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A comparative analysis of exchange rate fluctuations and economic activity: The cases of Egypt and Turkey

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Author Info

  • Magda Kandil
  • Nazire Nergiz Dincer

Abstract

Purpose – The paper aims to examine the effects of exchange rate fluctuations on real output, the price level, and the real value of components of aggregate demand in Egypt and Turkey. Design/methodology/approach – Building on a theoretical model that decomposes movements in the exchange rate into anticipated and unanticipated components, the empirical investigation traces the effects through demand and supply channels. Findings – In Turkey, anticipated exchange rate appreciation has significant adverse effects, contracting the growth of real output and the demand for investment and exports, while raising price inflation. Random fluctuations in Turkey have asymmetric effects that highlight the importance of unanticipated depreciation in shrinking output growth and the growth of private consumption and investment, despite an increase in export growth. In Egypt, anticipated exchange rate appreciation decreases export growth. Given asymmetry, the net effect of unanticipated exchange rate fluctuations, in Egypt, decreases real output and consumption growth and increases export growth, on average, over time. Research limitations/implications – In light of the country-specific evidence, future research should extend the investigation using panel estimation, incorporating various demand and supply shocks along with exchange rate fluctuations, to establish the relative importance of various shocks on macroeconomic performance across MENA countries. Practical implications – While adhering to a flexible exchange rate policy to boost competitiveness, managing fundamentals to reduce excessive volatility impinging on the economic system over time should top the policy agenda. Originality/value – Excessive volatility in the real effective exchange rate could be detrimental to real growth, over time, as the evidence for Turkey and Egypt illustrates.

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Bibliographic Info

Article provided by Emerald Group Publishing in its journal International Journal of Development Issues.

Volume (Year): 7 (2008)
Issue (Month): 2 (October)
Pages: 136-159

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Handle: RePEc:eme:ijdipp:v:7:y:2008:i:2:p:136-159

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Related research

Keywords: Economic development; Economic fluctuations; Egypt; Exchange rates; Turkey;

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References

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  1. Rogers, John H. & Wang, Ping, 1995. "Output, inflation, and stabilization in a small open economy: Evidence from Mexico," Journal of Development Economics, Elsevier, vol. 46(2), pages 271-293, April.
  2. Solimano, Andres, 1986. "Contractionary devaluation in the southern cone : The case of Chile," Journal of Development Economics, Elsevier, vol. 23(1), pages 135-151, September.
  3. Pierre-Richard Agénor, 1991. "Output, devaluation and the real exchange rate in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 127(1), pages 18-41, March.
  4. Barbone, Luca & Rivera-Batiz, Francisco, 1987. "Foreign capital and the contractionary impact of currency devaluation, with an application to Jamaica," Journal of Development Economics, Elsevier, vol. 26(1), pages 1-15, June.
  5. Sweder van Wijnbergen, 1986. "Exchange Rate Management and Stabilization Policies in Developing Countries," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 17-42 National Bureau of Economic Research, Inc.
  6. Kandil, Magda & Mirzaie, Aghdas, 2002. "Exchange rate fluctuations and disaggregated economic activity in the US: theory and evidence," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 1-31, February.
  7. Kandil, Magda & Mirzaie, Ida Aghdas, 2003. "The effects of dollar appreciation on sectoral labor market adjustments: Theory and evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(1), pages 89-117.
  8. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-54, November.
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Cited by:
  1. Sabri, Nidal Rachid & Peeters, Marga & Abulaben, Diama K., 2012. "The impact of exchange rate volatility on trade integration among North and South Mediterranean countries," MPRA Paper 38080, University Library of Munich, Germany.

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