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To Smooth or Not to Smooth

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  • Martin Petri
  • Tahsin Saadi-Sedik

Abstract

This paper estimates the effect of grants and workers'' remittances on Jordan''s long-term equilibrium real exchange rate. We estimate an equilibrium path for the Jordanian real exchange rate using the Johansen cointegration methodology over the period 1964 to 2005. Controlling for other fundamentals, we find that both grants and workers'' remittances appreciate the equilibrium real exchange rate in a statistically and economically significant way. We also find that assessing deviations of the actual real exchange rate from the estimated equilibrium real exchange rate is nontrivial because different smoothing methodologies and the nonsmoothed estimates give very different results.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/257.

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Length: 37
Date of creation: 01 Nov 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/257

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Keywords: Capital inflows; Workers remittances; Exchange rates; Economic models; exchange rate; real exchange rate; trade openness; terms of trade; equilibrium exchange rate; exchange rate regime; exchange rate misalignments; real exchange rates; real exchange rate misalignments; exchange rate misalignment; nontradable goods; effective exchange rate; real effective exchange rate; foreign exchange; tradable goods; nominal exchange rate; open economy; fixed exchange rate regime; exchange rate appreciation; trade restrictions; real exchange rate appreciation; fixed exchange rate; exchange rate crisis; foreign exchange market; current exchange rate; policy-induced openness; real exchange rate misalignment; dollar exchange rates; exchange rate regimes; oil prices; domestic demand; equilibrium model; history of exchange rate; exchange rate adjustment; importing country; factor markets; dual exchange rate; nominal effective exchange rate; exchange rate increases; import prices; nominal exchange rates; trading partner; exchange rate literature; domestic prices; per capita income; aggregate demand; risk diversification; domestic goods; open trade; undervalued exchange rate; trade deficits; partner countries; partner country; trade liberalization; commodity prices; exchange rate arrangements; trade regime; world prices; open trade regime; exchange rate overvaluation; exchange rate system;

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References

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  1. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  2. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
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  4. Arvind Subramanian & Raghuram Rajan, 2005. "What Undermines Aid's Impacton Growth?," IMF Working Papers 05/126, International Monetary Fund.
  5. Joannes Mongardini & Tahsin Saadi-Sedik, 2003. "Estimating Indexes of Coincident and Leading Indicators," IMF Working Papers 03/170, International Monetary Fund.
  6. Luca Benati, 2001. "Band-pass filtering, cointegration, and business cycle analysis," Bank of England working papers 142, Bank of England.
  7. Jean-Louis Combes & Tahsin Saadi-Sedik, 2006. "How does trade openness influence budget deficits in developing countries?," Journal of Development Studies, Taylor & Francis Journals, vol. 42(8), pages 1401-1416.
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  12. Kenneth Rogoff & Yu-chin Chen, 2002. "Commodity Currencies and Empirical Exchange Rate Puzzles," IMF Working Papers 02/27, International Monetary Fund.
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  14. Mohsin S. Khan & Ehsan U. Choudhri, 2004. "Real Exchange Rates in Developing Countries," IMF Working Papers 04/188, International Monetary Fund.
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  16. Peter J. Montiel & Jonathan D. Ostry, 1994. "The Parallel Market Premium: Is It a Reliable Indicator of Real Exchange Rate Misalignment in Developing Countries?," IMF Staff Papers, Palgrave Macmillan, vol. 41(1), pages 55-75, March.
  17. Ratna Sahay & Luis Felipe Céspedes & Paul Cashin, 2002. "Keynes, Cocoa, and Copper," IMF Working Papers 02/223, International Monetary Fund.
  18. Canova, Fabio, 1993. "Detrending and Business Cycle Facts," CEPR Discussion Papers 782, C.E.P.R. Discussion Papers.
  19. Bayoumi, Tamim & Jayanthi, Sarma & Lee, Jaewoo, 2006. "New Rates from New Weights," CEPR Discussion Papers 5860, C.E.P.R. Discussion Papers.
  20. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  21. 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.
  22. Ronald Macdonald & Luca Antonio Ricci, 2004. "Estimation Of The Equilibrium Real Exchange Rate For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 282-304, 06.
  23. Martin Petri & Tahsin Saadi-Sedik, 2006. "The Jordanian Stock Market," IMF Working Papers 06/187, International Monetary Fund.
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Citations

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Cited by:
  1. Adolfo Barajas & Ralph Chami & Dalia Hakura & Peter Montiel, 2010. "Workers' Remittances and the Equilibrium Real Exchange Rate: Theory and Evidence," Department of Economics Working Papers 2010-12, Department of Economics, Williams College.
  2. Eugenio Cerutti & Mario Mansilla, 2008. "Bolivia," IMF Working Papers 08/154, International Monetary Fund.
  3. Viktors Ajevskis & Ramune Rimgailaite & Uldis Rutkaste & Olegs Tkacevs, 2012. "The Assesment of Equilibrium Real Echange Rate of Latvia," Working Papers 2012/04, Latvijas Banka.
  4. Prachi Mishra & Antonio Spilimbergo & Peter Montiel, 2010. "Monetary transmission in low income countries," Department of Economics Working Papers 2010-14, Department of Economics, Williams College.
  5. Jemma Dridi & Maher Hasan, 2008. "The Impact of Oil-Related Incomeon the Equilibrium Real Exchange Rate in Syria," IMF Working Papers 08/196, International Monetary Fund.
  6. International Monetary Fund, 2011. "Determinants of Remittances," IMF Working Papers 11/18, International Monetary Fund.
  7. Joannes Mongardini & Brett Rayner, 2009. "Grants, Remittances, and the Equilibrium Real Exchange Rate in Sub-Saharan African Countries," IMF Working Papers 09/75, International Monetary Fund.
  8. Jean-Louis COMBES & Patrick PLANE & Tidiane KINDA, 2010. "Capital Flows and their Impact on the Real Effective Exchange Rate," Working Papers 201032, CERDI.
  9. Ralph Chami & Adolfo Barajas & Peter Montiel & Dalia Hakura, 2010. "Workers' Remittances and the Equilibrium Real Exchange Rate," IMF Working Papers 10/287, International Monetary Fund.
  10. Joannes Mongardini & Alexander Chudik, 2007. "In Search of Equilibrium," IMF Working Papers 07/90, International Monetary Fund.
  11. Tahsin Saadi Sedik & Serhan Cevik, 2011. "A Barrel of Oil or a Bottle of Wine," IMF Working Papers 11/1, International Monetary Fund.

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