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Expectations of future income and real exchange rate movements

  • Aziz Hayat

    ()

    (Deakin University)

  • Bahodir Ganiev

    ()

    (Westminster International University in Tashkent)

  • Xueli Tang

    ()

    (Deakin University)

Registered author(s):

    We show that the changes in expectations of future income driven by exogenous factors (such as the discovery of oil, an increase in global demand for natural resources, etc.) can cause movements in the real exchange rate (RER) in excess of, and sometimes even in the opposite direction to, what one would expect given the changes in current income. We provide both a theoretical model and empirical evidence of this. In particular, we show that the signing of numerous production sharing agreements (PSAs) between the government of Azerbaijan and foreign oil companies in 1994–99 fuelled expectations of higher future incomes, resulting in a considerable appreciation of the RER. Some of these PSAs subsequently failed or ran into difficulties, which led to a downward revision of expected future income and a depreciation of the RER in 1999–2003, even though the current income started to rise, due to an increase in the current oil revenue.

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    File URL: http://www.deakin.edu.au/buslaw/aef/workingpapers/fin-econometrics/2012_05.pdf
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    Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Financial Econometics Series with number 2012_05.

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    Length: 34
    Date of creation: 26 Mar 2012
    Date of revision:
    Handle: RePEc:dkn:ecomet:fe_2012_05
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    Web page: http://www.deakin.edu.au/buslaw/aef/index.php

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