Transcript Gestiunea activităţii unei firme de intermediere

The Long-Run Determinants
of the Real Exchange Rate in
Transition Economies
MSc: CĂLĂVIE ALINA MIHAELA
Supervizor: ALTĂR MOISĂ
CONTENT
Literature Review
Theoretical Background
Determinants of the Real Exchange
Rate in Transition Economies: A Model
Empirical Analysis for Romania
Conclusion
1. LITERATURE REVIEW
Fundamental
Models
Behavioural
Models
Williamson (1983) - FEER
Williamson (1994)
Clarck & MacDonald (1998) - BEER
Stain & Allen (1995) - NATREX
Feyzioglu (1997)
Elbadawi (1995)
Halpern & Wyplosz (1997, 2002)
Frait & Komarek (2001)
2. THEORETICAL BACKGROUND
Real Exchange Rate and External
Competitiveness
Real appreciation can be interpreted as a loss of
competitiveness only if the RER becomes overvalued
in relation to its equilibrium value.
The competitiveness must be interpreted with respect
to the main trading partners, different world regions
and different group of producers.
Real Exchange Rate, Double-Speed
Economy and Deindustrialization
Due to the weak institutional framework, the inefficient
domestic firms are not forced to leave the market
and they burden the cost of the efficient ones.
Keeping the trained employees in the old sector may
artificially delay the restructuring process.
Deindustrialization and real appreciation are
simultaneously determined by the productivity gains
in industrial production.
Real Exchange Rate as an Indicator of
Convergence
Real exchange rate development can be seen as a common
denominator since the external purchasing parity of transitional
countries’ currencies is determined primarily by their relative
productivities. The real appreciation also implies the convergence
of price levels of these countries to the EU countries.
R
Appreciation
(ERDI)
ERER (successful transformation)
ERDI>1
R=ERDI=1
ERER (unsuccessful transformation)
Initial real
undervaluation
PPP
ERDI<1
Time
What is the equilibrium real exchange rate?
PPP – Purchasing Power Parity
It assumes that the real exchange rate equilibrium remains
stable over a long period. It does not take into account for
structural changes.
ERER – Equilibrium Real Exchange Rate:
the rate consistent with the country’s macroeconomic
balance, including both internal and external balances.
Any change in fundamental determinants of internal or external
balance can affect the value of the ERER.
DETERMINATS OF THE RER IN A SMALL
OPEN TRANSITIONAL ECONOMY
Definition of the RER
The real exchange rate can be defined as the nominal exchange
rate (E ), times the ratio of foreign to domestic prices (P*/P).
RER  EP * / P
where the domestic price index is:
P  Pna  Pmb  Px(1ab)
and the foreign price index is:
P*  Pna**  Pxb**  Pm(1*a*b*)
THE MODEL
Hypotheses
-
the currency convertibility is already established
there are no quantitative restrictions on foreign trade
managed float exchange rate regime
the prices of tradables and nontradables are liberalized
strong monopolistic structure
subsidization of the nontradables sector
price rigidity and inflexible wages
Consumer’s optimization problem:



maxU i Cni , Cmi , M di

i
i
i
i
p

C

p

C

M

V

M
n
n
m
m
d
0

Profit maximization in the nontradables sector:
pn  (1  j )[wLn / Qn  sn ]
pn  pn ( j, w, sn , C )
Profit maximization in the tradables sectors:
pi  pi ( pi* , E)
 Li  Li ( w, pi , si )

