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A comparative analysis of exchange rate fluctuations and economic activity: The cases of Egypt and Turkey

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  • Magda Kandil
  • Nazire Nergiz Dincer

Abstract

Purpose - The paper aims to examine the effects of exchange rate fluctuations on real output, the price level, and the real value of components of aggregate demand in Egypt and Turkey. Design/methodology/approach - Building on a theoretical model that decomposes movements in the exchange rate into anticipated and unanticipated components, the empirical investigation traces the effects through demand and supply channels. Findings - In Turkey, anticipated exchange rate appreciation has significant adverse effects, contracting the growth of real output and the demand for investment and exports, while raising price inflation. Random fluctuations in Turkey have asymmetric effects that highlight the importance of unanticipated depreciation in shrinking output growth and the growth of private consumption and investment, despite an increase in export growth. In Egypt, anticipated exchange rate appreciation decreases export growth. Given asymmetry, the net effect of unanticipated exchange rate fluctuations, in Egypt, decreases real output and consumption growth and increases export growth, on average, over time. Research limitations/implications - In light of the country-specific evidence, future research should extend the investigation using panel estimation, incorporating various demand and supply shocks along with exchange rate fluctuations, to establish the relative importance of various shocks on macroeconomic performance across MENA countries. Practical implications - While adhering to a flexible exchange rate policy to boost competitiveness, managing fundamentals to reduce excessive volatility impinging on the economic system over time should top the policy agenda. Originality/value - Excessive volatility in the real effective exchange rate could be detrimental to real growth, over time, as the evidence for Turkey and Egypt illustrates.

Suggested Citation

  • Magda Kandil & Nazire Nergiz Dincer, 2008. "A comparative analysis of exchange rate fluctuations and economic activity: The cases of Egypt and Turkey," International Journal of Development Issues, Emerald Group Publishing, vol. 7(2), pages 136-159, October.
  • Handle: RePEc:eme:ijdipp:v:7:y:2008:i:2:p:136-159
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    Citations

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    Cited by:

    1. Nidal Rashid Sabri & Marga Peeters & Diama K. Abulaban, 2012. "The impact of exchange rate volatility on trade integration among North and South Mediterranean countries," International Journal of Business and Globalisation, Inderscience Enterprises Ltd, pages 107-121.
    2. Amr Hosny & Magda Kandil & Hamid Mohtadi, 2013. "The Egyptian Economy Post-Revolution: Sectoral Diagnosis of Potential Strengths and Binding Constraints," Working Papers 767, Economic Research Forum, revised Sep 2013.
    3. Bouoiyour, Jamal & Selmi, Refk, 2014. "Exchange Uncertainty and Export Performance in Egypt: New Insights from Wavelet Decomposition and Optimal GARCH Model," MPRA Paper 59568, University Library of Munich, Germany, revised 2014.

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