Theory and Empirics of Real Exchange Rates in Developing Countries

This paper develops a general equilibrium model of the real exchange rate for a small open economy, taking into account often overlooked characteristics of developing economies, such as the presence of significant aid flows, terms of trade variability, distorting trade taxes, and concentration of exports on natural resources. The equilibrium RER results from the intertemporal, optimal decisions of households on consumption, production, and trade of different goods, conditional upon government policies and external conditions. The model derives a concept of the sustainable current account based on the yield of the discounted present value of net exports which provides a rigorous framework for the computation of the equilibrium RER and misalignment indexes. We test the model in a sample of 73 developing countries in the 1970-2004 period using the PMG estimator proposed by Pesaran et al. (1999) and find it to be an encompassing representation of the data. We also develop a methodology to compute the misalignment of the real exchange rate, which requires to compute the permanent components of the determinants of the RER and to identify the equilibrium path for each country.Real exchange rates, general equilibrium, misalignment, panel data

Capital flows and long-term equilibrium real exchange rates in Chile

In the context of an empirical model, the authors examine the impact of capital flows, among other fundamentals, on long-term exchange rates in Chile. The real exchange rate and its fundamentals were found to be cointegrated during 1960-92. This cointegration allows a reinterpretation of uni-equatorial estimates of the equilibrium real exchange rate (ERER) to be consistent with long-run forward-looking behavioral models. It also permits the estimation of an error-correction model capable of disentangling short-run from long-run shocks in observed movements of the ERER. The nonstationary nature of the fundamentals allows one to decompose innovations into permanent and transitory components - to get an empirical measure of the sustainability of the fundamental with which the ERER is determined. In general, the estimate of the cointegration of the ERER and its corresponding dynamic error-correction specification corroborates the theoretical model and produces fairly consistent results. The derived ERER index and the corresponding real exchange rate misalignment (for given sustainable values of the fundamentals) successfully reproduce the salient episodes in Chile's recent macroeconomic history. Capital flows are disaggregated into four components: 1) short-term capital flows; 2) long-term capital flows; 3) portfolio investment; and 4) foreign direct investment. As expected from economic theory, short-term capital flows and portfolio investment were found to have no effect on the ERER (although they can affect the real exchange rate in the short run). But long-term capital inflows and foreign direct investment have a significant appreciating effect on the ERER. To the extent that the recent inflow of capital to Chile is dominated by long-term capital flows that are judged to be sustainable, an important part of the ensuing appreciation of the real exchange rate is consistent with equilibrium behavior - reducing the need for counterbalancing exchange rate on macroeconomic policies.Economic Stabilization,Environmental Economics&Policies,Achieving Shared Growth,Economic Theory&Research,Macroeconomic Management

Aid, Real Exchange Rate Misalignment and Economic Performance in Sub-Saharan Africa

Generating sustained growth in Sub-Saharan Africa is one of the most pressing challenges in global development. As the region needs foreign assistance to jump start its development, foreign aid becomes crucial. However, aid booms can also lead to exchange rate overvaluation curtailing exports and growth. This paper provides new evidence on the impact of aid and overvaluation on growth and exports using a sample of 83 countries from 1970 to 2004. We find that aid fosters growth (with decreasing returns) but induces overvaluation. Overvaluation reduces growth but the effect is ameliorated by financial development. Finally, we find new evidence on the negative impact of overvaluation on export diversification and sophistication.Africa, Sub Sahara, real exchange rate, misalignment, exports, growth

From the Treaty of Rome to Cotonou: Continuity and change in the governance of EU-Africa relations

This chapter provides a long-term and comprehensive assessment of the institutional frameworks governing EU-Africa relations, from the 1950s Rome Treaty to the 2000s Cotonou Agreement. It takes stock of how the set of institutions, rules, narratives and practices that govern those relations have evolved historically, examining their origins, nature and effects. The chapter considers how key actors dynamically interacted within these institutional frameworks and their main contexts to shape concrete policy outcomes. It explores what have been the principal arrangements governing those delineated relations: the Rome Treaty, the Yaoundé conventions, the Lomé conventions and the Cotonou Agreement. The EU launched a public consultation on the future of the ACP-EU cooperation post 2020 and an evaluation of the first 15 years of Cotonou. The EU’s self-assessment pointed to progress on aspects such as poverty reduction, trade flows, peace and security, while recognising weaknesses in relation to political dialogue, human rights, migration and involvement of non-state actors.info:eu-repo/semantics/submittedVersio