November 2004 Misalignment (1/73)
Real Exchange Rate Real Exchange Rate Misalignment in Misalignment in
Turkey, 1987-2003Turkey, 1987-2003
Aykut KibritçioğluAykut KibritçioğluDepartment of EconomicsAnkara University, Turkey
November 2004 Misalignment (2/73)
Dr. sc. pol. Aykut KibritçioğluAssociate ProfessorDepartment of EconomicsFaculty of Political SciencesAnkara UniversityTR-06590 Cebeci, Ankara, Turkey
Tel.: +90-312-3197720, ext. 340Fax: +90-312-3197736E-mail: [email protected]: http://dialup.ankara.edu.tr/~kibritci/wiiw.html
November 2004 Misalignment (3/73)
Research Visit to the ÖNB & WIIW(Vienna, Austria, November 1-15, 2004)
Research Visit to the ÖNB & WIIW(Vienna, Austria, November 1-15, 2004)
“An Analysis of Early Warning Signals of Currency Crises in Turkey, 1986-2004”
“Real Exchange Rate Misalignment in Turkey, 1987-2003”
“An Overview of Macroeconomic Developments in Turkey”(with special reference to the AK-Party Era, 2002-04)
http://dialup.ankara.edu.tr/~kibritci/http://dialup.ankara.edu.tr/~kibritci/wiiw.htmlwiiw.html
November 2004 Misalignment (4/73)
Real Exchange Rate MisalignmentReal Exchange Rate Misalignmentin Turkey, 1987-2003in Turkey, 1987-2003
Abstract: Real exchange rate misalignment measures deviations of actual real exchange rate from its long-run, or equilibrium, level. Policy makers and many researchers are interested in predicting and monitoring misalignment in the foreign exchange market, because, in many cases, it is closely related to possible current account problems or impending currency crises. This study mainly aims to discuss the sensitivity of estimation results to the alternative combinations of actual real exchange rate indices and equilibrium definitions, by using quarterly data from 1987 to 2003 for Turkish lira. The 16 measures of misalignment employed in this study show that the differences between these alternative measures vary between 6.5 and 36.5 percent points, which actually is a very strong indication for high sensitivity of the degree of misalignment to the selected combination of the actual and equilibrium real exchange rate indices.
JEL Classification: E31, F31, C22Key Words: Exchange rate determination; purchasing power parity; real exchange rate; misalignment; time series techniques; Turkish economy
November 2004 Misalignment (5/73)
The full-text of the study is downloadable as pdf file (in Turkish):http://econpapers.hhs.se/paper/wpawuwpma/0403006.htm
or http://econwpa.wustl.edu/eps/mac/papers/0403/0403006.pdf
November 2004 Misalignment (6/73)
Outline of the PresentationOutline of the Presentation Introduction: Motivation and Aims
Real Exchange Rate: Conceptual Classification
Literature Review
Actual Real Exchange Rate (A)
Long-Run Real Exchange Rate (E)
Real Exchange Rate Misalignment (M)
Currency Crises and Misalignment
Concluding Remarks
November 2004 Misalignment (7/73)
Introduction:Introduction:Motivation & AimsMotivation & Aims
of the Studyof the Study
November 2004 Misalignment (8/73)
In the late 1990s, Turkey was not able to join the global disinflation process observed explicitly...
Global Inflation & Disinflation and Turkey
0.1
1.0
10.0
100.0
1000.0
10000.0
100000.0
19
49
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
MaximumInflation Rate(worldwide)
Turkey
DevelopingCountries
World Average
United States
Austria
Introduction: Motivation & Aims (1)
Annual Consumer Price Inflation(%, log scale)
November 2004 Misalignment (9/73)
-5
5
15
25
35
45
55
65
75
85
95
105
115
125
135
145
19
69
.01
19
70
.01
19
71
.01
19
72
.01
19
73
.01
19
74
.01
19
75
.01
19
76
.01
19
77
.01
19
78
.01
19
79
.01
19
80
.01
19
81
.01
19
82
.01
19
83
.01
19
84
.01
19
85
.01
19
86
.01
19
87
.01
19
88
.01
19
89
.01
19
90
.01
19
91
.01
19
92
.01
19
93
.01
19
94
.01
19
95
.01
19
96
.01
19
97
.01
19
98
.01
19
99
.01
20
00
.01
20
01
.01
20
02
.01
20
03
.01
20
04
.01
monthly
annual
Turkey suffered from high and persistent inflation since more than three decades. But , finally, it’s declining now...
