Disorderly adjustments to the misalignments in the Korean won
TL;DR: The authors estimated the equilibrium exchange rates for Korea's real effective rates using Clark and MacDonald's (1999) behavioural equilibrium exchange rate (BEER) approach, which suggests that the real exchange rate was substantially overvalued during the period prior to the currency crisis of 1997-98.
Abstract: This paper estimates the equilibrium exchange rates for Korea's real effective rates using Clark and MacDonald's (1999) behavioural equilibrium exchange rate (BEER) approach. The estimation result suggests that the real exchange rate was substantially overvalued during the period prior to the currency crisis of 1997-98. The subsequent adjustment, however, was disorderly in the sense that the real exchange rate overshot its long-run equilibrium value. There was also a large deviation from the BEER, indicating that the sharp depreciation was not an equilibrium phenomenon.
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TL;DR: In this article, the empirical results for a sample of 63 developing countries suggest that deviations of the real exchange rate in either direction from the value that is consistent with external and internal equilibria reduce economic growth.
65 citations
TL;DR: In this article, the authors examined the equilibrium real exchange rate and misalignments in developing Asian countries during the period 1995-2008 and investigated the relationship between misalignment and export performance.
Abstract: This paper examines the equilibrium real exchange rate and real exchange rate misalignments in developing Asian countries during the period 1995-2008. In addition, the relationship between real exchange rate misalignment and export performance is investigated. In the lead-up to the 1997-1998 financial crisis, real exchange rate exhibited persistent overvaluation in the crisis-affected countries. After the crisis, real exchange rate undervaluation was evident in many Asian countries such as People’s Republic of China (PRC), Malaysia, and Thailand. This study also shows that real exchange rate misalignment could have a negative impact on export performance in developing Asia. With its implications on economic activity, monitoring real exchange rate equilibrium and misalignment is a useful tool for governments/central banks to ensure balance in the economy.
37 citations
Cites background or methods from "Disorderly adjustments to the misal..."
...Indonesia Sahminan (2005) BEER ( 993Q –2005Q2) TOT, productivity, real interest rate differentials, NFA 0% overvaluation in 996– 997 Korea Kinkyo (2008) BEER ( 98 Q –2000Q3) Net foreign asset, TOT, real interest rate differential, productivity differential, fiscal balance 0% overvaluation in 996Q –…...
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...Kinkyo (2008) applies the 10 | ADB Economics Working Paper Series No. 151 BEER approach in determining the equilibrium RER in 1981Q1–2000Q3....
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TL;DR: In this article, the authors measure to what extent the real effective exchange rate of the Korean won is misaligned from its equilibrium value by estimating the equilibrium value using the behavioral equilibrium exchange rate approach.
11 citations
Cites background or methods from "Disorderly adjustments to the misal..."
...Because the analysis of Kinkyo (2008) covers the period from 1981Q1 to 2000Q3, it is not unreasonable not to include China....
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...Papers that do address this issue such as Chinn (1998), Goldfain and Baig (1998), and Kinkyo (2008) mostly focus on the 1997 financial crisis period, therefore, we cannot conclude whether and to what extent the won is under- or over-valued from the equilibrium rate assumed by economic fundamentals…...
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...Following Clark and MacDonald (1998) and Kinkyo (2008), this explanatory variable is included to capture the Balassa-Samuelson effect....
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...…and stability tests were all implemented using the computer software program, Jmulti. coefficient of LTOT can be either positive or negative as explained in the previous section, and the estimated coefficient value for LTOT turns out to be negative as was also found in the work of Kinkyo (2008)....
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...Kinkyo (2008) used the fiscal balance divided by the GDP as a proxy for the Korean risk premium and reported a significant coefficient with the expected sign....
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Dissertation•
01 Jan 2015
TL;DR: In this article, the authors show that lower volatility of real oil price in local currency causes lower volatility in government expenditure and fiscal balance as a share of GDP in Middle East oil exporting countries.
