An Inquiry into Exchanges Rate Misalignments As a Cause of the Major Global Trade Imbalances (original) (raw)
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The Impact of Currency Misalignment on Trade Balance of Emerging Market Economies
Organizations and markets in emerging economies, 2021
This study is an attempt to examine the impact of currency misalignment on the trade balance of emerging market economies from 1980 through 2016. It firstly measures the equilibrium RER and corresponding misalignment series of 21 EMEs separately adopting a single equation approach and then includes them in the trade regression together with undervaluation and overvaluation to estimate the dynamic relationship between the trade balance and real exchange rate misalignment employing the system generalized method of moment estimation approach. The study suggests that, being a composite series of undervaluation and overvaluation, higher real exchange rate misalignment helps recover trade imbalances. It also identifies that undervaluation improves trade balance, while overvaluation cuts it down. The study identifies that the misalignment series of RER for most of the EMEs are substantially dominated by overvaluation episodes, and hence the opposing impact of undervaluation and currency misalignment on the trade balance of EMEs is not surprising. From the policy perspective, competitiveness achieved through currency movements helps emerging market economies not only to improve
Exchange Rate Misalignments and World Imbalances
SSRN Electronic Journal, 2010
Since the mid-1990s, the world imbalances have increased significantly with a large US current deficit facing Asian surpluses, mainly Chinese. Since 2007, a partial reduction of these imbalances has been obtained, largely thanks to production's decreases, without large exchange rate adjustments. The Asian surpluses have remained important. The objective of this paper is to examine the exchange rate misalignments (ERM) of the main emerging countries in Asia and Latin America since the 1980s, so as to shed light on the 2000s by a long term analysis and compare with the industrialized countries' case. Our results confirm that ERM have been reduced since the mid-2000s at the world level, but the dollar remained overvalued against the East Asian countries, except the yen. Chinese, Indian and Brazilian exchange rate policies have been much contrasted since the 1980s. The Indian rupee has been more often overvalued while a more balance situation prevailed in Brazil only since the 2000s. The Latin American countries have faced wider and more dispersed ERM and current imbalances than East Asian countries. But Argentina, Chile and Uruguay benefits now of undervalued currencies while Mexico is closer to equilibrium.
Review of Development Economics, 2015
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Exchange rate misalignments and the external balance under a pegged currency system
This paper analyzes the link between the exchange rate misalignments and the external balance under a pegged currency system focusing on the CFA zone. Having discussed and chosen an appropriate analytical framework, it addresses the issue of model uncertainty regarding the equilibrium exchange rate model before estimating currency misalignments. The results show that misalignments have a negative and asymmetric impact on the current account. While overvaluation of the CFA franc deteriorates the current account in the CFA zone, undervaluation does not improve it. Finally, our results highlight that the export concentration tends to exacerbate the overall negative impact of currency misalignments on the external balance. Thus, greater economic diversification is needed in an environment in which countries face both uncertainty in the terms of trade and uncertainty in the nominal exchange rate to conduct a proactive exchange rate policy. JEL classification: F31, F32, C11.
Equilibrium Exchange Rates and Misalignments: The Case of Homogenous Emerging Countries
2016
We compute the exchange rate misalignment for a set of emerging economies between 1980 and 2013 using the behavioural equilibrium exchange rate definition. The real equilibrium exchange rate is constructed using a parsimonious model and estimators that are robust to cross-sectional independence and small sample size bias. We find that these countries tend to intervene to avoid real appreciation of their currencies following a rise in relative productivity, casting doubt on the Balassa-Samuelson effect. East-Asian countries have maintained their currencies at an artificially low level in order to remain competitive and boost economic growth these past years.
The Effect of Exchange Rate Movements on Trade Balance: A Chronological Theoretical Review
This paper evaluates the current state of the literature concerning the effects of exchange rate movements on trade balance. Thus, this paper is a review article and provides a survey of the alternative theories that focus on the effect of exchange rate changes on the trade balance. It systemizes the literature into four distinct reviews and approaches following the chronological order. The paper presents the (a) Standard Theory of International Trade, (b) Elasticity Approach, (c) Keynesian Absorption Approach, and (d) Monetary Approach. The study shows that higher attention should be given for the most plausible dynamic theory in this field, known as the J-Curve.
Current-Account Imbalances, Real Exchange-Rate Misalignments, and Output Gaps
Economics, 2022
This study analyzes the relationships between domestic and foreign output gaps, current-account imbalances, and real effective exchange-rate (REER) misalignments. We first set up a theoretical framework based on the elasticities and absorption approaches of the balance of payments to derive and clarify these relationships. Next, we perform panel VAR estimates in a sample of 18 advanced economies between 1986 and 2017. We find an inverse relationship between domestic output gaps and current accounts with reciprocal influences between the two variables. Moreover, we observe that increases in current accounts generally boost both temporary and structural growth. Additionally, our results indicate that REER misalignment shocks cause reactions of the opposite sign on the current account and on cyclical economic growth. We also find evidence of higher growth resulting in a real exchange-rate appreciation, which supports the Balassa–Samuelson hypothesis.
Equilibrium Exchange Rates and Misalignments: The Case of Homogenous Emerging Market Economies
2017
We compute the exchange rate misalignment for a set of emerging economies between 1980 and 2013 using the behavioural equilibrium exchange rate definition. The real equilibrium exchange rate is constructed using a parsimonious model and estimators that are robust to cross-sectional independence and small sample size bias. We find that these countries tend to intervene to avoid real appreciation of their currencies following a rise in relative productivity, casting doubt on the Balassa-Samuelson effect. East-Asian countries have maintained their currencies at an artificially low level in order to remain competitive and boost economic growth these past years. Length: 26 pages
Title : Misalignment of Exchange Rates : Effects on Trade and Industry
2007
In the spring of 1981 the U.S. dollar began a four-year period of real appreciation that took it to a peak of more than 50% by first quarter of 1985. The appreciation of the dollar in real terms was part of the adjustment process by which the increase in the structural budget deficit in the United States was financed. By mid-1985, the current account deficit was about 120billionatanannualrate,providingasignificantsourceoffinanceforthe120 billion at an annual rate, providing a significant source of finance for the 120billionatanannualrate,providingasignificantsourceoffinanceforthe200 billion Federal budget deficit. The links from the shift in the budget to the appreciation of the dollar are discussed in Branson (1985) and chapter 1 in this volume. The appreciation of the dollar in real terms reduces the competitiveness of U.S. output in all U.S. industry that is directly or indirectly substitutable for foreign output. It is these effects that are the topic of this paper. The appreciation of the dollar was a prolonged but temporary phenomenon that is reversible when the structural deficit is reduced or when international investors resist absorption of additional dollardenominated debt into their portfolios. This reversal began in late 1985. The depression of output and employment in previously competitive U.S. industries may not be completely reversible, however. The protracted period of a high dollar has provided an opportunity for non-U.S. competitors in industries with increasing returns-due to fixed