Introduction: Motivation & Aims (2)Consumer Price Inflation (%)
November 2004 Misalignment (10/73)
Introduction: Motivation & Aims (3)
In Turkey, the black-market for foreign exchange disappeared gradually since early 1980s.
Source: CBRT and PCY/WCY; own calculations.
1
10
100
1000
10000
100000
1000000
10000000
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
Black Market Exchange Rate (TL/USD)
Official Exchange Rate (TL/USD)
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
Official Exchange Rate to “Black-Market”Exchange Rate
“Black-Market” Exchange Rate = 1.0
November 2004 Misalignment (11/73)
Since May 1981, Turkey has a relatively flexible exchange rate system. This gradually removed the black-market for FX in Turkey.
In 2000, the monthly growth rates of nominal exchange rates were pre-determined to gradually disinflate the economy.
0
1
2
3
4
5
6
7
8
9
50.0
1
52.0
1
54.0
1
56.0
1
58.0
1
60.0
1
62.0
1
64.0
1
66.0
1
68.0
1
70.0
1
72.0
1
74.0
1
76.0
1
78.0
1
80.0
1
82.0
1
84.0
1
86.0
1
88.0
1
90.0
1
92.0
1
94.0
1
96.0
1
98.0
1
00.0
1
02.0
1
04.0
1
-35
0
35
70
105
140
175
210
245BMER / OER (left axis) Annual Increases in OER (right axis)
Introduction: Motivation & Aims (4)
November 2004 Misalignment (12/73)
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.401
98
5
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
“Currency Substitution” in Turkey
FX Deposits to M2
Introduction: Motivation & Aims (5)
High inflation and low credibility of government policies in the 1990s created a strong currency substitution. But it’s changing now...
November 2004 Misalignment (13/73)
Latest monthly data shows that there is a tendency towards “reverse currency substitution” in Turkey, since late 2002.
Introduction: Motivation & Aims (6)Two Indicators of Currency Substitution in Turkey (%)
30
50
70
90
110
130
150
1998
.01
1998
.04
1998
.07
1998
.10
1999
.01
1999
.04
1999
.07
1999
.10
2000
.01
2000
.04
2000
.07
2000
.10
2001
.01
2001
.04
2001
.07
2001
.10
2002
.01
2002
.04
2002
.07
2002
.10
2003
.01
2003
.04
2003
.07
2003
.10
2004
.01
2004
.04
2004
.07
2004
.10
Selected Events Foreign Exchange Deposits / TL-denominated Deposits (M2Y - M2) / M2
November 2004 Misalignment (14/73)
Do the actual nominal exchange rates show “equilibrium” or “long-run” exchange rates, since the “black market” disappeared in Turkey?
If not, why some economic actors sometimes are suggesting that the Turkish lira is “over” or “under”valued against foreign currencies?
What are the reasons for disequilibrium in the FX market, if there is no “black market” for FX?
How can we measure the divergence of actual real exchange rates from long-run levels? Any reliable empirical methodology?
Why do the “black market” exchange rates not necessarily represent the “equilibrium” exchange rates?
Introduction: Motivation & Aims (7)
November 2004 Misalignment (15/73)
T w o -G o od sIn ternal Real
Exchan geRate
T hree-G oo dsIn ternal Real
Exchan geRate
In ternalReal ER
Bilateral
M u ltilateral
PPP-BasedExternal Real ER
M u nd ell-F lem ing -T yp e Real ER
(T erm s-o f-T rade)
ExternalReal ER
A ctua lRea l E R
T im e-In d epen den t(co nstan t)
T im e-Varying(variab le)
PPP-BasedEqu ilib rium RER
F BERERDerived from a
S in g le-Eq uationM o del
F BERERDerived from aM u lti-Equ atio n
M o del
F un dam en tals-BasedEqu ilib rium RER
L ong-RunRea l E R
Real Exchange Rates: Conceptual Classification
November 2004 Misalignment (16/73)
How far were real exchange rates diverged from equilibrium levels between 1987 and 2003 in Turkey?
To what extent were the real exchange rates misaligned or appreciated before the 1994 and 2000-2001 currency crises in Turkey?
Is the Turkish lira really overvalued in real terms against foreign currencies as early 2003? If yes, how far?
If there is a remarkable signal of real appreciation, can it cause a new currency crisis in the country?
