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The Equilibrium Real Exchange Rate in a Commodity Exporting Country

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  • Taline Koranchelian
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    Abstract

    Drawing on the existing literature, I estimate a long-run equilibrium real exchange rate path for Algeria. I find that the Balassa-Samuelson effect together with real oil prices explain the long-run evolution of the equilibrium real exchange rate in Algeria. The half-life of the deviation of the real exchange rate from the estimated equilibrium level is about nine months, similar to that in other commodity-exporting countries. The general conclusions are that: (i) there is a time-varying long-run equilibrium exchange rate in Algeria as in other commodity-exporting countries; and (ii) the real effective exchange rate of the Algerian dinar at end-2003 was broadly in line with this equilibrium.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/135.

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    Length: 18
    Date of creation: 01 Jul 2005
    Date of revision:
    Handle: RePEc:imf:imfwpa:05/135

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    Keywords: Exchange rates; exchange rate; real exchange rate; real effective exchange rate; effective exchange rate; real trading partners; terms of trade; foreign exchange; oil prices; exchange rate policy; exporting countries; domestic economy; equilibrium exchange rate; exchange rate path; exchange rate regime; nominal exchange rate; basket of currencies; foreign exchange market; exchange rate behavior; real exchange rate behavior; political economy; terms of trade shocks; open economy; nominal exchange rate policies; real exchange rate path; imported good; trade shocks; tradable goods; exchange rate target; export prices; oil shock; exchange rate dynamics; trading partner; exchange rate levels; nontradable goods; market equilibrium model; perfect competition; exchange rate targeting; trade liberalization; domestic production; intermediate inputs; aggregate consumption; trade losses; commercial policies; constant real exchange rate; balance of payments; trade liberalization measures; import restrictions; partner countries; overvalued exchange rate; domestic price;

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    1. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    2. Edison, Hali J & Melick, William R, 1999. "Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(2), pages 93-111, April.
    3. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
    4. Y.Chen & K. Rogoff, 2003. "Commodity Currencies and Empirical Exchange Rate Puzzles," DNB Staff Reports (discontinued) 76, Netherlands Central Bank.
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    6. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
    7. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    8. Peter J. Montiel & Jonathan D. Ostry, 1991. "Macroeconomic Implications of Real Exchange Rate Targeting in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 38(4), pages 872-900, December.
    9. Dornbusch, Rudiger, 1982. "PPP Exchange-Rate Rules and Macroeconomic Stability," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 158-65, February.
    10. Mohsin S. Khan & Jonathan David Ostry, 1991. "Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries," IMF Working Papers 91/3, International Monetary Fund.
    11. Mohsin S. Khan & Ehsan U. Choudhri, 2004. "Real Exchange Rates in Developing Countries," IMF Working Papers 04/188, International Monetary Fund.
    12. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
    13. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper," IMF Working Papers 02/223, International Monetary Fund.
    14. Peter B. Clark & Ronald MacDonald, 2000. "Filtering the Beer," IMF Working Papers 00/144, International Monetary Fund.
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    Cited by:
    1. Korhonen, Iikka & Juurikkala, Tuuli, 2007. "Equilibrium exchange rates in oil-dependent countries," BOFIT Discussion Papers 8/2007, Bank of Finland, Institute for Economies in Transition.
    2. Todd Schneider & Nabil Ben Ltaifa & Faisal Ahmed & Saade Chami, 2007. "Yemen," IMF Working Papers 07/5, International Monetary Fund.
    3. Kangni KPODAR & Oumar DIALLO & Boileau LOKO, 2008. "Buoyant Capital Spending and Worries over Real Appreciation: Cold Facts from Algeria," Working Papers 200804, CERDI.
    4. Eugenio Cerutti & Mario Mansilla, 2008. "Bolivia," IMF Working Papers 08/154, International Monetary Fund.
    5. Jesús Ferreyra & Jorge Salas, 2006. "The Equilibrium Real Exchange Rate in Peru: BEER Models and Confidence Band Building," Working Papers 2006-006, Banco Central de Reserva del Perú.
    6. Elena Loukoianova & Plamen Iossifov, 2007. "Estimation of a Behavioral Equilibrium Exchange Rate Model for Ghana," IMF Working Papers 07/155, International Monetary Fund.
    7. Ogundipe, Adeyemi & Ogundipe, Oluwatomisin, 2013. "Oil Price and Exchange Rate Volatility in Nigeria," MPRA Paper 51668, University Library of Munich, Germany.
    8. Hayat, Aziz & Ganiev, Bahodir & Tang, Xueli, 2013. "Expectations of future income and real exchange rate movements," Journal of Banking & Finance, Elsevier, vol. 37(4), pages 1274-1285.
    9. Habib, Maurizio Michael & Kalamova, Margarita Manolova, 2007. "Are there oil currencies? The real exchange rate of oil exporting countries," Working Paper Series 0839, European Central Bank.
    10. 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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