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A Comparative Analysis of Exchange Rate Fluctuations and Economic Activity: The Cases of Egypt and Turkey

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  • Magda Kandil

    ()
    (International Monetary Fund)

  • Nazire Nergiz Dincer

    ()
    (State Planning Organization)

Abstract

The paper examines 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. The theoretical model decomposes movements in the exchange rate into anticipated and unanticipated components. Unanticipated currency fluctuations determine aggregate demand through exports, imports, and the demand for domestic currency, and aggregate supply through the cost of imported intermediate goods and producers’ forecasts of relative competitiveness. 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. Further, unanticipated exchange rate fluctuations 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 decreases real output and consumption growth and increases export growth, on average over time.

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Bibliographic Info

Paper provided by Economic Research Forum in its series Working Papers with number 0722.

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Length: 40 pages
Date of creation: Dec 2007
Date of revision: Dec 2007
Publication status: Published by The Economic Research Forum (ERF)
Handle: RePEc:erg:wpaper:0722

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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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