Which one of the real exchange rate indices that are currently available is more reliable to detect an approaching currency crisis?
Introduction: Motivation & Aims (8)
November 2004 Misalignment (17/73)
Forecasting the future values of the Turkish lira!
Determining any “notional” equilibrium (nominal or real) exchange rates!
Testing whether the PPP rule is valid for the case of Turkey!
Measuring the degree of the nominal real exchange rate misalignment!
Investigating the short-run dynamics of real exchange rates (issues of adjustment speed & symmetry)!
What we will not do in this study are:
Introduction: Motivation & Aims (9)
November 2004 Misalignment (18/73)
M > 0 => TL is depreciated in real termsM = 0 => A is a “realistic” exchange rateM < 0 => TL is appreciated in real terms
Attention: A is an “observable” variable, while E is a “non-observable” one!
A: Actual real exchange rateE: Long-run (Equilibrium) Real Exchange RateM: Degree of Misalignment
M = (A – E) / E
Introduction: Motivation & Aims (10)
November 2004 Misalignment (19/73)
Real Exchange Real Exchange Rates:Rates:
Conceptual ClassificationConceptual Classification
November 2004 Misalignment (20/73)
A l t e r n a t i v e A c t u a l R E R s T h e o r e t i c a l D e f i n i t i o n P r o x i e s U s e d F o r D o m e s t i c a n d / o r
F o r e i g n P r i c e s
T w o - G o o d I n t e r n a l R E R f o r T r a d a b l e s a n d N o n t r a d a b l e s ( i . e . , i n t e r n a l T O T )
t h e r e l a t i v e p r i c e o f t r a d e d g o o d s i n t e r m s o f n o n t r a d e d g o o d s
e T N T =
dNTdT PP
dNTfTn PPe
p r i c e i n d e x e s f o r t r a d a b l e s a n d n o n t r a d a b l e s i n t h e h o m e c o u n t r y , o r f o r e i g n W P I a n d d o m e s t i c C P I
I n t e r n a l R E R s
T h r e e - G o o d I n t e r n a l R E R f o r E x p o r t a b l e s , I m p o r t a b l e s a n d N o n t r a d a b l e s
t h e r e l a t i v e p r i c e s o f e x p o r t e d a n d i m p o r t e d g o o d s i n t e r m s o f n o n t r a d e d g o o d s
e X = dNTdX PP
a n d e M =
dNTdMn PPe
p r i c e i n d e x e s f o r e x p o r t a b l e s , i m p o r t a b l e s a n d n o n t r a d a b l e s i n t h e h o m e c o u n t r y
Real Exchange Rates: Conceptual Classification
Internal Real Exchange Rates
November 2004 Misalignment (21/73)
Real Exchange Rates: Conceptual Classification
External Real Exchange RatesA l t e r n a t i v e A c t u a l
R E R s T h e o r e t i c a l D e f i n i t i o n
P r o x i e s U s e d F o r D o m e s t i c a n d / o r
F o r e i g n P r i c e s P P P - B a s e d B i l a t e r a l A c t u a l R E R
t h e r a t i o o f t h e p r i c e o f a r e p r e s e n t a t i v e c o n s u m p t i o n o r p r o d u c t i o n b a s k e t i n a f o r e i g n c o u n t r y t o t h e p r i c e o f a r e p r e s e n t a t i v e b a s k e t i n t h e h o m e c o u n t r y m e a s u r e d i n t h e s a m e c u r r e n c y
e P P P b = e n P f / P d
C P I s f o r t h e h o m e c o u n t r y a n d a s p e c i f i c f o r e i g n c o u n t r y
P P P - B a s e d M u l t i l a t e r a l ( o r E f f e c t i v e ) A c t u a l R E R
t h e r a t i o o f t h e w e i g h t e d a v e r a g e p r i c e o f a r e p r e s e n t a t i v e c o n s u m p t i o n o r p r o d u c t i o n b a s k e t i n s e l e c t e d f o r e i g n c o u n t r i e s t o t h e p r i c e o f a r e p r e s e n t a t i v e b a s k e t i n t h e h o m e c o u n t r y m e a s u r e d i n t h e s a m e c u r r e n c y
e P P P m =
d
m
1i
iwif
ni P)Pe(
w i t h 1wm
1ii
C P I s f o r t h e h o m e c o u n t r y a n d a s e l e c t e d g r o u p o f c o u n t r i e s , s u c h a s m a i n f o r e i g n t r a d e p a r t n e r s ( i = 1 , 2 , 3 , … , m )
M u n d e l l -F l e m i n g o r A g g r e g a t e P r o d u c t i o n C o s t R E R ( i . e . , e x t e r n a l T O T )
