equilibrium exchange rate in a developing economy - bleda hasa

7/31/2019 Equilibrium Exchange Rate in a Developing Economy - Bleda Hasa

1/42

-1-

Equilibrium ExchangEratE in a DEvEloping

Economy

04(3

5)2012

bed hd*


2/42


3/42

-3-

contEntS

Abstract 5

1. Introduction 7

2. Theoretical background and applications 8

3. Data and Methodology 16

4. Tests and Empirical Results 22

5. Conclusions 31

Bibliography 32

Appendix l 36

Appendix ll. Data Description & Sources 38

Appendix lll. Box on BS effect 40


4/42

-4-


5/42

-5-

abStract1

This research attempts modelling equilibrium real exchange ratefor Albanian currency. For high-growth economies, factors likeBalassa-Samuelson effect and terms of trade, referring to internaland external equilibrium in an economy, play a substantial role inguiding equilibrium RER. This research relies on a BEER approach tomodel a long-run relationship between RER, a Balassa-Samuelsonterm, terms of trade and net foreign assets, as well as real interestrate differential, sticking to few variables considering that the sampleof 13 years is critically small for the method used. BehaviouralEquilibrium Exchange Rate (BEER) approach is a statistical modelthat offers a feasible alternative to equilibrium exchange rate,

though at the disadvantage of lacking the macroeconomic balancenormative. Findings suggest that terms of trade and relative priceshave the greatest impact to relatively affect real exchange rate,while real interest rate differential and net foreign assets have onlya marginal effect. Also, it is real exchange rate and relative priceratio that adjust to restore equilibrium, once the system is subjectto a shock.

Key words: Equilibrium exchange rate, BEER, Balassa-Samuelson,cointegration1 a s d e es f s wk ws we s ess f f mS Es d Fe D ues, uK.


6/42

-6-


7/42

-7-

1. introDuction

tee s e w ed z e f e. S dd e s fe ess k ss e ess ee ewse.

az ee e s e ee s w, s ese ees f e s we s e ef f e. te de fds f ee edee s ee ed csses (1928) e ps pwe p (ee ppp). We e f ppps ee kw ess, ws w d dw ee fewk f ee e de, s es ss es sd e e we eessed see.

Se ee e ees e d e de f e e ee e ws se. m e fee ees e sed f f e es esed e ess fs e eks

f ee e. Se e, ee sd fewkse ee se e ee e, s sed e esee. iee f d see sessf e de f s fd s edeed ese des d f. ye, zd e f e f fe e, eds eefs f se e ee e ewse.

te s sd s ee ee fs ffeee e s e d e eee d e sss. te f be E Ee re ezes e ef ee ee f dee ees, e s eeffe d es f de, we s e fee esf d eees w s e s ses. te wkeeds s fws. Se ii des w e ee fewkd s f s . Se iii es d ded sses. E ess d ee eszed Se iv. te f se des.


8/42

-8-

2. thEorEtical bacKgrounD anDapplicationS

2.1 litEraturE rEviEW

tee s de ss e w f e e, eee ppp ess, es ds fee ded es. ad, e () ee e ewee wes sd e e f e e ees e e. a e e f ppp e s e lw f oe pe (loop)2.

me-ee ppp (ess ese) ezes deee e f s ss, ees e dffees, ees,d e fs w f e ee eee e.

i s ss f ppp d f es e e de. is fs e ee ede de d sese e f s fe. D sees 700es e f ded ewee hd d Edsw f des f w f e e s se(F, K, & rff, 1995). os s fs d e e fe f ppp (rff, 1996). oe fs sde ed we ppp s dsssed.

ts ss d f e e wede es. tffs d -ff es s we e esf e se ds seed w dffee es. Ee d

res (1995) zed (dseed) cpi f 23 es ed uS d cd, d e ee e f e se dewee w es ws f f dse ewee e. tede effe d ee dd dddse w 2,500-23,000 es ewee w es e se sde f e de.

aee, fe f ppp s ee ed

sk es. Ds (1976) es de swed w

2 ase ppp d loop e e e se, ppp e ed e ee es, we loop s e f e e.


9/42

-9-

e d f sk es e de f eee dee d e e dees f ppp. De sk es e ds ke e ppp d e . Sdes e e s be-Wds ed w fee es fsed e des. Feke (1978) fds f ppp ef d. b ee wef wee es e wd see es e,sk es e f ess eee f ppp ess. Dese e sess, sdes d f e se eesejeed ppp (Feke, 1981) (K, 1978). meese & rff(1983) swed -f-se fess f e des

fed w ppp d d, ef d wk. Ee 15ee es f de f e ee e ed ed sess f e e-ee ppp(Fke & rse, 1995).

i s fs e ee e, rff (1996) swed ee e eds, ppp ee dd d se ses dd, k e wf e d s. he sesed

es ee sf dfs e ppp e, e bss-Ses (ee b-S) effe, eds e d sed e. We f e ew e ee, e eee es w e ded sde effe s b-Seffe.

balaSSa SamuElSon hypothESiS.

te e f e fs dee e -e eee e d eeed es e ee ee.te s f e dees s e bss-Seseffe, ee ded ee bss(1964) d Ses (1964)3. ude e sss, eb-S effe es e ee fse w f es e-ded ds se es w ee e ew dee ees, ded we ezss e ses ds, w se e ee e e.

3 aed iii, f e s


10/42

-10-

te ee s ee eed w d e f es z ee e. te s eese fewk,e fde de (FEER) des jde eesse sse ee d ses ied Ee be (Ws, 1983), (We-lews, 1992).isd d Fe (1998) de de es e - e s-ese (S-i)s, we Se (1994) ses e efeee d sk dss ewee e S-i s f dffee es.