Qi  Qi ( w, pi , si )
i  m, x
Given managed exchange rates:
CA  KA  F1  F0
Total product, in nominal terms, equals:
Y  ( pn  sn )  Qn  pm  Qm  ( px  sx )  Qx
The budget deficit can be written, in nominal terms, as:
D  pn  Gn  (1 / E)  pm*  Gm  sn  Qn  sx  Qx  (1 / E)  x  p*x Q x (1 / E)  f  pm*  I m
The overall change in the money supply is given by:
M s1  M s 0  D  ( F1  F0 )
The nominal exchange rate is market determined, so:
E  E[ F , D(G, s, taxes), w, i]
Consequently, the real exchange rate can be written as:
RER  RER [ pn ( j, w, sn , Cn ), pm ( pm* , E), px ( p*x , E), D(G, s, taxes), F , w, i]
A Basic Introduction to the Romanian
Economic Context
Price liberalization
The initial process was built up in three rounds: in November 1990,
in April 1991 and in July 1991
During 1994-1996 controls were reintroduced, especially on food
prices.
In early 1997 most prices were liberalized. The weight of
administrated prices in the CPI basket reduced at about 15
percent.
Soft budget constraints and the arrears
Soft budget constraints and weak corporate governance allowed a
faster wage growth, especially in 1995, 1996 and 1998.
This problem is acute in the case of major utilities. Despite the
losses and arrears, the wages in this sector remain some of the
highest in Romania.
Exchange rate regime liberalization
1992: the actual exchange rate regime was introduced. Its main
features are full retention regime and the convertibility of the Leu
Until the end of 1996 administrated controls persisted, which led to
the existence of three exchange rates in parallel.
January 1997: a managed float rate was introduced.
Mid-1999: Romania faced some difficulties with reimbursement of the
foreign debt. The NBR had to interfere in order to stop the
excessive depreciation of the Leu.
Foreign trade liberalization
The policies adopted aimed the geographical diversification and
restructuring of exported and imported commodities.
Trade liberalization is relatively high in Romania.
Empirical Analysis of the Real Exchange Rate
Determinants: The Case of Romania
ln rer  f (ln tnt, ln w, nfa, open)
-
- -
+
lnrer– –openness
The real exchange rate
open
the
wage
lnlnw
nfa
tnt––net
thereal
foreign
relative
assets
price of non-traded to traded goods
The
tradables
prices
were
approximated
by
prices,
The
exchange
rate
is
defined
asnon-food
the
The
openness
isasdefined
as between
the
sumtotal
of the
imports
andnominal
exports
It isreal
calculated
the
ratio
the
nominal
wage
in the
Net
foreign
assets
are
defined
as the
foreign
assets
minus
while
theinrate
nontradables
prices
were
computed
the weighted
(expressed
national
scaled
on
exchange
ROL/USD
deflated
with
thetoasconsumer
price
national
economy
andcurrency)
the consumer
price
index.
total
liabilities
to foreigners,
expressed
as
aGDP.
ratio
GDP.
average
of food
and services
prices.
index.
The
decrease
in
the
index
means
real
appreciation
Openness
is
used
to
measure
effects
of
regime
on the
In transition
economies
theasnominal
wage
is atrade
often
established
by
Net
foreign assets
appear
athe
measure
of
country’s
external
This
ratioLeu
isbargaining.
taken
intorate
account
in order
to quotation.
measure
the
Balassaequilibrium
exchange
and
may
be leads
interpreted
as
a measure
of
of
the
with
respect
tocertainly
the
direct
collective
increases
nominal
position.
An
increase
ofExogenous
nfa
tointheworker’s
appreciation
of
Samuelson
effect.
This
means
that
transition
countries
where
the
degree
ofcurrency;
foreign
trade
liberalization.
open
regimes
are
wage
determine
inflation
pressures
in the
economy.
the
national
the
maintenance
ofMore
the net
foreign
assets
productivity
faster
will to
have
a higher
inflation currency.
rate. CPI
associated
with
more
depreciated
currency.
stock
allows
to rises
the central
bank
support
the domestic
increase has a result the real appreciation of the domestic
currency.
The time series used
4.608
.8
4.607
.6
4.606
.4
