Nepal has a large and persistently growing trade deficit with India and an overall negative trade balance. Its economy is growing slowly relative to India's, while the exchange rate is pegged with India at a parity that is believed to be overvalued. In this article, possible misalignment of Nepal's real effective exchange rate is considered by estimating a behavioural equilibrium exchange rate, using a set of fundamentals for the period 1975–2008. The estimates from the Johansen (1988) cointegrated vector autoregression (VAR) model as well as a single-equation bounds-testing approach to cointegration suggest that Nepal's trade-weighted real exchange rate was overvalued in the last decade-and-a-half.
The problem is to evaluate the likelihood that a country will face a currency or balance of payments crisis over a given horizon. When is it rational for market participants to expect a depreciation of the currency? On the basis of considerable empirical studies we know that in both banking and currency crises, there is a multitude of weak and deteriorating economic fundamentals. Our theme is that there is an economic logic to medium and longer-term m ovements in exchange rates, within the context of a consistent dynamic stock-flow model. The equilibrium real exchange rate is a trajectory, not a point. We provide objective measures of the real fundamentals that determine the moving equilibrium real ex c hange rate, and explain the dynamic economic mechanism whereby the actual exchange rate converges to this moving equilibrium exchange rate, called the NATREX. The fundamentals are primarily social consumption/GDP, which is generally driven by fiscal polic y, and the productivity of the economy. Trends in social consumption/GDP, and in fiscal policy, reflected political regime changes in France, Germany and Italy.
PurposeThe purpose of this paper is to examine the impact of real exchange rate misalignment on economy and economic sectors, namely construction, manufacturing and mining and quarrying in Malaysia.Design/methodology/approachThe equilibrium real exchange rate and economic models are estimated using the autoregressive distributed lag approach.FindingsAn increase in productivity differential or reserve differential will lead to an appreciation of real exchange rate in the long run. An increase in positive (negative) real exchange rate misalignment will lead to an increase (decrease) in economy. An increase in long-run real exchange rate misalignment will lead to a decrease in economy. Real exchange rate misalignment or long-run real exchange rate misalignment can influence the manufacturing sector in Malaysia. More specifically, undervaluation will promote whereas overvaluation will hurt the manufacturing sector.Originality/valueReal exchange rate misalignment can be a policy to influence economy but may not be the best choice.
History is replete with examples where states have interfered with foreign exchange markets in order to influence exchange rates. The trade conflicts between the two world wars, for instance, were fought not only via the imposition of tariffs, but also via competitive devaluations. Since then, straightforward competitive devaluations have become a rare phenomenon; contemporary scenarios, in which exchange rate policies are criticized for their potentially protectionist impact, tend to be much more sophisticated. The exchange rate policy followed by China is certainly the outstanding, yet not exclusive, example. In recent years policymakers worldwide have criticized China for maintaining an undervalued real exchange rate as part of its strategy of export-led growth.
PurposeThe purpose of the paper is to examine the impact of exchange rate misalignment on economic growth in India using annual data from 1980 to 2014.Design/methodology/approachFirst, misalignment is measured, which is defined as the deviations of the actual real exchange rate (RER) from its equilibrium level. The equilibrium real exchange rate (ERER) is estimated using the auto-regressive distributed lag (ARDL) model by considering key macroeconomic fundamentals of the determinants of RER. Zivot and Andrews' unit root with structural break is used to test the stationarity property of data. The impact of exchange rate misalignment on economic growth has been examined using ARDL and variance decomposition techniques.FindingsOur results find an overvaluation of the exchange rate till 2000, and thereafter, an undervaluation of the exchange rate prevails in India. Further, the result indicates that an increase in exchange rate misalignment leads to a decrease in economic growth and vice versa. Moreover, a positive misalignment (overvaluation) hurts the economic growth and a negative misalignment (undervaluation) promotes the economic growth.Research limitations/implicationsFrom the policy perspective, the results highlight that India needs to maintain an appropriate exchange rate which can reduce the RER misalignment. It is better for the Reserve Bank of India (RBI)'s intervention to smoothen the fluctuations of the exchange rate to avoid the inefficiency in the allocation of resources. However, to minimize the RER misalignment, the intervention should be conducted only in the short run.Originality/valueThe study contributes to the existing literature by estimating the exchange rate misalignment for India and its impact on economic growth.
This paper investigates the impact of Naira real exchange rate misalignment on Nigeria's economic growth using quarterly data spanning the period 2000-2014. We derive estimates of Real Exchange Rate Misalignment (RERMIS) by computing deviations of the actual real exchange rate from a sustainable equilibrium path that is determined using the Behavioural Equilibrium Exchange Rate (BEER) approach of Edwards (1989). Our modelling approach accounts for the possible effects of endogeneity and structural breaks in the estimated relationships. In terms of the extent of RERMIS, results show that the naira was on the average overvalued by 0.17 per cent during the study period. The Gregory and Hansen procedure provides evidence of cointegration between output and its determinants with a structural break in 2003Q2. Furthermore, we found empirical support for a negative impact of RERMIS on economic growth. In view of these findings, the study recommends the continued use of market-based exchange rate arrangements as a way of ensuring that the naira real exchange rate follows its path of sustainable equilibrium. This would complement other government policies aimed at promoting economic growth in the country.
