Transcript Document

The Academy of Economic Studies
The Faculty of Finance, Insurance, Banking and Stock Exchange
Doctoral School of Finance and Banking
Dissertation paper
Real Exchange Rate Misalignments and Trade Competitiveness.
The Case of Romania
MSc Student Zmeu Oleg
Coordinator Professor Moisă Altăr
Bucharest 2010
The aims of the paper
I.
1.
2.
3.
4.
5.
Choosing the variables that determine the behavior
of the real equilibrium exchange rate (REER)
Estimating the equilibrium exchange rate
(the BEER model)
Calculating the real exchange misalignments
(RERM)
Choosing the proxies of trade competitiveness
Determining the impact of RERM on trade
competitiveness – a VAR approach
Importance of real exchange rate misalignments
•
Could be used to predict future shifts of the exchange rate (Aguirre,
Calderon, (2005));
•
May underline the need to adjust the exchange rate;
•
A likely prelude to financial crisis (Krugman (1979), Kaminsky and
Reinhart (1999));
•
May affect economic growth (Edwards (1989));
•
May boost the economic growth, as was the case of Japan and
Germany and more recently, China (Dooley et al. (2003)).
II.
Literature review
•
The relationship between real exchange rate misalignments and trade competitiveness was
predominantly conducted on countries that record great share of exports in GDP;
•
Balassa (1990) explores the relationships between RERM and the exports of four African
countries (Tanzania, Kenya, Ghana and Ivory Cost) during 1974 – 1981. He finds that
exports are highly responsive to RERM;
•
Ghura and Grennes (1993) run regression between RERM and other macroeconomic
indicators (saving, exports, investments). The result of their study confirm the economic
theory. The exchange rate – an important variable in measuring the relations with abroad.
•
Söderling (2000) proves that overvalued currency of Cameroon in the 1980s were
responsible for a worsening in total exports by 30 – 50%.
•
Sekkat and Varoudakis (2000) demonstrated that inconsistent macroeconomic policies and
RERM are responsible for overvaluation.
•
Fukunishi (2004) explores the relationships between real exchange rate misalignments and
exports competitiveness. He proves that most currencies of Sub-Saharan countries were
largely overvalued since their independence in early 1960s. Overvalued currencies
discouraged exports and accounted for a peak of 90% misalignment of exchange rate
during 1980s.
Data
•
•
•
•
•
Quarterly data used were obtained from Eurostat. The missing time series
were obtained from the site of National Bank of Romania (www.bnr.ro).
The period covered is Q1 2000 – Q4 2009.
All time series were seasonally adjusted using Census X12 method developed
by U.S Census Bureau and implemented in EViews 6. The price indexes (CPI,
export unit value, import unit value) have fixed base 2000 = 100.
The stock and flow variables (imports, exports, net foreign assets, final
consumption expenditure of households) are normalized to GDP.
Exchange rate RON/EUR is expressed as units of domestic currency per unit
of foreign currency.
Choosing the “fundamentals”
The stationarity of the determinants factors was checked.
•
Productivity differential – stationary (not included)
•
Final Government consumption expenditure – stationary (not included)
•
Real interest rate differential – stationary (not included)
ADF and PP unit root tests
ADF and PP unit root tests on
fundamentals
Choosing the VAR length
VAR stability
VAR Lag Order Selection Criteria
Endogenous variables: L_RER TOT OPEN CONS
Exogenous variables: C
Date: 06/09/10 Time: 21:49
Sample: 2000Q1 2009Q4
Included observations: 37
Roots of Characteristic Polynomial
Endogenous variables: L_RER TOT OPEN CONS
Exogenous variables: C
Lag specification: 1 1
Date: 07/02/10 Time: 23:00
Root
Lag
LogL
0
1
2
3
LR
FPE
AIC
-104.81 NA
0.004212
-30.0305 129.34* 0.000177
-13.0448
25.708 0.000173*
-0.78132 15.9094 0.000231
SC
5.881631
2.704349
2.651071*
2.853044
Modulus
HQ
6.055784
5.943
3.575115* 3.0113*
4.218451
3.2036
5.117037
3.6512
* indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion
0.849754 - 0.080980i
0.849754 + 0.080980i
0.534102
0.118045
No root lies outside the unit circle.