Abstract: The aim of this thesis is three-fold. First, in contrast to developed exporting countries such as Australia, New Zealand and Canada, Middle East oil exporting countries are years behind achieving the prerequisites for floating exchange rate and Inflation Targeting monetary regime. On the other hand, their performance under fixed exchange rate (to the US dollar) has brought them some painful experience such as the Dutch Disease and high inflation. For a sample of five of these countries -- Qatar, Oman, Kuwait, Saudi Arabia and the UAE -- we conduct a set of counterfactual experiments. We empirically simulate government consumption expenditure, under a hypothetical peg to a nominal anchor (oil price in either the radical or moderate version) or to a basket (containing the US Dollar, Yen and the Euro) and compare this simulation with whatever exchange rate regime each country actually followed. We find that lower volatility of real oil price in local currency causes lower volatility in government expenditure and fiscal balance as a share of GDP. Hence, we face a less volatile economy.
Second, we determine the equilibrium exchange rate (using BEER) of these five oil exporting countries in the Persian Gulf which depend heavily on exports of oil, natural gas and oil products. We employ a new data set for the real effective exchange rate of these countries which is updated annually and covers the period from 1980 to 2011. Given the limited length of the sample (32 years) and low power of individual country by country tests for unit root and cointegration, estimating separate equations for each country (time series) does not provide us with precise results; therefore, to increase the efficiency of the estimators, we employ panel analysis. We apply the pooled mean-group (PMG) of Pesaran et al. (1999) and four more panel estimators for a robustness check. All estimators strongly support the positive effect of real oil price on the real effective exchange rate (i.e. higher real oil price leads to appreciation of the real effective exchange rate) which is consistent with theoretical predictions and with previous studies for commodity (oil) exporting countries. The productivity deferential elasticity is 0.10 which is consistent with the results of the related literature such as the studies of MacDonald and Ricci (2004) for South Africa, and of Lee et al. (2008) for 48 countries over 1980-2004. The BEERs of Qatar, Kuwait and (to some extent) the UAE follow their real effective exchange rates. From 2000, with the increase in oil price, the BEERs appreciate while the real exchange rate of Oman and Saudi Arabia decline; therefore, the Saudi Arabian and Omani currencies get undervalued.
Third, employing a new data set of Canadian commodity price indices, we revisit the Canada Bank Equation and introduce a new version with more fundamentals. We present a similar equation for Australia as one of the other developed commodity exporting countries. Using cointegration and the first differences analysis between real exchange rate and fundamentals, we investigate the SVECM and SVAR frameworks to decompose the variance of real exchange rate of Canada and Australia. In the SVECM analysis, the productivity differential and commodity price are the main contributor to the variance of the real exchange rates of Australia and Canada. For the SVAR analysis, we confirm that, as in the literature, demand shock is the dominant force in explaining the variance of real exchange rates of both countries. This result does not change even by adding the commodity price shock to the SVAR framework.
11 citations
Cites background from "Disorderly adjustments to the misal..."
...Krugman (1978) applies equation 16 to the 1920s and the 1970s; he could not support the PPP in both periods....
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TL;DR: In this paper, the authors examined the size of real exchange rate misalignment in seven developing Asian counties and Japan and developed an analytical framework to estimate the equilibrium RERs, which were then used to derive the RER misalignments.
Abstract: This paper examines the size of real exchange rate (RER) misalignment in seven developing Asian counties and Japan An analytical framework is developed to estimate the equilibrium RERs, which are then used to derive the RER misalignments The estimation results from the model indicate that RERs have been misaligned in most of the Asian countries during the sample period, although not to the extent claimed in some studies The real exchange behaviour in these countries is mostly consistent with the economic fundamentals and the magnitude of measured RER misalignment is not alarming
6 citations
Cites methods from "Disorderly adjustments to the misal..."
...In this study, the estimation of RER misalignment relies on the BEER approach (introduced by Clark and MacDonald 1998) to estimating the RER equilibrium, which is more suitable for developing or transition economies (Chudik and Mongardini 2007; Chen et al. 2008; Kinkyo 2008; Jongwanich 2009)....
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References
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TL;DR: In this article, the authors proposed a correction factor for the likelihood ratio test for cointegration in the vector autoregressive model to improve the finite sample properties of the test.