Ee e des eed e ee se ppp e

s d k. te se f fde s e sese d ees ee d sffe d e d ee se w f deeees e e. a ss deee e ezes e e f e fss e e e ee e (BEER). i s ede f es ffe e d d s s s sdeed sk-fw sse

de (ck & mDd, 1999), (Wdw, 1999). We kes e uip d b-S effe, bEEr ks ede ss f e e (s FEER).i s sd i sed BEER de sse f E/lek e ee e f a.

2.2 moDElling ExchangE ratE (bEEr)

te bEEr de fws e sdd f ck dmDd (1999). te s s e uip k s e (4.1), we e es djsed w sk f4:

qet+k

= - (rt- r

t*) +

t(2.1)

wee rEr s fe e e e f e e.

E (4.1) e ewe s rEr:

qt= qe

t+k+ (r

t- r

t*) -

t(2.2)

4 bEEr s ee ed re Effee Ee re.


11/42

-11-

s ,

t

= + t

+ t

(2.3)

wee ts e-ze d e d

ts e

e f sk e. i ee e se s sef f e f des fe de.

(2.4)

te e qet+k e sdeed s - sse

e f rEr ( ) ss ees. i efe eessed s f f see es ee eedw sk-fw de.

qt= f(tot

t,tnt

t,nfa

t) (2.5)

F, rEr e s eessed s f:

qt= f(rt- rt*

), tott,tntt,nfat,t) (2.6)

wee s es f de d eses e eeess fe e, s ee e f ded -ded ds s ese f bss-Ses effe. pded e eee d e es e i(1), e es wd eef e e fe. ms , deees s eeed i(1) de fse e w ewd w e, d s s e ee e.

2.3 applicationS

a e des dffee es kes e jee f e esee d sefs.ojees, ese, sde fd e ek w e esee, e

e esee es e f ee e ee e.

_


12/42

-12-

bEEr des ee e e f e w ddes e se effes. Edw (1994) des- e, s es f de, ese f eess,e fws, e ee sed d e we. Wdw (1999) dfes bEEr w ee e, f eeed e , e s sdeeffes s w ee ke FDi e e. te eseef e e bS-effe s e ezed e bEErde, s s ed dffee es edes (mDd, 2000).tee s ee f efde des ded es ke FEER, natrEx, iEb,

s ese des e ee sed f d.

applicationS in DEvEloping countriES

mde e ee e ppp fewk s ees s e ed de sefs eed se es. bess e. . (2003) d Ee e. . (2005)se es ee ses ee e bss-Sesfewk f ee e.

Fs, e fe f ppp ee e de se esfs e b-S effe, ke e esee f s s ss, de (he & Wsz, 1997)d de f dffee (bess, Fz, & x,2003)) ed e eds eed b-S effe fde eded sdd e. te e ewee d e ee e seed f e

ed s eeed s edee e ee e ede se des e e rEr ees (mss,1986), (Ee c., 1993)5.

i dd, b-S fewk e eeded e e e fded fs ee e f -des. a de weeee e dee e dfed dd w- , sesed bw (1984), ded

sde fs ke ee s w e s effes.5 Eese ee d e edee ess f e fe f ppp e dese s we. add fs e eed e s d e eds.


13/42

-13-

i ess ss e e e es f dedf -de ds, eses dsse e e d s s f -de ds se es . lee e. . (2008) fds s edee e sdf s ees cEE ees.

Fee, ee dsses ewee e b-S effe db-bwe effe (b & bwe, 1965). We e effes s, e e f eed (dseed) es ffes rErf ess eed djses w ke es. Ee wde ees, see f b-S effe, e cpi

se f sees e des sf ed effes cpi-sed e ee e. te se f eed es cpi ske es f 10% 46 % cEE d e 90es (Eee. . (2005)). n ez d de w se ddfs de s (ese) b-S effe.

te se f e f e fde es s e wk f bEEr (see te i.1, 37). i des w e

d e e s e sf e f def es f ke e s ees. leee. . (2008) se de ess de s d e e e e des es efe deez k e. Sfe f e de/-deee e effe s ee deed s deeees, ess e ss e (te 2. 1).


14/42

-14-

te 2.1 S f fds f - effes s es

d e f _dff fd Ecmef-

fe

1/2 fe( -

es)

S'75-98

ae (2003) -0.42 -0.31 --

czemeek & K-ek (2008)

-2.17 0.0256 0.1692 -0.1033 3.89

pdrwdwz(2003)

-1.32 -2.221 -1.028 --

Es Fz (2000) 0.443* 1.422 0.778* --

Es hss (2005) 1.71 7.578 --

l

as-g

(2002) --

l ve (2002) -1.91 1.22 0.005 -0.461 1.08

pedEEc &b

De bekd Sk(2001)

(-0.4) - (-0.7)-0.6(.

F e

(2006)

Ecmef-

fe

ed1/2 fe

( -es)

cze -3.03 -0.84959 -0.08703 -0.44 1.1

h -2.25 -0.30 -0.64 0.8

pd -0.79 0.61 -0.48 1.0

Sk -1.18 -0.28 2.1

Se -0.21 -0.66 0.8

te ee f wde e f es sed edes, ee f e ess f e esee es, fe dffee es eeees w ees e kee de, , ee e ke, kes swe s ds ke. te e f es df ppp,d ss e sfe, s ded ese keefes d d ffe ee e edffee. teefe, e wde e f eses f b-S effe de s djse effe f rEr e e de se -sefs de s sesf d ss e sdes. ce, des w e dfd e sf ess, ss de ee f

ss-se f. te e s e s f ese es. as ezed e e f e d esf ess, edee e de fd


15/42

-15-

e sees d (b d mDd (1999), mDd(1995)). te de f e sees sdes s e we sef es.


