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

Taya Dumrongrittikul () and Heather Anderson

No 4/15, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

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.

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. (search for similar items in EconPapers)
JEL-codes: C33 C51 E52 F31 (search for similar items in EconPapers)
Pages: 42
Date: 2015
New Economics Papers: this item is included in nep-mac, nep-mon, nep-opm and nep-sea
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: How do shocks to domestic factors affect real exchange rates of Asian developing countries? (2016)
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