Abstract: With the cointegration formulation of economic long-run relations the test for cointegrating rank has become a useful econometric tool. The limit distribution of the test is often a poor approximation to the finite sample distribution and it is therefore relevant to derive an approximation to the expectation of the likelihood ratio test for cointegration in the vector autoregressive model in order to improve the finite sample properties. The correction factor depends on moments of functions of the random walk, which are tabulated by simulation, and functions of the parameters, which are estimated. From this approximation we propose a correction factor with the purpose of improving the small sample performance of the test. The correction is found explicitly in a number of simple models and its usefulness is illustrated by some simulation experiments.
403 citations
TL;DR: In this article, a framework based on endogenous noise trading is proposed to reduce the volatility of the exchange rate without any sacrifice in terms of monetary autonomy, and empirical evidence supports the existence of a non-fundamental channel in the link between exchange rate regimes and exchange rate volatility.
Abstract: Policy-makers often justify their choice of fixed exchange rate regimes as a shelter against nonfundamental influences in the foreign exchange market. This paper proposes a framework, based on endogenous noise trading, which makes sense of the policy-makers' view. We show that as a result of multiple equilibria, the model violates Mundell's "Incompatible Trinity:" under some conditions, it is possible to reduce the volatility of the exchange rate without any sacrifice in terms of monetary autonomy. We provide empirical evidence supportive of the existence of a nonfundamental channel in the link between exchange rate regimes and exchange rate volatility. If … markets come to believe exchange rate stability is not itself a significant policy objective, we should not be surprised that snowballing cumulative movements can develop that appear widely out of keeping with current balance-of-payments prospects or domestic price movements. At that point, freely floating exchange rates, instead of delivering on the promise of money autonomy for domestic monetary or other policies, can greatly complicate domestic economic management [Paul Volcker 1978–79, p. 9].
306 citations
Posted Content•
TL;DR: The authors empirically examined the long-run relationship between real exchange rates and real interest rate differentials over the recent floating exchange rate period, using a panel cointegration method, with data for a set of industrialized countries.
Abstract: This paper empirically examines the long-run relationship between real exchange rates and real interest rate differentials over the recent floating exchange rate period, using a panel cointegration method, with data for a set of industrialized countries. The paper finds evidence of statistically significant long-run relationships and plausible point estimates, which contrasts with much existing evidence. The failure of others to establish such relationships may reflect the estimation method they use rather than any inherent deficiency of the fundamentals-based models.
137 citations
01 Jan 2000
TL;DR: The authors empirically examined the long-run relationship between real exchange rates and real interest rate (RERI) differentials over the recent floating exchange rate period and found evidence of statistically significant long run relationships and plausible point estimates.
Abstract: This paper empirically examines the long-run relationship between real exchange rates and real interest rate (RERI) differentials over the recent floating exchange rate period A panel cointegration estimator is applied to a data set of 14 industrialized countries In contrast to much other research on the RERI model, we find evidence of statistically significant long-run relationships and plausible point estimates The failure of most other researchers to establish such relationships may therefore reflect the estimation method used rather than any inherent deficiency in the real exchange rate–real interest rate relationship
97 citations
TL;DR: In this article, a general equilibrium intertemporal model with optimizing consumers and producers is developed to analyze how temporary terms-of-trade disturbances affect the path of real exchange rates and the current account.
Abstract: In this paper a general equilibrium intertemporal model with optimizing consumers and producers is developed to analyze how temporary terms-of-trade disturbances affect the path of real exchange rates and the current account. Changes in the internal terms of trade (arising from tariff changes) and to the external terms of trade are considered. The model is completely real, and considers a small open economy that produces and consumes three goods each period. It is shown that, without imposing rigidities or adjustment costs, interesting paths for the equilibrium real exchange rate can be generated. In particular, "equilibrium overshooting" can be observed. Precise conditions under which a temporary import tariff will worsen the current account in period 1 are derived. The way in which temporary and permanent external terms-of-trade shocks will affect the current account are analyzed. Several ways in which the model can be extended are discussed. The results obtained from this model have important implications for the design of balance of payments policy and for the analysis of real exchange rate misalignment and overvaluation. Copyright 1989 by The London School of Economics and Political Science.
76 citations