16/42

-16-

3. Data anD mEthoDology

3.1 Data conStruction

Sees f s sd e ee ed f w s es e ee e see f d6. F eee e, e e ese s ee sed, ed def ee e eessed s fe ee f e e (E/lek), e f dffeeewee e d E e.

tde / -de (tnt) s e dffeee f ede / -de e ee E e s e b-S effe7. tes f de s e f e ede e de eses. D sed e bk f a. ne fe sses (nfa) f e k sses se f gDp e sed s f f f e e. reees e dffee (r-r*) s esed e 1 e es f a d e ed f 1-e E, defed esee cpi. rsk e. te f de s sef gDp ee f E e s eeed e e ske effe e ee e. We se d k 1995, es e e s f 1998 d eed fs e f 2011 (see aed ii. D Des)8.

6 m ses e www.kf. d www.s...7

te dsde f s ese s des dss f effe dedsde fs.8 Ses: bk f a wese, ise f Sss f a, Es. Sesees e e sed f sef se ese wk d e e.


17/42

-17-

Graph 1. Inspection of main variables

-.2

-.1

.0

.1

.2

.3

.4

1998 2000 2002 2004 2006 2008 2010

-5.2

-5.1

-5.0

-4.9

-4.8

-4.7

1998 2000 2002 2004 2006 2008 2010

Real exchange rate (log of) foreigncurrency/ unit of home currency

Relative price index: T/NT (home)-PPI/HCPI (euro land)

Export Price index over Import Priceindex ratio (at home)

Public debt (home)/public debt(euro area)

NFA of banking system home

Real Interest rate differential(home - foreign)

.00

.04

.08

.12

.16

.20

1998 2000 2002 2004 2006 2008 2010

.18

.20

.22

.24

.26

.28

.30

.32

.34

1998 2000 2002 2004 2006 2008 2010

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1998 2000 2002 2004 2006 2008 2010

.65

.70

.75

.80

.85

.90

1998 2000 2002 2004 2006 2008 2010

Graph 2. Price indices

85

90

95

100

105

110

115

120

98 99 00 01 02 03 04 05 06 07 08 09 10

HICP in Euro area

PPI in Euro area

70

80

90

100

110

120

98 99 00 01 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 10

Tradables price index - AlbaniaNontradables price index-Albania


18/42

-18-

3.2 mEthoDology

3.2.1 Data propErtiESEe ss es es f ess s

sse w ee eds.t se e deees f e esses eee e sees es d s ese f sd es f e f es. te s sef d ef ef e f e e d f esee s se f e-ees, w f ss esee s

e e f s.

i es/fe fw es e s s wesk es e fe -e ee. ye, s s fd e es e s e sed -s e. as ee, f -s f see ks se ed d 1970-1990, f ed ded es,

s s f e se ed s eeded 100es. as Jses (2006) , s e s e ss e f e e. F ss f ew,s ds e ee ed d e efef e ss. besdes ee ees sejdes, f es e efed deee s.

Def. a ss ess s defed s (wek) sess f ssfes ee ees, () s e, ()s fe e d () s e sse1. Ss,

() E[yt] = s f t,() v [yt] = s f t,() c [y

t,y

t+n] = s f t,

1 (Harris & Sollis, 2003).


19/42

-19-

te es sss eess e fsdffeee f e sees e esed s fws:

yt=ay

t-1+ xd +

1y

t-1+...+

qy

t-q+e

t

wee, x eeses s s d ed, d =-1, we d ee ess e: H0: = 0 dh: < 0. te ed es f e (y

t-q)

e dded

f se e f e esds ese e e e wese. r e es w se ed es s d f ar(1) ess.

te es es f s e e s Sdes-ds es e ee wked Dke &Fe (1979) d e eed mK (1991) (1996),ee e es e aeed Dke Fe (aDF)9.

3.2.2 cointEgration & JohanSEn approach

te ee wee -s es ee ed s ess ws ed e

ge (1981) w sed e e de -e es. Ee d ge (1987) j deeed

9 Sdd ess sed Eews 6.0.

csde se d-ee ess (d..), eyt eeed fs de -eesse (ar) ess:

yt= p y

t-1+ ~N(0,2)

e e e fytdeeds e es eds e

yt -1

s dse e ses t d es f ds w 0 e d se 2, .e. de d deede dsed (ee..d). te ey

t

w e s f s (p) < 1; k s (p)= 1, y

ts s2.

2 We s (p) > 1,yt s s d ese .


20/42

-20-

ss e f es f e d esees f e sses w e. te esed e ess e esed e es ewee i(1)es s e es w s es eeess, s e ee f e w -s es d lS. os, sze d we f- ess es e f sess f eess. te fd f ceed-var s e gereese tee10.

besdes Ee d ge ed, Jse (1988) (1991)

ded sed ee f eeesee, wds wde ed de - ees se s e. te Jse ve E cemes (ee vEcm) eese ds Ee dge we:

Zi,t=

t-j* Z

i,t-1+* Z

i,t-1+d

i,t+

i,t

wee,Zi,t s e e f e N edes es e sse, s f s e effes (N x N) d eess,

i,t-js e f effes f e N es ees

e eed, w s d f seeds f djses(s) d - effes (s), s e f s effes f dees es e var de ee dffee f ze, d

i,ts e e f ..d es es

w e ze d fe e.

Jse es w ses f e e var (ee cvar), e es f ee (cv) d dee f e k (cr). Jsede se f lked r (lr) es ss, wse sds deeds e dees es e var de,w ses dee f cr d deeses, ke eee Jse . Sed, e deede ml es f, sed f e lS, deee ee se eded k eess.

