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.

/pdf/equilibrium-real-exchange-rate-misalignment-and-export-22y6zrqbzb.pdf

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

https://researcharchive.lincoln.ac.nz/bitstream/handle/10182/1106/Su_MCM.pdf;sequence=3

An empirical analysis of China's equilibrium exchange rate: A co-integration approach

Global macroeconomic imbalances are among the key issues facing policymakers, especially in the US and China which are the two major affected / contributing parties. While there has been a great deal of discussion and disagreement on this important issue, what all sides have in common is the general failure to adequately pay attention to the role of the exchange rate in allocating resources internally between tradables and nontradables. These sectoral changes can have both real and macroeconomic consequences. This paper offers a simple analytical exposition of some of the issues relating to Chinas and East Asian development and their impact on global imbalances using a two-sector tradable and nontradables model.

The real exchange rate, sectoral allocation and development in China and East Asia: A simple exposition

This thesis analyses exchange rate dynamics in a managed floating exchange rate regime, under two alternative specifications of private expectations: adaptive expectations and long-run perfect foresight. The whole analysis follows the asset market approach to exchange rate determination. A built-in government reaction function is incorporated in a neoclassical general equilibrium portfolio balance model. The intervention rule employed, reflects both the "reference rate proposal" of Ethier and Bloomfield (1975) and the 3rd guideline of the IMF for the management of floating exchange rates. The government intervenes in the foreign exchange market in order to minimize the discrepancies of the spot exchange rate from the government reference rate (estimate of the long-run exchange rate), at every moment in time. It is shown that the degree of success at which government intervention moderates short-run exchange rate variability depends on the degree of precision with which the government forms its estimate of the long-run exchange rate path. Any prediction errors lead to dynamic instability. A generalisation of the intervention rule leads to a stable long-run equilibrium even if the government uses the wrong estimate of the long-run exchange rate path (competitive exchange rate policies). However, the sustenance of these equilibria creates crises in the balance of payments and the system ultimately returns to the free floating long-run position. Persuance of competitive exchange rate policies increases the degree of reserve use and could lead to intervention at cross purposes, increasing the need for international liquidity. A re-interpretation of our intervention rule to reflect speculative behaviour leads to similar results as government intervention. The liquidation of speculative profits, however, creates additional short-run exchange rate variability, enhancing the non-profit making nature of government intervention.

Expectations and exchange rate dynamics under managed floating : an asset market approach

With the floating exchange rate regime that Kenya is currently under, it was suspected at the beginning of this study, that the exchange rate channel of monetary policy transmission mechanism is effective in Kenya and that exchange rates overshoot in Kenya. If exchange rates overshoot and this channel is effective in Kenya, then both would impact negatively on aggregate incomes. This paper therefore set out to establish how the effects of exchange rate overshooting are transmitted into the macroeconomic variables in Kenya. Empirical evidence to prove that exchange rates overshoot in Kenya was sort before its effects in the economy can be traced. Two models were estimated in the paper. The first one aims at establishing for the evidence of exchange rate overshooting in Kenya under the floating exchange rate regime using quarterly data from 1993:1 to 2001:4. The second model traces the transmission of exchange rate .overshooting to the other macroeconomic variables in the economy using monthly data from January 1993 to December 2001. To establish for the evidence of exchange rate overshooting, due to the non-existence of cointegration in the overshooting variables therefore making the estimation of an error correction model impractical, a short-run equation was estimated with the result that exchange rates overshoot in the short-run. The results of the short run overshooting equation show evidence for exchange rate overshooting in Kenya in the short run. The lags of money supply in the preferred model are positive up to the second quarter. This means that exchange rates overshoot on impact and reaches the overshooting peak at the end of the second quarter then starts to trace back its long run path. The short run path and the long run path converge after eight months,

Exchange rate overshooting and its transmission through the monetary policy in Kenya

The analysis of exchange rate decision and its dynamic adjustment are the core of exchange rate theory. In this paper, based on the exchange rate overshooting model, we highlight the mechanism of financial economy and real economy and their two-wheeled driven manner operation, which is associated with the aggregate supply and aggregate demand of macroeconomic. With the help of nonlinear macro-finance theory, we introduce tradable financial assets into the money supply and demand analysis, and try to make a new analytical framework. From the angle of financial economy and real economy, we analyze the dynamic changes in the nominal exchange rate U.S. dollar, and use it as a basis for empirical research, examining the U.S. dollar exchange rate and economic misalignment.

Exchange rate dynamics of the dollar

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Exchange rate dynamics of the dollar