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The paper finds that simple econometric specifications yield surprising rich and complex dynamics -- relative prices respond to the nominal exchange rate and pass-through effects, import and export volumes respond to relative price changes, and the trade balance responds to changes in import and export values.
The paper finds that simple econometric specifications yield surprising rich and complex dynamics -- relative prices respond to the nominal exchange rate and pass-through effects, import and export volumes respond to relative price changes, and the trade balance responds to changes in import and export values.
With the loss of Soviet control in Central and Eastern Europe, as well as the move toward economic liberalization in many developing countries, a huge increase in the number of convertible currencies in the world has occurred. A key aspect of the management of these currencies involves their relationships with the world economy, which is determined
There is an ongoing debate in the literature on whether global trade flows have become disconnected from the large real effective exchange rate movements in the wake of the global financial crisis. The question has important policy implications for the role of exchange rates in supporting growth and restoring external balance. In this paper, we use Turkey---a large and open emerging market economy that has experienced sizable swings of the real effective exchange rate---as a case study to test competing hypotheses. Our results lend support to the finding in existing cross-country studies that the real effective exchange rate remains an important determinant of trade flows. But, its effect is not symmetric in secular periods of appreciation and depreciation and is, oftentimes, dwarfed by the impact on trade flows of the income growth differential between trade partners.
The rapid increase in international trade and financial integration over the past decade and the growing importance of emerging markets in world trade and GDP have inspired the IMF to place stronger emphasis on multilateral surveillance, macro-financial linkages, and the implications of globalization. The IMF's Consultative Group on Exchange Rate Issues (CGER)--formed in the mid-1990s to provide exchange rate assessments for a number of advanced economies from a multilateral perspective--has therefore broadened its mandate to cover both key advanced economies and major emerging market economies. This Occasional Paper summarizes the methodologies that underpin the expanded analysis.
The extensive use of the US dollar when firms set prices for international trade (dubbed dominant currency pricing) and in their funding (dominant currency financing) has come to the forefront of policy debate, raising questions about how exchange rates work and the benefits of exchange rate flexibility. This Staff Discussion Note documents these features of international trade and finance and explores their implications for how exchange rates can help external rebalancing and buffer macroeconomic shocks.
A reduction in the U.S. current account deficit vis-à-vis emerging Asia involves a shift in demand from U.S. to emerging Asia tradable goods and a change in international relative prices. This paper quantifies the required adjustment in the terms of trade and real exchange rates in a three-country open economy model of the U.S., China, and other emerging Asia. We compare scenarios where both Chinese and other emerging Asian export prices change by the same proportion to the case where export prices remain constant in one country and increase in the other. Our results are robust to different assumptions about elasticities of substitution and to introducing a high degree of vertical fragmentation in production in the model.
A number of emerging markets have experienced substantial real exchange rate appreciation in recent years, generating concerns about competitiveness and prompting policymakers to respond with a combination of mitigating policies. This paper shows that fiscal policy can play a role in alleviating these pressures. Using a sample of 28 emerging market economies over 1983-2011, we estimate a dynamic model of the real exchange rate and find that a permanent fiscal adjustment may reduce appreciation pressures over the long term. Furthermore, the composition of public spending matters, with reductions in current spending playing a key role. To illustrate the importance of these findings, the paper focuses on the case of Brazil. Our results suggest that maintaining fiscal discipline while increasing public investment in Brazil is likely to ease real appreciation pressures, highlighting the importance of tackling long-standing budget rigidities.
In spite of the attention paid exchange rates in recent economic debates on developing countries, relatively few studies have systematically analyzed in detail the various ramifications of exchange rate policy in these countries. In this new volume from the National Bureau of Economic Research, leading economists use rigorous models to tackle various exchange rate issues, while also illuminating policy implications that emerge from their analyses. The volume, divided into four main sections, addresses: the role of exchange rates in stabilization programs and the adjustment process; the importance of exchange rate policy during liberalization reform in developing countries; exchange rate problems relevant and unique to developing countries, illustrated by case studies; and the problems defining, measuring, and identifying determinants of real exchange rates. Authors of individual papers examine the relation between commercial policies and exchange rates, the role of exchange rate policy in stabilization programs, the effectiveness of devaluations as a policy tool, and the interaction between exchange rate terms of trade an capital flow. This research will not only prove crucial to our understanding of the role of exchange rates in developing countries, but will clearly set the standard for future work in the field.
This book is a synthesis of the author's ideas and research concerning the monetary consequences of trade flows, and the relevance of conventional balance of payments adjustment theory. These ideas are considered mainly in the context of developing countries, many of which suffer from deep structural difficulties and severe foreign exchange shortages. Mainstream economic theory regards the balance of payments to be self-adjusting, meaning that the impact of the balance of payments on the growth and development process is neither considered nor analysed. In contrast, the author emphasises the importance of integrating monetary considerations into trade theory and argues that the balance of payments consequences of trade policy need to be carefully addressed. This approach has a number of implications for important issues such as the sequencing of trade liberalisation; the role of the exchange rate in equilibrating the balance of payments; the case for protection; and the way in which the importance of export growth is articulated. Some of the ideas expressed have a long and distinguished ancestry, but they are not part of the mainstream orthodoxy and need airing in a world increasingly divided into rich and poor countries. The author also considers the case for a new international economic order which would better serve the needs of developing countries, particularly by stabilising primary product prices and controlling speculative capital flows. Trade and development economists, and policymakers concerned with economic growth and development, will appreciate the original and illuminating research in this book.