t h e r e l a t i v e c o s t o f a l l g o o d s , m e a s u r e d i n a c o m m o n c u r r e n c y , i n t h e h o m e a n d f o r e i g n c o u n t r y * * *
e T O T = e n G D P D f /
G D P D d
= dXdM
n P/Pe
G D P d e f l a t o r s f o r t h e h o m e a n d f o r e i g n c o u n t r y ( o r e x p o r t a n d i m p o r t p r i c e d e f l a t o r s f o r t h e h o m e c o u n t r y , m e a s u r e d i n d o m e s t i c a n d f o r e i g n c u r r e n c i e s , r e s p e c t i v e l y )
E x t e r n a l R E R s
T r a d e d G o o d s R E R
t h e r e l a t i v e c o s t o f t r a d e d g o o d s , m e a s u r e d i n a c o m m o n c u r r e n c y , i n t h e h o m e a n d f o r e i g n c o u n t r y
e T = dTfT
n P/Pe
o u t p u t p r i c e , p r o d u c t i o n c o s t , o r f a c t o r c o s t i n d e x e s f o r t r a d e d g o o d s i n t h e h o m e a n d f o r e i g n c o u n t r y
November 2004 Misalignment (22/73)
Literature Review:Literature Review:Equilibrium Exchange Rates Equilibrium Exchange Rates
and the Case of Turkeyand the Case of Turkey
November 2004 Misalignment (23/73)
Alternative Approaches to Estimation of E
Selected Studies on Industrial Countries
Selected Studies on Developing
Countries Short Comments
1.1.1. Traditional PPP Tests (Simple OLS procedure)
Frenkel (1981), Hakkio (1984)
Ahlers and Hinkle (1999: 293–313)
1.1. PPP-Based Reduced-Form Approach
1.1.2. New Generation PPP Tests (Cointegration Tests)
Froot and Rogoff (1994), Breuer (1994), MacDonald (1995)
It involves single-equation estimation of E as a function of international relative prices.
1.2.1. Supply-Side Fundamentals-Based Reduced-Form Approach (Balassa-Samuelson Effect)
Canzoneri, Cumby and Diba (1996). Survey: Rogoff (1996)
1.2.2. Demand-Side Fundamentals-Based Reduced-Form Approach (Baumol-Bowen Effect)
De Gregorio, Giovanni and Wolf (1994), De Gregorio and Wolf (1994), Feyzioğlu (1997)
1. Single-Equation Reduced-Form Estimations
1.2. Fundamentals-Based Reduced Form Approach
1.2.3. Combined Fundamentals-Based Reduced-Form Approach
MacDonald (1997)
Traditional Studies: Edwards (1989, 1994), Razin and Collins (1997), Mongardini (1998). Cointegration Studies: Elbadawi (1994), Elbadawi and Soto (1994, 1995), Loayza and Lopez (1997), Baffes et al. (1999).
E is assumed to be a function of some set of fundamentals. The sectoral productivity difference between the domestic tradables and nontradables sectors is a frequently used supply-side fundamental. On the demand-side, many authors usually employ the level of per capita income and government spending as major fundamentals which affect E.
Literature: Estimation Methodologies for E (I)
November 2004 Misalignment (24/73)
Alternative Approaches to Estimation of E Selected Studies on
Industrial Countries
Selected Studies on Developing Countries
Short Comments
2.1. The Partial Equilibrium “Trade Equations” Approach
Bayoumi et al. (1994), Isard and Faruqee (1998, IMF’s macroeconomic balance approach), Wren-Lewis and Driver (1999)
Devarajan et al. (1993), Devarajan (1999)
This approach is mainly based on the standard Mundell-Fleming current account specification (for industrial countries).
2.2.1. Williamson’s Fundamental Equilibrium Real Exchange Rate (FEER)
Williamson (1994)
2.2.2. The IMF’s Desired Equilibrium Exchange Rates (DEER)
Bayoumi et al. (1994)
2.2.3. Natural Equilibrium Exchange Rate (NATREX) Approach of Stein and his Associates
Stein (1994), Stein, Allen and associates (1995)
2. Fundamentals-Based Estimation from Structural Econometric Models
2.2. General Equilibrium Approach
2.2.4. Haque-Montiel Approach for Developing Countries
Haque, Lahiri and Montiel (1990), Haque and Montiel (1999)
Williamson’s and Bayoumi’s and others’ approaches are based on normative definitions of the E and they usually use large, fully dynamic structural models to simulate E, while Stein’s and his associates’ approach is based on a positive E definiton within a small medium-term model.