10 See (1987; Ee & ge, 1987) f s f f ge reesetee.

j=1

4


21/42

-21-

a f Jse a, e -s f ees, ees :

Determining the unrestricted VAR, ensuring that i,te we

se. Testing for reduced rank of d ded s

f dees es. tes f e ses Zi s de s lr e es. i ess e ess ee e s ds cv s e ess:

LRTR

(r|k)= -T ln (1-i)

weeis e es eee f e . as

es e ded mK-h-mes(1999)11.

Testing for uniqueness of CV and for weak exogeneity.

a Jse ed w e es

f s ees s e. D d sed ffe es ess d ed sed eses. Weee s e swe s w ses e eeded fe s ess d sffe we vEcm s, sees f d e efeed ss dss eweedffee ess e sees des (Jses, 2006). Wee se s s s f f e e fses , s f e feess f e se.

Jse (2002) s deeed s se e, w e sf f dee s sees (50-70 ses).rese d a (1992 ) sfed f f s sees w dfes s es wd s f. Eews 6.0 ee ke ses esf mK-h-mes (1999).

11 c es f mhm sed Eews dffe f se eed Jse &Jses (1990).

i=r+1

k


22/42

-22-

4. tEStS anD Empirical rESultS

4.1 Data propErtiES

i sed aeed Dke Fe tes (aDF) ek f s se e 1998- 2010. a e es wee sesdjsed. a see w Swz if ce (Sic)d 10 s ws se.

u ess sw e es ded s sd e

-s12. F es e ess f ws ejeed ees, fs dffeee. te eseef s ed dd e e ess f e aDF es.

a es e e-ee fs dffeee d w s, d f 4. We we dffeeses e e dffee ess, se sws essee sees (g 1. . 17).

4.2 Empirical rESultS4.2.1 thE var moDEl anD tEStS For rEDucED ranK oF

o d e e d esed var de f 5 s ws esed sde dd ess e f 3 4 f s f e es.Swz-ce d h-q es ses e f 1we e ess ses f 4 5.

resd e d es f esed-varw 1 fed f e fs , we fed de - f sk e (lambda) esds. tes w es es e e e fe (ess sw). varss sw ss feees e sese se-eed esds, esd skewess, ee s, e s kss d esde eseds13. Sze d

we f ese ess e ffeed se sze. W e 12 ms ds es ess sw de se s. te e e ees.13 (hed & Jses, 2000).


23/42

-23-

e, e esed var wd s f e f e e esss e se swed. he s se deees f feed. i kesse ess d e ess ess ee. F s ses s sesed se fe deees f feed. i se e eed.

te ee ee f e BEER ee de s ee s es e (ed w f uip ds see)- es ewee RER d e fde (-s) es ed BEER, efeed s e.Determination of rank of matrix and of number of deterministic

es Jse ed s de ses. cees ess ses 1 e e deede fdees es.

We e ess ses de 4, ess f ees sesed eds e es, ss.Jses (2006) sess se 2 s e e sefded ee e e eds e d, ess cvs

e ssed e ze e (ses se 1), w s e se. u ess swed sees e s.i se eed w ee e e e( ed), ee e s e ds. cee k des e e ee e ef ee es sesed e de (Jses,2006). a e ee de wd ses w ees, e f e uip w sk e, d e e fe ppp eed w b-S e d e fdes.

4.2.2 EStimation anD iDEntiFication

i sk e e e ss uip s w de e ees w s e ed d eed s se. ts s e sed e -effe f -0.548 ee e rEr f 1 ee e e ees e dffee. a e - e effes

e sf s jded Sdes -ds, -effes ssf e s d (te 4. 1). Ds esssw esd e, e, d -e ejeed, we fed es f esd eeseds.


24/42

-24-

Table 4.1. Eigenvector decomposition of (unrestricted) long-run matrix

rEr rr_DiFF nFa/gDp tnt tot lambDa conStant

l reeffes.

1 -0.5484 0.3148 1.2398 -0.5257 -0.528715 5.6488

[-4.02391]* [ 1.33567] [ 19.1758]* [-9.66391]* [-4.98103]*

adjseeffes

-0.367282 0.11623 -0.005659 -0.25886 0.276248 -0.021861

[-2.47995]* [ 1.03814] [-0.10526] [-2.74134]* [ 1.00944] [-0.15600]

* -ss se kes

(i) ress ee-e

lked r (lr) es sss ejeed ss f e fdds e nfa sfe f e es e.

Tabela 4.2. Restrictions on long-run coefficients: teses

(1,k)=0e=0 _dff =0 f/d d

c-se(1) [ 12.658* ] [ 10.272*] [1.6489] [ 17.417*] [19.015*] [14.547*]

(*) es sfe 5 %

(i) l-r wek eee

Wek eee ess s esed w lr es ede(Jse S. , 1995). te ess ee s ef ees s feed e ss f e ees e sse, we s ses feed e.

Table 4.3. Testing for weak exogeneity


25/42

-25-

: teses(k,1)=0

d(e) 2(1) d(_dff)

2(1) d(f)

2(1) d()

2(1) d()

2(1) d(d)

2(1)

(c-se(1) 5.172471 0.979017 0.014521 6.400073 0.20597 0.025266

c ve(95 %)

{ 3.841 } { 3.841 } { 3.841 } { 3.841 } { 3.841 } { 3.841 }

idd lr ess w ds f wek eee

f 4 es e esed vEc de (te 4. 3). Jess fed e -sfe, e d ee

de/-de e s djs ewe sse s esed sk14.

