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The sources of Real Exchange Fluctuations in Developing Countries : an Econometric Investigation

By Imed Drine and Christophe Rault

Abstract

In this paper we address the two following questions: (1) what are the major sources of real exchange rate fluctuations in developing countries? (2) do economic policy makers have room to face possible real exchange rate fluctuations? To answer these questions, we estimate a structural VAR model for 3 developing countries (Morocco, The Philippines, Uruguay) and carry out the conventional exercises of impulse response functions and of variance decomposition of forecast error. Our investigatation suggest that domestic shocks dominate real exchange rate fluctuations and that the contribution of external shocks is relatively low. Besides, the low contribution of the nominal shock put into question monetary policies which seek to promote competitiveness through a currency devaluation. Moreover, our estimations confirm that the real exchange rate also depends on shocks on foreign interest rate and/or on the terms of exchange which can make it move from its equilibrium level. The budgetary tool therefore remains efficient to stabilize the real exchange rate with respect to possible external shocks

Topics: Serbia, Post-socialist Transformation, Transition, Blocked Transition, Entrepreneur, New Entrepreneurs, Spontaneous Privatization
Year: 2004
OAI identifier: oai:deepblue.lib.umich.edu:2027.42/40039

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