How do Shocks to Domestic Factors Affect Real Exchange Rates of Asian Developing Countries

This paper examines real exchange rate responses to shocks in exchange rate determinants for fourteen Asian developing countries. The analysis is based on a panel structural vector error correction model, and the shocks are identified using sign and zero restrictions. We find that trade liberalization generates permanent depreciation, and higher government consumption causes persistent appreciation. Traded-sector productivity gains induce appreciation but their effects are not immediate and last only for a few years. Real exchange rate responses to unexpected monetary tightening are consistent with the long-run neutrality of money. The evidence suggests that trade liberalization and government consumption have a strong effect on real exchange rates, while the effects of traded-sector productivity shocks are much weaker.

• Publication year

  2016

• Venue

  Journal of Development Economics

• Publication date

  2016-03-01

• Fields of study

  Economics

• Identifiers
  DOI 10.1016/J.JDEVECO.2015.10.004
• External record

  Open on Semantic Scholar

• Source metadata

  Semantic Scholar

• Responses of the real exchange rate to unexpected monetary tightening are consistent with the long-run neutrality of money.

  Confidence 0.93

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• Traded-sector productivity gains appreciate the real exchange rate, but the effect is delayed and lasts only for a few years.

  Confidence 0.95

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• Higher government consumption is associated with a persistent appreciation of the real exchange rate.

  Confidence 0.97

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• Trade liberalization is associated with a permanent depreciation of the real exchange rate.

  Confidence 0.98

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review

• asian developing countries

  sample, country group

  The set of fourteen developing Asian economies analyzed in the panel sample.

  Aliases: fourteen Asian developing countries

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• government consumption

  economic variable, demand factor

  Public-sector spending by the government that enters as a domestic demand determinant.

  Aliases: higher government consumption

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• panel structural vector error correction model

  method, statistical model

  A panel time-series model used to estimate dynamic relationships among exchange-rate determinants and the real exchange rate.

  Aliases: panel SVECM, SVECM

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• real exchange rate

  economic variable, outcome

  The relative price of domestic goods to foreign goods used as the main outcome in the paper.

  Aliases: real exchange rates

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• sign and zero restrictions

  identification method, restriction

  Identification restrictions imposed on the structural shocks to distinguish their effects in the model.

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• traded-sector productivity

  economic variable, productivity factor

  Productivity in the sector producing tradable goods, treated as a determinant of exchange-rate movements.

  Aliases: traded sector productivity, traded-sector productivity gains

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• trade liberalization

  policy, shock

  Policy changes that reduce trade barriers and open the economy to international trade.

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review
• unexpected monetary tightening

  shock, policy shock

  An unanticipated increase in monetary restrictiveness used as a monetary shock.

  Aliases: monetary tightening

  박진우 (dztg5apj7m) extractionAK (4715169a40) reviewB (s683577b42) reviewKiller Whale (322360f1c1) review

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