Literature: Estimation Methodologies for E (II)
November 2004 Misalignment (25/73)
Literature: A, E and M Related Studies on Turkey (I)
Main Topic of the Studies Selected Studies Data Period and Frequency
Empirical Methodology
Selçuk (1993a) 1987.I–1993.V, monthly
Weighted index calculations
Selçuk (1993b) 1982.I–1992.XII, monthly
Weighted index calculations
Kıpıcı & Kesriyeli (1997)
1987.I–2000.VII, monthly
Weighted index calculations
Estimation of Actual Real Exchange Rates (A)
Erlat & Arslaner (1997a, 1997b)
1953–1995, annual
Weighted index calculations
Agenor, McDermott & Üçer (1997)
1987.I–1995.I, quarterly
Vector autoregression (VAR) Determination or Macroeconomic Effects of A Saygılı, Şahinbeyoğlu
& Özbay (1998) 1987.I–1996.XII, monthly
Weighted index calculations, OLS and market-share analysis
Telatar & Kazdağlı (1998)
1980.X–1993.X, monthly
Cointegration Long-Run Validity of Purchasing-Power-Parity
Sarno (2000) 1980.I–1997.XII, monthly
Unit-root tests and nonlinear modeling techniques
November 2004 Misalignment (26/73)
Literature: A, E and M Related Studies on Turkey (II)
Main Topic of the Study Selected Study
Data Period and Frequency
Empirical Methodology
Alper & Sağlam (2000)
1987.I–1999.I, quarterly
Cointegration
Uğur & Vehbi (2002)
1989–2001, quarterly
Cointegration
Özlale & Yeldan (2002)
1994.IV–2001.XII, monthly
Time-varying parameter model and OLS
Doroodian et al. (2002)
1987.I–1997.6, monthly
Long-term regression
Civcir (2003a) 1987.I–2000.XII, monthly
Johansen cointegration test
Estimation of Real Exchange Rate Misalignment (M)
Civcir (2003b) 1987.I–2000.XII, monthly
Cointegration
Üçer et al. (1998)
1989.IV–1997.IV, monthly
Signal approach
Nierhaus (2000)
1979.VI–1996.XII, monthly
Signal approach Misalignment as an Early-Warning Indicator for Currency Crises
Kibritçioğlu (2000)
1985.XII–1999.IX, monthly
Signal approach
Short-Run Dynamics of Misalignment and the Issue of Adjustment Symmetry
Arghyrou et al. (2003)
1986.I–2001.III, quarterly
“Quadratic Logistic Smooth Transition Error Correction Model”
November 2004 Misalignment (27/73)
““Actual” Real Actual” Real Exchange Rates:Exchange Rates:Internal & External “A”Internal & External “A”
Indices for TurkeyIndices for Turkey
November 2004 Misalignment (28/73)
65
75
85
95
105
115
125
135
145
19
95
q1
19
95
q3
19
96
q1
19
96
q3
19
97
q1
19
97
q3
19
98
q1
19
98
q3
19
99
q1
19
99
q3
20
00
q1
20
00
q3
20
01
q1
20
01
q3
20
02
q1
20
02
q3
20
03
q1
20
03
q3
20
04
q1
20
04
q3
1995 = 100
A1 (K&K)
A2 (TNT)
A3 (Reuters)
A4 (SPO)
CBRT-CPI
CBRT-WPI
JPM
Increase: DepreciationDecrease: Appreciation
notincludedin thesampleperiod
Actual Real Exchange Rates (A): Alternatives
1995=100, 1995.I – 2003.III
November 2004 Misalignment (29/73)
Correlations Between Different A Indices
Note: The correlation coefficients for two CBRT indices are calculated for the 1995.I-2003.III period, while for all other indices the correlation coefficients are calculated for the 1987.I-2003.III period.