Table 4.4 Joint test restriction on exogeneity and structural restrictions 2(4)es - effes 2(5) es - effes df f

J2(df) es [ 1.5036 ] [ 3.6742 ]

2(df) { 9.488} { 11.070 }

te - e effes f fdes ee sed esed cvar, we f sk es . a ese -de e de e, s dee wd e ese (e) f rEr, eeee e. te sze f 1.16 ee e f 1 ee ese -de es s ee e

e ese f d 0.4-0.7 f De bek d Sk (2001), we e e f e dd e sees fds Ese Ee ees (te 2. 1, .14). as, es f des se sed. a 10 % ese e es wd e 4.8 % e ese e.

14 a e s es esed-vEc sw eee f d, f dd.


26/42

-26-

Table 4.5. Eigen vector decomposition of long-run matrix

l r e effes (e s); -sss kesrEr rr_Df nFa / gDp tnt tot d s

1.00 -0.451 0.319 1.160 -0.470 -0.497 5.572

[-3.62325] [ 1.48281] [ 19.6583] [-9.45884] [-5.13270]

adjse seed effes (-effes); -sss kesrEr rr_Df nFa / gDp tnt tot d-0.46691 - - -0.31273 - -[-3.04410] na na [-3.02576] na na

uip sess e des e s eeed deeewe e des ees e eeeds e fe ees e.hee, eed e e t0, we ees edffee s se, s e w e ee f dee fe de. S, f e sess se es e ded f e ew e e ees e. ye e sze f e effe s es, 0.45 ee e rEr f ee 1 eeese e ees e dffee.

re ee e es se ee effef 0.5 ee de, w e w s. ae sk e sd eeed e ssed w edeeed e. pse s f ee de s see , w ss es sk e sedee. oe sse e f e se s s

ee de e d f e des w, w s ese eed sk e. ts s e (see) sk e dees, e (see)des w es . S, rErees de we sk e. as s, k 1998, des de ws 38 % we a d jsed s e f 1997. i e 2000, we e d szed d sk e sd e deed,

de a eed d 61 %. tse fes d sk e ws e e 2000 1998, 1998 se dd eed w, e


27/42

-27-

e se w d e fe 2000 s sk d deed.

te ew s e ee de s ese eed ske sef, d s s rEr. t kes e edeese e se eed ee de.

4.3 Economic intErprEtation

a s s e w e fB-S effe e

s. te ee e (tnt) s es eB-S effe de ee d eses s we s dedsde esses. te e e eed e e f eedes -de e de. aee, sew f ees e 10-14 % f gDp ww-sded e e w (ee eed) d .

use f ee d ese wd e de sse dffeee e b-S effes f ded sde effe f sed, e d ee e e ds sd d f ee s eed se,d d s se e d ee15.

a s se, e fds ses w edes es djs e, rer d tnt. tee e wses e ee ee. te -effe frers

e ( 0.46), f fe ess w es, e fs djse es. a ee e fs djse seed s e ed e s ss e, e d e e. We s ssed e de/-de ee e (tnt) djss e ee sse w e e ef e e des eess d s. re -e djss ss e e de es

e e e.

15 a e de ee d (gDp/ee ee E e)dd e sf ess ee we e es ded (ess sw).


28/42

-28-

te djse effe e fed w s ee se, w ses e sed sse. te eee (tnt) s djse ee ( 0.3).

ass e ss ed f s e s ded fdes -de e de, e deded rErdse s eed k de djse f -dee de e e Er. F s ded d we wd ee -de es a e efee, s e es dw s we se edse . hee, e bss-Ses dse e sed ee e ees se. S

se wd d de e sss. Fs, e sse ees e ee e e s ee e we e des. b es, e eee d ee e (tnt), djs e w (ss)e ses.

4.3.1 conStructing an Equilibrium ExchangE ratE

i s sse s e e e eee (bEEr) s e e. i eed fd ee e f es, ee e. us

s e e e ee f e. cek e eedes e (tnt) s sse w s e.

tee s de ss es BEER, hpfeed e s f e edes e tnt d ee es e ssed sse w e

e. ts s w bEEr s ss e e ee e e. i s de se es. te bEEr ese s ew e d 1999-2001, e-e. te dee ke 2002 s es, we s ee se, e,e 2004- 2007q1 fwed e-e 2007-2008. te dee k e 2009 rEr se e ese (g 3).


29/42

-29-

F e ses i sed hp feed e ee e(hp_rEr) s de-deed e f e eee (bEEr), s--s e ee e (rEr). We esze f e de-s eed fe ss, ee esed sees ed e ed.

4.3.2 problEmS With bEEr moDEl

te e-e es (Ecm) ses e e w efes e e f e ess d e ed f, we ee s ee e e s ee e se w es. i 1998, e ws e ess fee f e s- f 1997, we 2010e e w ws de s s ee16.

add, bEEr fes e e e se edee we deed f s ses ee e s eese e. ts s se eed e feessdeee f e se dsssed Jses (2006). W f-fe f 4 es, w s ee fd sdes. e (seed) e e-e ess w kee few es 13-es se. b, Jse

ezes cv we e es s se w see ()s e z e, s Ecm w e fed rEr

16 bk f a, (a re 2010).

Graph 3. BEER, HP filter of RER as of 2011, as of 2007 and actual RER

98 99 00 01 02 03 04 05 06 07 08 09 1098 99 00 01 02 03 04 05 06 07 08 09 100.006

0.006

0.007

0.007

0.008

0.008

0.009

BEER HP_RER2011 RER

0.006

0.006

0.007

0.007

0.008

0.008

0.009

BEER HP_RER2007 RER


30/42

-30-

see es e e (g 4). ts ds esw e-ees ( e) f e ee e see sdeed e ee.

te se f e s f-fe e f ss f. b

djse-effes e e effe f e see, w s e e -de e de17. F 1% dee e (ee 1 % ese des -de es), e e ee e eses (ees) 1.16 %. if sk e e e ee kes e, e s ses sed e -de e de s ed djse e. tsse fs we w e ss f e fee -dees, w s s w e se, d ee e e, s e ke.

