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Long-run and Short-run Determinants of the Real Exchange Rate in Zambia

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  • Mkenda, Beatrice Kalinda

    (Department of Economics, School of Economics and Commercial Law, Göteborg University)

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    Abstract

    The paper analyses the main determinants of the real exchange rate in Zambia. It first gives a brief review of the Zambian economy and a review on real exchange rate studies. Then an illustrative model is presented. The study employs cointegration analysis in estimating the long-run determinants of the real exchange rates for imports and exports, and of the internal real exchange rate. The finding is that terms of trade, government consumption, and investment share all influence the real exchange rate for imports, while terms of trade, central bank reserves and trade taxes influence the real exchange rate for exports in the long-run. The internal real exchange rate is influenced by terms of trade, investment share, and the rate of growth of real GDP in the long-run. Error-correction models are then estimated. Besides the difference of the fundamentals mentioned above, aid and openness are found to impart short-run effects on the real exchange rate indices. The coefficients of adjustment are found to be -0.38, -0.79 and -0.80 respectively for the real exchange rates for imports and exports, and for the internal real exchange rate.

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    Bibliographic Info

    Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 40.

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    Length: 68 pages
    Date of creation: 30 Apr 2001
    Date of revision:
    Handle: RePEc:hhs:gunwpe:0040

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    Postal: Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden
    Phone: 031-773 10 00
    Web page: http://www.handels.gu.se/econ/
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    Keywords: Real Exchange Rate; Misalignment; Cointegration; Zambia;

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    References

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    1. Elbadawi, Ibrahim A & Soto, Raimundo, 1997. "Real Exchange Rates and Macroeconomic Adjustment in Sub-Saharan Africa and Other Developing Countries," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 74-120, Supplemen.
    2. Jurgen A. Doornik & David F. Hendry & Bent Nielsen, 1998. "Inference in Cointegrating Models: UK M1 Revisited," Journal of Economic Surveys, Wiley Blackwell, vol. 12(5), pages 533-572, December.
    3. Janine Aron & Ibrahim Elbadawi and Brian Kahn, 1997. "Determinants of the real exchange rate in South Africa," Economics Series Working Papers WPS/1997-16, University of Oxford, Department of Economics.
    4. Baffes, John & Elbadawi, Ibrahim A. & O'Connell, Stephen A., 1997. "Single-equation estimation of the equilibrium real exchange rate," Policy Research Working Paper Series 1800, The World Bank.
    5. Bates, Robert H & Collier, Paul, 1995. "The Politics and Economics of Policy Reform in Zambia," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 4(1), pages 115-43, May.
    6. Hamid Faruqee, 1995. "Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective," IMF Staff Papers, Palgrave Macmillan, vol. 42(1), pages 80-107, March.
    7. Janine Aron, 1999. "A Recent History of Zambia`s Management of Copper Price Shocks," Economics Series Working Papers WPS/1999-15, University of Oxford, Department of Economics.
    8. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate," IMF Working Papers 94/90, International Monetary Fund.
    9. Cottani, Joaquin A & Cavallo, Domingo F & Khan, M Shahbaz, 1990. "Real Exchange Rate Behavior and Economic Performance in LDCs," Economic Development and Cultural Change, University of Chicago Press, vol. 39(1), pages 61-76, October.
    10. Tarhan Feyzioglu, 1997. "Estimating the Equilibrium Real Exchange Rate," IMF Working Papers 97/109, International Monetary Fund.
    11. Jun Nagayasu & E. Gelbard, 1999. "Determinants of Angola's Parallel Market Real Exchange Rate," IMF Working Papers 99/90, International Monetary Fund.
    12. Alexander W. Hoffmaister & Carlos I. Medeiros & Pierre-Richard Agénor, 1997. "Cyclical Fluctuations in Brazil's Real Exchange Rate," IMF Working Papers 97/128, International Monetary Fund.
    13. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269, September.
    14. repec:fth:oxesaf:97-16 is not listed on IDEAS
    15. Aron, Janine & Elbadawi, Ibrahim A., 1992. "Parallel markets, the foreign exchange auction, and exchange rate unification in Zambia," Policy Research Working Paper Series 909, The World Bank.
    16. Ghura, Dhaneshwar & Grennes, Thomas J., 1993. "The real exchange rate and macroeconomic performance in Sub-Saharan Africa," Journal of Development Economics, Elsevier, vol. 42(1), pages 155-174, October.
    17. Bigsten , Arne & Kayizzi-Mugerwa, Steve, 2000. "The Political Economy of Policy Failure in Zambia," Working Papers in Economics 23, University of Gothenburg, Department of Economics.
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    Cited by:
    1. Sosunov, K. & Ushakov, N., 2009. "Determination of the Real Exchange Rate of the Ruble and Assessment of Long-Run Policy of Real Exchange Rate Targeting," Journal of the New Economic Association, New Economic Association, issue 3-4, pages 97-121.

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