Exploiting a new dataset available for four countries (Egypt, Jordan, Kuwait and Yemen), this pap... more Exploiting a new dataset available for four countries (Egypt, Jordan, Kuwait and Yemen), this paper assesses the claim that real exchange rate undervaluation affects both the quantity of exports (intensive margin) and the probability of exporting a certain product to a certain destination (extensive margin) of trade in Arab countries. We find robust evidence suggesting that RER depreciation/undervaluation promotes exports at both the intensive and the extensive margins. Moreover, when financial openness is driven by FDI the latter reinforces the RER effects, but it tends to counter it when it is mainly dominated by non-FDI flows. In this case there will be even a more dire need for a higher economy-wide subsidy through an undervalued real currency in order for manufacturing exporting firms to grow at the intensive margin, and especially for overcoming the more challenging impediments of opening new markets or developing new export products.
This paper asks whether the choice of the exchange regime matters for macroeconomic stabilization... more This paper asks whether the choice of the exchange regime matters for macroeconomic stabilization in the aftermath of civil conflicts. This important aspect of the macroeconomic agenda for post-conflict countries has been largely ignored by the literature. Using a panel of 132 countries (38 post-conflict countries and a control group of 94 economies) in the period 1970-2008 we estimate the effect of the main exchange rate regimes (fixed, managed floating and free float) on the demand for money balances and inflation. The optimality of the three Exchange rate regimes was assessed in terms of their capacity to create an ‘enabling’ policy environment for aid effectiveness in promoting the re-monetization and inflation stabilization of post-conflict economies. The evidence broadly suggests that the managed floating regime appears to have an edge.
The research addresses three methodological questions that are central to effective exchange rate... more The research addresses three methodological questions that are central to effective exchange rate and macroeconomic management: what are the determinants and how to model the real exchange rate (RER), how to estimate its equilibrium level, and how to quantify the likely impact of misalignment on exports and long-run economic growth. Despite the substantial number of RER models, current research is limited in that it usually does not present an explicit solution of the theoretical model in econometric terms, it suffers from severe shortcomings arising from measurement error and structural breaks, and policy recommendations derived from estimated models are usually based on the statistical significance of some regression coefficients, which does not necessarily constitute a valid evaluation of alternative policy trajectories. We develop a simple analytical model of the exchange rate based on the long tradition of modeling real exchange rates in the context of general equilibrium, rati...
Critics of trade liberalization argue that globalization increases countries’ vulnerability to ec... more Critics of trade liberalization argue that globalization increases countries’ vulnerability to economic shocks and hence may exacerbate domestic social conflict. Such social conflict may also be transformed into armed conflict. Others argue that globalization promotes economic growth and reduces poverty, which leads to a reduction in the risk of internal conflict. Several studies find trade to reduce the risk of
This paper develops a theoretical model that allows for assessing the poverty impact of the real ... more This paper develops a theoretical model that allows for assessing the poverty impact of the real exchange rate (RER), as an economy-wide relative price, in a fully optimizing model at the household and the firm levels. The model motivates empirical estimation of the response of average household wage and non-wage incomes to RER depreciation/undervaluation. In particular, it is possible to assess the extent to which an RER undervaluation (or RER depreciation) is pro-poor, using a precise metric that compares the rate of change of the income of the poor relative to that of the non-poor in response to RER devaluation/depreciation. We estimate the model using national-level panel data from the Egyptian Central Agency for Public Mobilization and Statistics and the ERF’s data bank. We find robust evidence suggesting that strategic real currency depreciation/undervaluation at the macroeconomic level promotes pro-poor income growth at the household level.
Exploiting a new dataset available for four countries (Egypt, Jordan, Kuwait and Yemen), this pap... more Exploiting a new dataset available for four countries (Egypt, Jordan, Kuwait and Yemen), this paper assesses the claim that real exchange rate undervaluation affects both the quantity of exports (intensive margin) and the probability of exporting a certain product to a certain destination (extensive margin) of trade in Arab countries. We find robust evidence suggesting that RER depreciation/undervaluation promotes exports at both the intensive and the extensive margins. Moreover, when financial openness is driven by FDI the latter reinforces the RER effects, but it tends to counter it when it is mainly dominated by non-FDI flows. In this case there will be even a more dire need for a higher economy-wide subsidy through an undervalued real currency in order for manufacturing exporting firms to grow at the intensive margin, and especially for overcoming the more challenging impediments of opening new markets or developing new export products.
This paper asks whether the choice of the exchange regime matters for macroeconomic stabilization... more This paper asks whether the choice of the exchange regime matters for macroeconomic stabilization in the aftermath of civil conflicts. This important aspect of the macroeconomic agenda for post-conflict countries has been largely ignored by the literature. Using a panel of 132 countries (38 post-conflict countries and a control group of 94 economies) in the period 1970-2008 we estimate the effect of the main exchange rate regimes (fixed, managed floating and free float) on the demand for money balances and inflation. The optimality of the three Exchange rate regimes was assessed in terms of their capacity to create an ‘enabling’ policy environment for aid effectiveness in promoting the re-monetization and inflation stabilization of post-conflict economies. The evidence broadly suggests that the managed floating regime appears to have an edge.
The research addresses three methodological questions that are central to effective exchange rate... more The research addresses three methodological questions that are central to effective exchange rate and macroeconomic management: what are the determinants and how to model the real exchange rate (RER), how to estimate its equilibrium level, and how to quantify the likely impact of misalignment on exports and long-run economic growth. Despite the substantial number of RER models, current research is limited in that it usually does not present an explicit solution of the theoretical model in econometric terms, it suffers from severe shortcomings arising from measurement error and structural breaks, and policy recommendations derived from estimated models are usually based on the statistical significance of some regression coefficients, which does not necessarily constitute a valid evaluation of alternative policy trajectories. We develop a simple analytical model of the exchange rate based on the long tradition of modeling real exchange rates in the context of general equilibrium, rati...
Critics of trade liberalization argue that globalization increases countries’ vulnerability to ec... more Critics of trade liberalization argue that globalization increases countries’ vulnerability to economic shocks and hence may exacerbate domestic social conflict. Such social conflict may also be transformed into armed conflict. Others argue that globalization promotes economic growth and reduces poverty, which leads to a reduction in the risk of internal conflict. Several studies find trade to reduce the risk of
This paper develops a theoretical model that allows for assessing the poverty impact of the real ... more This paper develops a theoretical model that allows for assessing the poverty impact of the real exchange rate (RER), as an economy-wide relative price, in a fully optimizing model at the household and the firm levels. The model motivates empirical estimation of the response of average household wage and non-wage incomes to RER depreciation/undervaluation. In particular, it is possible to assess the extent to which an RER undervaluation (or RER depreciation) is pro-poor, using a precise metric that compares the rate of change of the income of the poor relative to that of the non-poor in response to RER devaluation/depreciation. We estimate the model using national-level panel data from the Egyptian Central Agency for Public Mobilization and Statistics and the ERF’s data bank. We find robust evidence suggesting that strategic real currency depreciation/undervaluation at the macroeconomic level promotes pro-poor income growth at the household level.
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Papers by Ibrahim Elbadawi