17 te f -de ds d sees cpi ske (a) s eed 60 %.

Graph 4. Cointegration graph for Restricted-CVAR

-.100

-.075

-.050

-.025

.000

.025

.050

.075

.100

98 99 00 01 02 03 04 05 06 07 08 09 10

Cointegrating relation 1


31/42

-31-

5. concluSionS

ts sd ees e ee e a.mde f e ee e s ee es fewk f ps pwe p. be de(bEEr) s eed s ese s es ee wd ses d s wde sed e sees de fee e f dee es. te s dee e ee e dee s bss-Seseffe, ded-sde effes de sed e es efee w e fe d ed sed

eses. as e ee e d f b-S effe sw-s, we ed e sse w Jse ed e. S ses f d ffe e we d szef ess, ee sdd bEEr de w uip k d eee e es, de/-de e, es fde d e fe sses, ws eed. ies e fes ws ded s wd ed ee ek d sed eses de s se f 52 es.

oe - es ws fd. re ee e dee de/-de e (tnt), b-S e,wee e edes es djs esee 46 eed 33 ee ee e ese e. Esf rEr wds de/-de d es f des esee 1.16 d 0.47 ee esee, e es dee rEr. tee s e swe w e b-Seffe s s e e es ded-sde effe f e fs.

adjse seed f rEr e s e fs ee ee f-fe f 4 es fd ded es.oe sse e es f se f ee e, sed f ee d, e b-S effe de sed e s se. b ese ees e b-S effe d e djse seed f ef ee f ess. ts s e f e ese f s e, wee e fs e fe ess, ke dee, ed e d e

effe f dseed es. uess e esee f ese fss sef ezed e e d e se sed, e e e f e e ed ssess sd e eeed ef.


32/42

-32-

bibliography

Balassa, B. (1964), The Purchasing Power Parity Doctrine: Areappraisal. Journal of Political Economy, Vol.72, No.6 , 584-596.

Bank of Albania. (2011), Annual Report 2010, Retrieved fromwww.bankofalbania.org: http://www.bankofalbania.org/web/Annual_Report_2010_6172_2.php, pp 39, Table 1.

Baumol, W. J., & Bowen, W. G. (1965), On the Performing Arts: TheAnatomy of Their Economic Problems. American Economic Review,

Vol. 55, No. 1/2 , 495-502.Bayoumi, T., & MacDonald, R. (1999), Deviations of ExchangeRates from Purchasing Power Parity: A Story Featuring Two MonetaryUnions, IMF Staff Papers, Vol. 46, No. 1.

Bhagwati, J. N. (1984), Why Are Services Cheaper in PoorCountries?, Economic Journal, Vol. 94, No.374 , 279-286.

Burgess, R., Fabrizio, S., & Xiao, Y. (2003), Competitiveness inthe Baltics in the Run-Up to EU Accession, IMF Country ReportNo.03/114, pp. 25-36.

Cassell, G. (1928), Post-War Monetary Stabilization, New York:Columbia University Press.

Clark, P. B., & MacDonald, R. (1999), Exchange Rates and EconomicFundamentals: A Methodological Comparison of BEERs and FEERs,In R. MacDonald, & J. L. Stein, Equilibrium Exchange Rates (pp. 285-322).

London: Kluwer Academic Publishers.

De Broeck, M., & Slk, T. (2001), Interpreting real exchange ratemovements in transition countries, IMF Working Paper, no. 56/01.Dickey, D. A., & Fuller, W. A. (1979), Distribution of the Estimators forAutoregressive Time Series With a Unit Root, Journal of the AmericanStatistical Association, Vol. 74, No. 366 , 427 - 431.

Dornbusch, R. (1976), Expectations and Exchange Rate Dynamics,Journal of Political Economy, Vol. 84, No.6 , 1161-1176.


33/42

-33-

gert, B., Halpern, L., & MacDonald, R. (2005), Equilibrium ExchangeRates in Transition Economies: Taking Stock of the Issues, Universityof Michigan: William Davidson Institute Working Paper Number 793.

Elbadawi, I. A. (1994), Estimating Long-Run Equilibrium RealExchange Rates. In J. Williamson, Estimating Equilibrium ExchangeRates (pp. 93-132). Institute For International Economics.

Engle, C. (1993), Real Exchange Rates and Relative Prices: AnEmpirical Investigation, Journal of Monetary Economics, Vol.32,No.1 , 35-50.

Engle, C., & Rogers, J. H. (1995), How Wide Is the Border, NBERWorking Paper No.4829.

Engle, R. F., & Granger, C. W. (1987), Co-integration and errorcorrection: Representation, estimation and testing, Econometrica,Vol. 55, No.2 , 251-276.

Frankel, J. A., & Rose, A. K. (1995), A Panel Project on PurchasingPower Parity: Mean Reversion Within and Between Countries, NBER

Working Paper No. 5006.Frenkel, J. A. (1978), Purchasing Power Parity: Doctrinal Perspectiveand Evidence from the 1920s, Journal of International Economics,Vol.8, No.2 , 169-191.

Frenkel, J. A. (1981, The Collapse of Purchasing Power ParitiesDuring the 1970s, European Economic Review, Vol. 16, No.1,145-165.

