Canale and Rajmund Mirdala

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II…

Abstract

The role of money and monetary policy of the central bank in pursuing macroeconomic stability has significantly changed over the period since the end of World War II. Globalization, liberalization, integration, and transition processes generally shaped the crucial milestones of the macroeconomic development and substantial features of economic policy and its framework in Europe. Policy-driven changes together with variety of exogenous shocks significantly affected the key features of macroeconomic environment on the European continent that fashioned the framework and design of monetary policies.

This chapter examines the key basis of the central bank’s monetary policy on its way to pursue and preserve the internal and external stability of the purchasing power of money. Substantial elements of the monetary policy like objectives and strategies are not only generally introduced but also critically discussed according to their accuracy, suitability, and reliability in the changing macroeconomic conditions. Brief overview of the Eurozone common monetary policy milestones and the past Eastern bloc countries’ experience with a variety of exchange rate regimes provides interesting empirical evidence on origins and implications of vital changes in the monetary policy conduction in Europe and the Eurozone.

Details

Fiscal and Monetary Policy in the Eurozone: Theoretical Concepts and Empirical Evidence
Type: Book
ISBN: 978-1-78743-793-7

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Book part
Publication date: 22 April 2015

Barbara Pistoresi and Alberto Rinaldi

Relying on a new dataset, this paper examines the genesis of current account fluctuations and the investment cycle in Italy. We perform a Granger causality test that shows…

Abstract

Relying on a new dataset, this paper examines the genesis of current account fluctuations and the investment cycle in Italy. We perform a Granger causality test that shows that the persistent current account deficits in the years from unification to World War I were generated by variations in capital inflows, as hypothesized by Fenoaltea, and not by the dynamics of GDP, as in the Bonelli–Cafagna model. Finally, we show that these capital inflows prompted an industrial investment cycle in equipment and machinery but not – as claimed by Fenoaltea (1988) – a general investment cycle which included also construction and more volatile components of investment. These patterns held under both fixed and floating exchange rate regimes.

Details

Research in Economic History
Type: Book
ISBN: 978-1-78441-782-6

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Book part
Publication date: 23 October 2017

Rajmund Mirdala and Júlia Ďurčová

Asynchronous current account trends between North and South of the Euro Area were accompanied by significant appreciations of real exchange rate originating in the strong…

Abstract

Asynchronous current account trends between North and South of the Euro Area were accompanied by significant appreciations of real exchange rate originating in the strong shifts in consumer prices and unit labor costs in the periphery economies relative to the core countries of the Euro Area. The issue is whether the real exchange rate is a significant driver of persisting current account imbalances in the Euro Area considering that, according to some authors, differences in domestic demand are more important than is often realized. In the paper we examine relative importance of real exchange rate and demand shocks according to the current account adjustments in the Euro Area member countries. Our results indicate that while the prices and costs related determinants of external competitiveness affected current account adjustments primarily during the pre-crisis period, demand drivers shaped current account balances mainly during the crisis period.

Details

Economic Imbalances and Institutional Changes to the Euro and the European Union
Type: Book
ISBN: 978-1-78714-510-8

Keywords

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Abstract

Details

Nonlinear Time Series Analysis of Business Cycles
Type: Book
ISBN: 978-0-44451-838-5

Abstract

Details

Panel Data Econometrics Theoretical Contributions and Empirical Applications
Type: Book
ISBN: 978-1-84950-836-0

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Book part
Publication date: 26 April 2014

Nikolaos Giannellis and Georgios P. Kouretas

The aim of this study is to examine whether China’s exchange rate follows an equilibrium process and consequently to answer the question of whether or not China’s…

Abstract

Purpose

The aim of this study is to examine whether China’s exchange rate follows an equilibrium process and consequently to answer the question of whether or not China’s international competitiveness fluctuates in consistency with equilibrium.

Design/methodology/approach

The theoretical background of the paper relies on the Purchasing Power Parity (PPP) hypothesis, while the econometric methodology is mainly based on a nonlinear two-regime Threshold Autoregressive (TAR) unit root test.

Findings

The main finding is that China’s price competitiveness was not constantly following a disequilibrium process. The two-regime threshold model shows that PPP equilibrium was confirmed in periods of relatively high – compared to the estimated threshold – rate of real yuan appreciation. Moreover, it is implied that the fixed exchange rate regime cannot ensure external balance since it can neither establish equilibrium in the foreign exchange market, nor confirm that China’s international competitiveness adjustment follows an equilibrium process.

Practical implications

The results do not imply that China acts as a currency manipulator. However, a main policy implication of the paper is that China should continue appreciating the yuan to establish external balance.

Originality/value

This paper is the first which accounts for a nonlinear two-regime process toward a threshold, which is defined to be the rate of change in China’s international competitiveness. Consequently, the paper draws attention to the role of China’s international competiveness in accepting the PPP hypothesis.

Details

Macroeconomic Analysis and International Finance
Type: Book
ISBN: 978-1-78350-756-6

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Article
Publication date: 22 June 2018

Zelealem Yiheyis and Jacob Musila

The purpose of this study is to examine the temporal relationships between inflation and exchange rate changes and their implications for the trade balance in Uganda…

Abstract

Purpose

The purpose of this study is to examine the temporal relationships between inflation and exchange rate changes and their implications for the trade balance in Uganda, which saw persistent trade deficits, rising inflation and disinflation episodes, as well as significant exchange-rate realignments and other liberalization measures over the sample period considered.

Design/methodology/approach

The short-run dynamics of the variables in question and the pattern of their long-run relationships are examined applying the bounds testing approach to cointegration on quarterly data.

Findings

The estimates suggest that, in the long run, a real depreciation leads to an increase in inflation; and that both real depreciation and inflation exert no significant effect on the trade balance. The estimated short-run dynamics suggest a causal relationship between the trade balance and the real exchange rate and between the real exchange rate and inflation, which is also found responsive to developments in the foreign sector. Taken together, the short-run and long-run multipliers seem to provide a weak support for the J-curve effect, while no evidence is found for the presence of the S-curve effect.

Originality/value

The study sheds light on the relationship among real exchange rate, inflation and the trade balance in the context of a small developing economy; it highlights that an improvement in the trade balance requires more than an appropriate exchange rate policy and underscores the importance of other policies in strengthening the external sector of the economy.

Details

International Journal of Development Issues, vol. 17 no. 2
Type: Research Article
ISSN: 1446-8956

Keywords

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