VAR satisfies the stability condition.
0.853604
0.853604
0.534102
0.118045
Johansen Cointegration Test and Vector Error Correction Estimates
Series
Number
of
coint.
relations
Eigenval.
Trace test statistic
Computed
val.
l_rer open
tot cons
Maximum eigenvalue test
statistic
5% critical
val.
p-val.
Computed
val.
5% critical
val.
p-val.
None
0.6140
58.8722
47.8513
0.0033
36.1778
27.5844
0.003
At most 1
0.2983
22.6924
29.7907
0.2613
13.4616
21.1312
0.410
At most 2
0.1691
9.2377
15.4971
0.3441
7.0399
14.2646
0.484
At most 3
0.0561
2.1999
3.8416
0.1384
2.1959
3.8416
0.138
The Johansen Cointegration Test demonstrates that there are only one
cointegration relations between the variables included in the test – the null
hypothesis of the existence of at most one cointegration relation cannot be
rejected at the 5% significance level.
The fundamentals
1.5
72
1.4
70
1.3
68
1.2
66
64
1.1
62
1.0
60
0.9
00
00
01
02
03
Trend
04
05
06
07
08
01
02
03
04
05
06
07
08
09
09
Final consumption expenditure of houseolds
Trend
Terms of Trade
85.0
82.5
The long-run equilibrium of the
determinants was captured using the
Hodrick-Prescott filter.
80.0
77.5
75.0
72.5
70.0
67.5
65.0
00
01
02
03
04
Trend
05
06
Openess
07
08
09
After adjusting the cointegration vector with respect to real exchange rate, the
following expression is obtained:
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•
•
•
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All the coefficients are statistically significant.
The increase of the terms of trade is translated into an appreciation of the
real exchange rate.
The degree of openness is positively related wit real exchange rate – an
increase of openness determines the depreciation of domestic currency.
A hike of final consumption expenditures of households appreciates the
domestic currency.
The RERM are calculated according to the formula:
Table 5 - real exchange rate (RER)
Table 6 – real exchange rate
and equilibrium exchange rate (REER)
misalignments
1.6
.16
1.5
.12
1.4
.08
1.3
.04
1.2
.00
1.1
-.04
1.0
00
01
02
03
04
REER
•
•
•
05
06
RER
07
08
09
-.08
00
01
02
03
04
05
06
07
08
09
Periods of overvaluation: 2000 – 2002, middle of 2004 – first quarter of 2008
Periods of undervaluation: 2002 – middle of 2004, first quarter of 2008 – last quarter
of 2009
The positive values (values above the red line) represent overvaluation.
Measures of competitiveness
•
Real exchange rate
-
-
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An increase of the RER (a depreciation) is associated with an improvement of a
nation’s competitiveness, as the domestic product prices expressed in foreign
currency decrease;
On the other hand, a decrease of the RER (an appreciation) may not necessarily
imply that domestic competitiveness worsened. It may reflect a convergence
process.
Export growth and market share
Drawbacks:
- International trade is not a zero-sum game;
- The exports could be increased through devaluation and keeping wages at low
levels (Porter, 1990).
•
Current account balance (criticized by Krygman, 1994):
-
•
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Prior posting large trade deficits, many countries have run trade surplus in order
to regain investors’ confidence (case of Mexico in the early 90s);
Production cost (cost of labour, with the well known ULC);
Global Competitiveness Index
Merchandise export and ULC growth
35%
50%
30%
40%
25%
30%
20%
20%
15%
10%
10%
0%
5%
0%
-10%
2000
2001
2002
2003
2004
Merchandise exports (%GDP ) lhs.
•
•
2005
2006
2007
2008
2009
ULC growth over previous period - rhs.
The ULC has decreased constantly since 2000, pointing towards an improvement of
domestic competitiveness.