Froot, K. A., Kim, M., & Rogoff, K. (1995), The Law of One priceover 700 Years, NBER Working Paper, No.5132.

Granger, C. W. (1981), Some Properties of Time Series Dataand Their Use in Econometric Model Specification, Journal ofEconometrics, 121-130.

Halpern, L., & Wyplosz, C. (1997), Equilibrium Exchange Rates inTransition Economies, IMF Staff Papers, Vol. 44, No.4.

Harris, R., & Sollis, R. (2003), Applied Time Series Modelling andForecasting, West Sussex, England: 2003 John Wiley & Sons Ltd.


34/42

-34-

Hendry, D. F., & Juselius, K. (2000), Explaining CointegrationAnalysis, Part II. Discussion Papers. Department of Economics:University of Copenhagen.

Isard, P., & Faruqee, H. (1998), Exchange Rate Assessment:Extensions of Macroeconomic Balance Approach, IMF OccasionalPaper No.167.

Johansen, S. (2002), A Small Sample Correction For the Testof Cointegrating Rank in the Vector Autoregressive Models,Econometrica, Vol. 70, No. 5 , 1929-1961.

Johansen, S. (1991), Estimation and Hypothesis Testing ofCointegration Vectors in Gaussian Vector Autoregressive Models,Econometrica, Vol. 59, No. 6 , 1551-1580.

Johansen, S. (1995), Likelihood-Based Inference in CointegratedVector Autoregressive Models, Oxford, UK: Oxford University Press.

Johansen, S. (1988), Statistical analysis of cointegration vectors,Journal of Economic Dynamics and Control, Vol 12, Issue 2-3, 231-254.

Juselius, K. (2006), The Cointegrated VAR Model: Methodology andApplications, Oxford: Oxford University Press.

Krugman, P. (1978), Purchasing Power Parity and Exchange Rates:Another Look at the Evidence, Journal of International Economics,Vol. 8, No.3 , 397-407.

Lee, J., Milesi-Ferretti, G. M., Ostry, J., Prati, A., & Ricci, L. A.(2008), Exchange Rate Assessments: CGER Methodologies, IMFOccassional Papers, No. 261.

MacDonald, R. (2000), Concepts to Calculate Equilibrium ExchangeRate: An Overview, Retrieved from Deutsche Bundesbank: http://www.bundesbank.de/download/volkswirtschaft/dkp/2000/200003dkp.pdf

MacDonald, R. (1995), Long-Run Exchange Rate Modeling - A Surveyof the Recent Evidence, IMF Staff Papers, Vol. 42, No.3, , pp. 437-489.

MacKinnon, J. G. (1991), Critical Values for Cointegration Tests, In R.F. Engle, & C. W. Granger, Long-Run Economic Relationships: Readingsin Cointegration (pp. 266-276). New York: Oxford University Press.


35/42

-35-

MacKinnon, J. G. (1996), Numerical distribution functions for unitroot and cointegration tests, Journal of Applied Econometrics, Vol.11, No. 6 , 601-618.

MacKinnon, J. G., Haug, A. A., & Michelis, L. (1999), Numericaldistribution functions of likelihood ratio tests for cointegration, Journalof Applied Econometrics, Vol. 14, Issue 5 , 563-577.

Meese, R. A., & Rogoff, K. S. (1983), Empirical Exchange RateModels of the Seventies: Do They Fit Out of Sample?, Journal ofInternational Economics, Vol. 14, Issues 1-2 , 3-24.

Mussa, M. (1986), Nominal Exchange Rate Regimes and theBehavior of Real Exchange Rates: Evidence and Implications,Carnegie-Rochester Conference Series on Public Policy. 25 (pp. 117-214). North-Holland.

Reinsel, G. C., & Ahn, S. K. (1992 ), Vector Autoregressive Models withUnit Roots and Reduced Rank Structure: Estimation, Likelihood Ratio Test,and Forecasting, Journal of Time Series Analysis, Vol. 13, 353-375.

Roggoff, K. (1996), The Purchasing Power Parity Puzzle, Journal

of Economic Literature, Vol. 34, No. 2 , 647-668.

Samuelson, P. A. (1964), Theoretical Problems on Trade Problems,The Review of Economics and Statistics, Vol. 46, No. 2, , 145-154.

Stein, J. L. (1994), The Natural Real Exchange Rate of the US dollar andDeterminants of Capital Flows. In J. Williamson, Estimating EquilibriumExchange Rates, Washington: Institute for International Economics.

Stock, J. H. (1987), Asymptotic Properties of Least Squares Estimatorsof Cointegrating Vectors, Econometrica, Vol. 55, No.5 , 1035-56.

Wadhwani, S. B. (1999), Currency Puzzles, Retrieved fromBank of England: http://www.bankofengland.co.uk/publications/speeches/1999/speech53.pdf

Williamson, J. (1983), The Exchange Rate System, Washington:Institute for International Economics.

Wren-Lewis, S. (1992), On the Analytical Foundations of theFundamental Equilibrium Exchange Rate, In C. P. Heargraves,Macroeconomic Modeling of the Long-Run (pp. 75-94). Alderhost,UK: Edward Elga Publishing.


36/42

-36-

appEnDixi.

Table1.1.

VariablesusedinExchang

eRatemodels

StuDy

StuDy

pro

D

gov

opEn

nFa

rirD

tot

inv

FD

pc(S)

rp

FDi

ae(2003)

-

-/+

2

as-ge.(2002)

-

+

2

aed

le-r

(1999)

-

-

+

-

-

5

bee.(1

999)

-

-

-

3

be(200

2)

-

-

-

-

4

bs(2002)

-

+

+

3

bsdtes(2003)

-

-

+

3

besse.