4.605
.2
4.604
.0
4.603
-.2
4.602
4.601
-.4
1994 1995 1996 1997 1998 1999 2000 2001
1994 1995 1996 1997 1998 1999 2000 2001
LNRER
LNTNT
5.0
8
4.9
6
4.8
4
4.7
2
4.6
0
4.5
-2
1994 1995 1996 1997 1998 1999 2000 2001
1994 1995 1996 1997 1998 1999 2000 2001
LNW
NFA
3.6
3.2
2.8
2.4
2.0
1.6
1.2
0.8
1994 1995 1996 1997 1998 1999 2000 2001
OPEN
Unit root tests
In order to test the stationarity of time series I
applied Perron’s tests (1994)
Variables
Order of
Integration
Level of
Significance
lnrer
I(1) TC
1%
lntnt
I(1) TC
1%
lnw
I(1) TC
1%
nfa
I(1) T
1%
open
I(1) T
1%
Lag Length Tests
Lag
LogL
LR
FPE
AIC
SC
HQ
0
346.8935
NA
3.97E-10
-7.458281
-7.038848
-7.28922
1
947.1214
1092.55
9.68E-16
-20.38475
-19.26626
-19.93392
2
1008.546
104.9045
4.30E-16
-21.20328
-19.38573*
-20.47068*
3
1034.986
42.18598
4.24E-16
-21.23565
-18.71905
-20.22128
4
1066.187
46.27517*
3.81E-16*
-21.37499*
-18.15934
-20.07885
5
1086.55
27.91319
4.44E-16
-21.27078
-17.35608
-19.69288
6
1115.5
36.4315
4.38E-16
-21.35955
-16.74579
-19.49987
7
1127.766
14.05728
6.49E-16
-21.07338
-15.76057
-18.93194
8
1150.519
23.52048
7.91E-16
-21.0229
-15.01103
-18.59969
Cointegration test
Hypothesized
No. of CE(s)
Trace
Eigenvalue
Statistic
Critical value
5 Percent
1 Percent
None **
0.427573
104.9282
68.52
76.07
At most 1 *
0.252823
53.60422
47.21
54.46
At most 2
0.180289
26.79056
29.68
35.65
At most 3
0.069478
8.500592
15.41
20.04
At most 4
0.020182
1.875694
3.76
6.65
Hypothesized
No. of CE(s)
Max-Eigen
Eigenvalue
Statistic
Critical value
5 Percent
1 Percent
None **
0.427573
51.32398
33.46
38.77
At most 1
0.252823
26.81366
27.07
32.24
At most 2
0.180289
18.28997
20.97
25.52
At most 3
0.069478
6.624898
14.07
18.63
At most 4
0.020182
1.875694
3.76
6.65
Cointegrating relationship
Normalization with respect to the real exchange rate yields the
following cointegrating relationship:
ln rer  4.680653  0.014566  ln tnt  0.022180  ln w  0.001637  nfa  0.016266  open
(0.00362)
(0.00702)
(0.00067)
.015
.010
.005
.000
-.005
-.010
-.015
1994 1995 1996 1997 1998 1999 2000 2001
Cointegrating relation
(0.00269)
Impulse Response Function
Response to Cholesky One S.D. Innovations ± 2 S.E.
Response of LNRER to LNRER
Response of LNRER to LNTNT
.0005
.0005
.0004
.0004
.0003
.0003
.0002
.0002
.0001
.0001
.0000
.0000
-.0001
-.0001
-.0002
-.0002
-.0003
-.0003
2
4
6
8
10
12
14
2
4
Response of LNRER to LNW
6
8
10
12
14
Response of LNRER to NFA
.0005
.0005
.0004
.0004
.0003
.0003
.0002
.0002
.0001
.0001
.0000
.0000
-.0001
-.0001
-.0002
-.0002
-.0003
-.0003
2
4
6
8
10
12
14
2
4
6
Response of LNRER to OPEN
.0005
.0004
.0003
.0002
.0001
.0000
-.0001
-.0002
-.0003
2
4
6
8
10
12
14
8
10
12
14
Variance Decomposition
Variance Decomposition
Percent LNRER variance due to LNRER
Percent LNRER variance due to LNTNT
100
100
80
80
60
60
40
40
20
20
0
0
2
4
6
8
10
12
14
2
Percent LNRER variance due to LNW
4
6
8
10
12
14
Percent LNRER variance due to NFA
100
100
80
80
60
60
40
40
20
20
0
0
2
4
6
8
10
12
14
2
4
Percent LNRER variance due to OPEN
100
80
60
40
20
0
2
4
6
8
10
12
14
6
8
10
12
14
Weak Exogeneity Tests
Variables
χ2(1)
Probability
lnrer
0.8247
0,3697
lntnt
0,1666
0,6831
lnw
0,1733
0,6772
nfa
7.9714
0,0048*
open
3.1030
0,0755
Short-Run Dynamics
Vector error correction model, after imposing
restrictions on the net foreign assets’ coefficients:
 ln rer  0.0257  [ln rer (1)  0.014566  ln tnt(1)  0.022180  ln w(1)  0.001637  nfa(1)
 0.016266  open(1)  4.680563]  0.349784   ln rer (1)  0.448357   ln rer (2)
 0.24764   ln rer (3)  0.002   ln tnt(2)  0.001887 lnw(1)  0.002275 lnw(-2)
 0.001829 lnw(-3)  0.000369  open(2)  0.000364  dummy97  0.000134  dummy99
CONCLUSION
The managed float exchange rate regime seems to
be the most appropriate policy for Romania.
This paper argues in favour of policies that will help
increase the flexibility of wages and reduce the
monopoly power in order to contribute to
endogenous adjustment of the real exchange rate.