On the other hand, the merchandise exports share in GDP remained stable during this
period at approximately 26% of GDP.
Choosing the VAR length
VAR estimates
VAR Lag Order Selection Criteria
Endogenous variables: EXP_GOODS_DEV REER_MISALIGN
Exogenous variables: C
Sample: 2000Q1 2009Q4
Included observations: 37
Lag
LogL
0
1
2
3
LR
FPE
118.8192 NA
146.2434 50.40138
155.1665 15.43*
159.1085 6.39238
AIC
SC
HQ
0.00 -6.31455 -6.22747 -6.28385
0.00 -7.58073
-7.3195 -7.48863
0.00 -7.846*
-7.411*
-7.69*
0.00
-7.8437 -7.23416 -7.62881
* indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion
The VAR stability
Roots of Characteristic Polynomial
Endogenous variables: EXP_GOODS_DEV REER_MISALIGN
Exogenous variables: C
Lag specification: 1 1
Date: 07/02/10 Time: 23:13
Root
0.673650 - 0.098793i
0.673650 + 0.098793i
Modulus
0.680856
0.680856
No root lies outside the unit circle.
VAR satisfies the stability condition.
The variables included are merchandise exports deviations and the real exchange rate misalignments.
The VAR length is 1 lag and the stability condition is fulfilled.
Impulse-response function and forecast variance decompositions - important ways
of assessing the relative importance of a shock in real exchange rate in accounting
for variation in trade competitiveness at various time horizons.
The impulse-response function of
exports merchandise deviations to
shock in real exchange rate
misalignments
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of EXP_GOODS_DEV to REER_MISALIGN
.05
.04
.03
.02
.01
.00
-.01
-.02
2
4
6
8
10
12
14
16
18
20
The impulse-response function shows that a positive shock in real exchange rate
misalignments, perceived as an appreciation process induces an increase of merchandise
exports deviations (translated into a fall of merchandise exports).
A maximum 1.8% impact of real exchange rate misalignments on merchandise exports
deviations is recorded on short-run (up to 4 quarters). Also, the impact is significant on shortrun. On medium and long-run the impact is decaying away, but the result is not statistically
significant.
Variance of merchandise export deviations due to RER
misalignments (%)
Variance Decomposition
Percent EXP_GOODS_DEV variance due to REER_MISALIGN
100
80
60
40
20
0
2
4
6
8
10
12
14
16
18
20
The real exchange rate misalignments appear to be responsible for 40% of
merchandise exports’ variance on long-run.
Even if considered with the short-run significance of the impulse-response,
the real exchange rate misalignments determine around 20% of the variance
of the merchandise exports deviations.
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I have encountered some special issues related to ULC.
Even if the results obtained running the VAR approach were inconclusive, if a
Johansen cointegration were run, a cointegration relation between the variables
included would results.
The ULC deviations have no unit
root
The Johansen cointegration test
between ULC deviations and real
exchange rate misalignments
The impulse-response function of the cointegrated VAR
Response to Cholesky One S.D. Innovations
Response of ULC_MIS to REER_MISALIGN
.04
.03
.02
.01
.00
-.01
-.02
1
2
3
4
5
6
7
8
9
10
The shock on real exchange rate misalignments and the ULC deviations’ response
confirm the results obtained earlier: a positive shock in real exchange rate
misalignments (an appreciation) determines a fall of ULC deviations (perceived as a
decrease of ULC and improvement of competitiveness).
Concluding remarks
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The signs of the determinants are in line with economic theory
and the coefficients are statistically significant.
In the covered period, the real exchange rate was well misaligned
compared to its long-run value.
The real exchange rate was misaligned by 4% during 2009.
Competitiveness is positively related to a depreciation currency.
The exports should not be encouraged through currency
depreciation. Increasing productivity and quality, becoming more
competitive through prices and costs is a more appropriate
strategy. It could also serve as the fundament for a sustained
economic development.
The real exchange rate should stay as close as possible to its
equilibrium level in order to avoid the economic distortions.
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