The fallacy of composition and contractionary devaluations: output effects of real exchange rate shocks in semi-industrialised countries

Abstract Job creation is at the centre of economic development and remains a source of sustenance for social and human relations. The creation of a job-enabling economic environment is imperative in promoting social and economic cohesiveness in the macro and microeconomic environment. Any shocks to the economy, particularly those of exchange rate shocks and changes in economic growth, may negatively affect the labour market and job creation. This study made use of quarterly observations, from the first quarter of 1995 to the fourth quarter of 2015, to investigate the effect of the real exchange rate and economic growth on South Africa’s employment status. South Africa, a developing country, was selected as a case study due to its high unemployment rate that is still increasing. The Vector Autoregressive (VAR) model and multivariate co-integration techniques were used in assessing the impact and responsiveness of employment to the real exchange rate and real economic growth in South Africa. Findings of this study revealed that employment responds positively to economic growth and negatively to the real exchange rate in the long-run. The short-run displays a positive relationship between real economic growth and employment, while the relationship between employment and the real exchange rate is also negative. However, the effect of economic growth in creating jobs is not significant enough in stimulating job creation in South Africa, as indicated by results in variance decomposition. Movements in the exchange rate exerted a significant short and long-run negative effect on employment dynamics; implying that a depreciation of the rand against the U.S. dollar is associated with decrease in overall employment. Exchange rate stability is thus important for economic growth and job creation in South Africa. The study provided further recommendations on promoting job creation in South Africa and other developing countries.

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Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks

World Journal of Applied Economics ◽

10.22440/wjae.7.2.3 ◽

2021 ◽

Vol 7 (2) ◽

pp. 61-87

Author(s):

Asta Ndongo ◽

Ibrahima Thione Diop

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Real Exchange Rate ◽

Economic Activity ◽

West African ◽

The Other ◽

Panel Var ◽

Policy Shocks ◽

Exchange Rate Shocks ◽

The Impact

This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.

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Real Exchange Rate, Exports, and Imports Movements: A Trivariate Analysis

The Pakistan Development Review ◽

10.30541/v44i2pp.177-195 ◽

2005 ◽

Vol 44 (2) ◽

pp. 177-195 ◽

Cited By ~ 8

Author(s):

M. Ali Kemal ◽

Usman Qadir

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Trade Deficit ◽

Raw Material ◽

The Real ◽

Long Run ◽

Short Run ◽

The Exchange Rate ◽

Exchange Rate Shocks ◽

Trivariate Analysis

The exchange rate exerts a strong influence on a country’s trade. It is depicted from the high correlation between the real exchange rate and exports (0.90) and that between the real exchange rate and imports (0.88). In the present-day scenario of falling levels of tariff and a reduced number of non-tariff barriers, the exchange rate has assumed a crucial role in influencing the trade deficit. Imports have a very significant association with exports as shown by the correlation between exports and imports (0.97). The increase in exports in the absence of surplus stocks requires an increase in production, which in turn requires capital and raw material. We analysed the long-run relationship and the short-run dynamics among the three variables. It is concluded that there exists a long-run relationship between real exchange rate, exports, and imports; and real exchange rate is negatively associated with the exports and positively associated with the imports. In the short-run, imports and exports adjust towards their equilibrium when there is disequilibrium. But the adjustment in the imports is greater than the adjustment in the exports. Moreover, exports do not respond to the shock caused by the real exchange rate, but imports respond to the sudden shock in the real exchange rate. The study ends up with the note that the sudden movements in the real exchange rate do not affect exports. Therefore, Pakistan should not worry about exchange rate shocks.

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Manufacturing restructuring and the role of real exchange rate shocks

Journal of International Economics ◽

10.1016/j.jinteco.2011.08.008 ◽

2012 ◽

Vol 86 (1) ◽

pp. 101-117 ◽

Cited By ~ 37

Author(s):

Karolina Ekholm ◽

Andreas Moxnes ◽

Karen Helene Ulltveit-Moe

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Exchange Rate Shocks

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Quality response to real exchange rate shocks: A panel SVAR analysis on China's agricultural exports

Agricultural Economics ◽

10.1111/agec.12650 ◽

2021 ◽

Author(s):

Rui Mao ◽

Mengying Xing ◽

Xiaohua Yu

Keyword(s):

Exchange Rate ◽

Real Exchange Rate ◽

Agricultural Exports ◽

Exchange Rate Shocks ◽

Quality Response

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The Minimum Economic Dividend for Joining a Currency Union

German Economic Review ◽

10.1111/j.1468-0475.2011.00550.x ◽

2012 ◽

Vol 13 (2) ◽

pp. 127-141 ◽

Cited By ~ 2

Author(s):

Michele Ca’Zorzi ◽

Fabrizio Zampolli ◽

Roberto A. De Santis

Keyword(s):

Exchange Rate ◽

Standard Deviation ◽

Real Exchange Rate ◽

Currency Union ◽

Potential Growth ◽

Supply Shocks ◽

Country Differences ◽

Cross Country ◽

Exchange Rate Shocks ◽

Parameter Values

Abstract A two-country model is developed to show how the optimality of a currency union depends on whether it brings an economic dividend in terms of potential growth and the Balassa-Samuelson (BS) effect (the steady appreciation of the real exchange rate due to cross-country differences in intersectoral productivity gaps). The model shows that such dividend needs to be larger, the higher the BS effect, the smaller the size of the economy, the larger the cross-country difference in the standard deviation of the supply shocks, the smaller their correlation and the larger the standard deviation of real exchange rate shocks. We calibrate the model to quantify such dividend as a function of plausible ranges of the parameter values. The results suggest that both the BS effect and the size of real exchange rate shocks play a key role in evaluating the optimality of accessing the currency union.

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