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Global and country-specific movements in real effective exchange rates: Implications for external competitiveness

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  • Nagayasu, Jun

Abstract

Using the Bayesian factor model, we decompose real effective exchange rates, which are considered a measure of external competitiveness, into global and country-specific factors. Among several findings, we report a particular global trend in real exchange rates, but a substantial proportion of their variation is found to be country-specific. In line with this finding, we find that structural shifts, when they do exist, are contained in country-specific factors. Furthermore, consistent with economic theory, this global factor is closely related to a trend in the global interest rate, while country-specific factors are closely related to idiosyncratic movements in the countries’ own interest rates. Such a decomposition results in better understanding of the exchange rate-interest rate relationship, and therefore our results can be interpreted as evidence that external competitiveness is heterogeneous among countries and that economic policies can influence countries’ competitiveness.

Suggested Citation

  • Nagayasu, Jun, 2017. "Global and country-specific movements in real effective exchange rates: Implications for external competitiveness," Journal of International Money and Finance, Elsevier, vol. 76(C), pages 88-105.
    • Handle: RePEc:eee:jimfin:v:76:y:2017:i:c:p:88-105
    DOI: 10.1016/j.jimonfin.2017.05.005
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    Cited by:

    1. Fakhri J. Hasanov & Noha Razek, 2023. "Oil and Non-Oil Determinants of Saudi Arabia’s International Competitiveness: Historical Analysis and Policy Simulations," Sustainability, MDPI, vol. 15(11), pages 1-39, June.

    More about this item

    Keywords

    Real effective exchange rate; Factor model; Variance decomposition; External competitiveness;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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