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How do Shocks to Domestic Factors Affect Real Exchange Rates of Asian Developing Countries

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  • Taya Dumrongrittikul
  • Heather M. Anderson

Abstract

This paper examines real exchange rate responses to shocks in exchange rate determinants for fourteen Asian developing countries. The analysis is based on a panel structural vector error correction model, and the shocks are identified using sign and zero restrictions. We find that trade liberalization generates permanent depreciation, and higher government consumption causes persistent appreciation. Traded-sector productivity gains induce appreciation but their effects are not immediate and last only for a few years. Real exchange rate responses to unexpected monetary tightening are consistent with the long-run neutrality of money. The evidence suggests that trade liberalization and government consumption have a strong effect on real exchange rates, while the effects of traded-sector productivity shocks are much weaker.

Suggested Citation

  • Taya Dumrongrittikul & Heather M. Anderson, 2015. "How do Shocks to Domestic Factors Affect Real Exchange Rates of Asian Developing Countries," Monash Econometrics and Business Statistics Working Papers 4/15, Monash University, Department of Econometrics and Business Statistics.
    • Handle: RePEc:msh:ebswps:2015-4
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    More about this item

    Keywords

    Exchange rate fundamentals; government consumption; monetary policy; panel vector error correction model; productivity improvement in the traded sector; real exchange rates; sign and zero restrictions; trade liberalization.;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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