(2003)

-

+

3

ced

Jze(2001)

-

-

-

3

cde(199

9)

-

2

csjk(200

3)

-

-

-

-

-

-

+

6

Ds(2001

)

-

-

-/+

3

Debek

dSk(2001)

-

+

2

Dsk(2003)

-

-

2

edle-r

(2003)

-

1

edlzs(2003)

-

+

-

-/+

-

5

Fzz(200

0)

-

-

2

Fse(2002

)

-

-

-/+

+

4

FdK

ek(1999,

2001)

-

+

-

-

-

4

hed

Wsz(1997)

-

-

2


37/42

-37-

hse

.(2005)

-

-

-

3

imF(1998)

-

+

-

+

4

Kzks(2000

)

-

+

2

KdKe(2002)

-

-

+

-

4

Kjkd

Zeeee

(1998)

-

1

lzsdte

(2002)

-

+

-

3

mDddWjk(2002)

-

-/+

-

-

4

m(2001)

-

-

-

+

4

r(2003)

-

-

3

rdeedre(2002)

-

-

2

rwdwz(2003)

-

-

-

3

rszek(20

03)

-

-

2

ve(2002)

-

+

+

3

nef

31

10

4

9

9

7

2

1

2

2

2

nef

0

2

7

3

3

2

1

3

0

0

0

tefsdes

31

12

11

11

10

9

3

3

2

2

2

ne:(-)

esefeeeef

eseeee.

proD=

d(

fkeeecpi/ppi,gDp/

,gDp/ee);g

ov=

ees(%

gD

p);opEn

=

s

fe

sds(%

fgDp);rirD=

e

ees

dffee(kefe

eesew

deese);tot

=

esfde(e

e

/e);inv=ese

(%gDp);FD=

fede(%fgDp);pc

=

es

(%f

gDp);rp

=

eed(dse

ed)esf

;FDi=

fedeese(%fgD

p);S=

ss(%fgFp).

Se:b

sed

e(2003),meekdKek(

2007)desdwdes.


38/42

-38-

appEnDix ii.Data DEScription & SourcES

lrer f re Ee re: f E-lek eee (fe e e f des e) ed e f w e des, f a d E e.

a es ed sws e. D e ://www.kf./we/Ssk_hje_230_1.. cpi www.s... F e sees e isef Sss sd e ed.

tnt1 (al_tnt eu_tnt): de -de e fa ee e e.

a deese _ wd ee fse ese -de e de f des e. hee ee ss eeed. i se sdes e e s ese sed, s -de de , w ee f se es.

- al_TNT (de de e ) a. r fde e de -de e de. a ese fese w e des s w rese Dee ds e f s e se (ed 1998 q1 2011 q2).

tde d -de e des f a e e, ee des sed f e ses

e e ed fe 1998. Se ses e fed e eess w de dsed d.

- eu_TNT (de de e ) E e. rf ppi hcpi f e E e. b des e e Ecb wese. ped ss.://e.es.e.e.e//e//sss/se_dse

al_nfa: e fe sses f e k sse a. nefe sses f e k sse s f f f ee (esed s f gDp). ae


39/42

-39-

ss e bk f a wese:://www.kf./we/Ssk_hje_230_1.?e=ee_e_se&e=ee&cs=16&ed_d=5

Lambda1 (sk e). r f de f a d de f e e.

_de: p de s se f gDp a. r f de (des d ee) s se f gDp. ae k f a wese e ss se 2000.te sees f de s eeded k 1998 s

d d eed s e e we f des de f s ed.

eu_gdebt: p de s se f gDp E e pde s se f gDp f E e e ess e 2000 :://e.es.e.e.e//e//sss/se_dse

a d ed f s wese e ee sed e d f e es 1998 d 1999 s eeds. te sees s ses djsed.

al_tot1: tes f tde te f e e de e de ( se e). te w des eee sed w bk f a f e se.

te se f d sed s sd s sed e

s e f e ses w e bk fa.


40/42

-40-

appEnDix iii.box on bS EFFEct

Given RER between home and abroad. Real Exchange rate andRelative price of traded goods are:

(2.0)

(2.1)

where subscript T stands for tradable goods. By subtracting (2.0)

from (2.1), we can write RER as the sum of two countries relativeprice ( ) and the difference of relative prices across economyand the tradable sector observed in each country.

(2.2)

Given that the final price is a weighted average of the prices intwo sectors:

(2.3)

ss f d (2.2) we e:

(2.4)1

ude e sss2, , e ee e f -deds ed de ds (e d d), efeed

s e ee e, s:(2.5)

wee,Ai s e e f d eseeses, d s se f e e se (i=N,T).F s sse se ses e e se e dd. E (2.5) ss e ee e f -deds (.e. e ee e) ees w ee1 We , e (2.4) s dfed w e .2 ie d ss ses, e.


41/42

-41-

fse d s e de se .

te effe s fe ed, e e e ses -de se. ts es es fse dw ewee de ds -de ds

e ee d, , se rEree.


42/42

cip K bK t

bed hdE es f fes ew me c s- //hd bed- t:bk f a, 2012

-42 f; 15.3 23 .

b.iSbn: 978-99956-42-52-6.

You may find this paper in the following address:

www.bankofalbania.org

If you want to receive a hard copy of this paper, write to us at:Bank of Albania

Sheshi Avni Rustemi, Nr. 24, Tiran, ShqipriTel.: + 355 4 2419301/2/3; + 355 4 2419409/10/11

Fax: + 355 4 2419408

or send an e-mail to:

[email protected]

Printed in 500 copies

equilibrium exchange rate in a developing economy - bleda hasa

Documents