Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia

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.

Summary

Summary

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Figures

Table 2: Key Trading Partners of Ten Developing Asian Economies, 2004–2007

Table 2: Key Trading Partners of Ten Developing Asian Economies, 2004–2007

Table 3: Estimation Results

Table 4: Coefficients of Real Exchange Rate and Real Exchange Rate Misalignment

Table 1: Empirical Studies of Real Exchange Misalignment in East and Southeast Asia

Figure 1: continued.

Figure 1: continued.

Full text

Jongwanich, Juthathip
Working Paper
Equilibrium Real Exchange Rate, Misalignment, and
Export Performance in Developing Asia
ADB Economics Working Paper Series, No. 151
Provided in Cooperation with:
Asian Development Bank (ADB), Manila
Suggested Citation: Jongwanich, Juthathip (2009) : Equilibrium Real Exchange Rate,
Misalignment, and Export Performance in Developing Asia, ADB Economics Working Paper
Series, No. 151, Asian Development Bank (ADB), Manila,
https://hdl.handle.net/11540/1798
This Version is available at:
http://hdl.handle.net/10419/109350
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ADB Economics
Working Paper Series
Equilibrium Real Exchange Rate,
Misalignment, and Export Performance
in Developing Asia
Juthathip Jongwanich
No. 151 | March 2009

ADB Economics Working Paper Series No. 151
Equilibrium Real Exchange Rate,
Misalignment, and Export Performance
in Developing Asia
Juthathip Jongwanich
March 2009
Juthathip Jongwanich is Economist in the Economics and Research Department, Asian Development Bank.
The author would like to thank William E. James for his comments. Research assistance from Nedelyn C.
Magtibay-Ramos and Lagrimas E. Cuevas is appreciated. This paper represents the views of the author
and does not represent those of the Asian Development Bank, its Executive Directors, or the countries
they present.

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Frequently asked questions

Q1. What are the contributions mentioned in the paper "Equilibrium real exchange rate, misalignment, and export performance in developing asia" ?

In this paper, the authors examined the impact of RER misalignment on export performance in eight Asian economies during the period 1995-2008. 

Q2. What is the effect of depreciation on the exports of parts and components?

Since parts and component exports involve a high proportion of imported parts and components, depreciation of a currency lowers the foreign currency price of exports and also increases the home-currency prices of component imports. 

Q3. What is the impact of RER misalignment on export performance?

RER misalignment in terms of real overvaluation could adversely affect export performance since real overvaluation reflects a loss in a country’s competitiveness. 

Q4. What are the commonly used price series in constructing RER?

The most commonly used price series in constructing RER for measuring international competitiveness are consumer price indices (CPIs). 

Q5. How much would the RER appreciate in response to productivity improvement?

The RER would appreciate by 4.15% and 1.29%, respectively, when TOT and GEXP increase by 1%, compared to 0.17% appreciation in response to productivity improvement by 1%. 

Q6. What are the key factors that are included in the long-run equilibrium RER?

Five key fundamental variables, namely, NFA, PROD, government spending, trade policy openness, and TOT, are generally included in estimating the long-run equilibrium RER under the BEER approach. 

Q7. What was the effect of the RER misalignment on export performance in other countries?

For other countries, i.e., PRC; Hong Kong, China; and India, the RER tended to exhibit undervaluation in the lead-up to the crisis period. 

Q8. Why do CPIs provide a good reflection of the purchasing power of the domestic currency?

Because they capture the relative costs of a broad basket of goods and services across countries, CPI-based RER measures provide a good reflection of the purchasing power of the domestic currency. 

Q9. What is the significance of FDI in determining export performance?

The importance of FDI in determining export performance, even using aggregate data, tends to support the hypothesis that multinational corporations are likely to be in a better position to overcome fixed costs induced by exports and have higher chances to successfully export. 

Q10. What is the effect of TOT on the RER in the PRC?

Particularly in Singapore and Hong Kong, China, a 1% increase in TOT would result in an appreciation of RER by 1.76% and 0.70%, respectively. 

Q11. What is the reason why the real exchange rate in Malaysia and Thailand has undervalued?

It is possible that there is still significant intervention in the foreign exchange markets in these two countries in order to maintain nominal and real exchange rate undervaluation to boost exports and trade balance. 

Q12. What is the significance of the RER in determining export performance?

This tends to imply that supply-side factors, such as infrastructure, logistics capabilities, skills, and general business climate, are likely to be important in determining export performance. 

Q13. What is the relationship between RER misalignment and export performance?

It is not surprising that RER misalignment in terms of real overvaluation could adversely affect export performance since real overvaluation reflects a loss in a country’s competitiveness and misallocations of resources toward the nontradable sector. 

Q14. What is the relationship between RER and c?

When NFA reaches steady state (i.e., f = 0), equation (2) can also trace out the relationship of RER and c. Starting from a position of external balance, a rise in c causes a CA deficit. 

Q15. What makes CPI-based RER less than ideal for assessing competitiveness?

the fact that CPI baskets contain a significant nontraded component makes CPI-based RER less than ideal for assessing competitiveness. 

Q16. What is the weighted average of the real income of key export partners?

WD is measured as the weighted average of the real incomes of key export partners, which together account for 75% of shipments of East and Southeast Asia to all trade partners. 

Q17. What is the p value of the coefficients for cointegration in developing Asia?

Equilibrium Real Exchange Rate, Misalignment, and Export Performance in Developing Asia | 17The test statistics for cointegration for eight developing Asian economies based on Johansen procedure are reported in Table 3. 

Q18. What is the method for calculating the RER misalignment?

The method for extracting the λ’s is described in Johansen and Juselius (1990) and Johansen (1988).RER misalignment is calculated by comparing the long-run equilibrium real exchange rate (RER*) to actual RER.