Actual Real Exchange Rates (A): Alternatives
A1 (K&K) A2 (TNT) A3 (Reuters) A4 (SPO) CBRT-CPI CBRT-WPI JPM
A1 (K&K) 1.000A2 (TNT) 0.932 1.000
A3 (Reuters) 0.656 0.595 1.000A4 (SPO) 0.186 0.191 0.782 1.000
CBRT-CPI 0.981 0.895 0.729 0.230 1.000CBRT-WPI 0.832 0.809 0.957 0.613 0.848 1.000
JPM -0.034 0.019 0.593 0.849 0.524 0.764 1.000
1.000.90-.0990.80-0.890.70-0.79
November 2004 Misalignment (30/73)
1995=100, 1987.I – 2003.III
Actual Real Exchange Rates (A): Selected A’s
65
75
85
95
105
115
125
135
145
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
1995 = 100A1 (K&K)
A2 (TNT)A3 (Reuters)
A4 (SPO)
Increase: DepreciationDecrease: Appreciation
November 2004 Misalignment (31/73)
A1: Trade-Weighted Real Effective Real Exchange Rate 1995=100; for 8 countries; PT Σ eWPIf , PN CPId ; A1 =
PT/PN . Source: SIS, CBRT and IMF’s IFS; authors’ calculations.
A2: Internal (TNT) Real Exchange Rate Index1995=100; derived by using implicit price deflators calculatedfrom GDP accounts: PT ( Px+ Pm) and PN Py-x+m ;A2 = PT / PN .Source: SIS and CBRT; authors’ calculations; deseasonalized.
A3: Reuters’ TRTWIN IndexJune 1999 = 100; for four countries; trade-weighted.Source: Reuters; the inverse of the original index; base year adjusted as 1995=100.
A4: SPO’s Real Effective Real Exchange Rate IndexJan. 1982 = 100; USD: 75% & Euro: 25%; for USA & Euro areaPPI and for Turkey WPI.Source: SPO; the inverse of the original index; base year adjusted as 1995=100.
Actual Real Exchange Rates (A): Properties
November 2004 Misalignment (32/73)
““Equilibrium” or “Long-Equilibrium” or “Long-Run”Run”
Real Exchange Real Exchange Rates:Rates:
Alternative “E” Indices for Alternative “E” Indices for TurkeyTurkey
November 2004 Misalignment (33/73)
Internal balance implies that markets for labor and non-tradable goods are “cleared”.
External balance requires a sustainable current account balance (CAB) in the country.
Accordingly, E is the real exchange rate which guarantees internal and external macroeconomic balances simultaneously, while external (policy) variables are at their sustainable levels.
It is expected that E is influenced by nominal and real variables in the short run, while it is affected only by real variables in the long run.
Long-Run Real Exchange Rate (E): Theoretical Overview
November 2004 Misalignment (34/73)
Long-Run Real Exchange Rate (E): Operational Definitions
Definition 1:“Base-Year Approach”
Basic PPP approach suggests that E is that real exchange rate which is valid when it is believed that the real value of a national currency is not over- or under-valued at that specific point of time.
Example: E is equal to the base-year value of an A index.(Selection of the base-year of A is crucial!)
Reference: Ahlers & Hinkle (1999)General Reference: Hinkle & Montiel (1999)
November 2004 Misalignment (35/73)
Definition 2:“Trend Approach”
Changing fundamentals also should change E! Therefore, the improved PPP idea allows for changes in E by defining E as a “time-varying trend value” of an A index.
Example: A’s trend value, which is calculated by employing the so-called Hodrick-Prescott filter.
Reference: Ahlers & Hinkle (1999)General Reference: Hinkle & Montiel (1999)
Long-Run Real Exchange Rate (E): Operational Definitions
November 2004 Misalignment (36/73)
Definition 3:“Fundamentals-Based Reduced Form Approach”
E is that real exchange rate which ensures the internal and external balances in the economy at the same time.
Internal Balance: E guarantees that the labor and non-tradables markets are “cleared”.External Balance: E guarantees that the CAB is at its sustainable level.
References: Baffes et al. (1999), Montiel (1997), Edwards (1989)& Rodriguez (1994)General Reference: Hinkle & Montiel (1999)
Long-Run Real Exchange Rate (E): Operational Definitions
November 2004 Misalignment (37/73)
E1: “Base-Year Value” of AFor each A index we have a different E1: E11, E12, E13 & E14.As the base year values of A1, A2, A3 and A4 are already set as1995 = 100, E1 values are simply given as: E11=E12=E13=E14=100.
E2: “Time-Varying Trend” of AFor each A index we have a different E2: E21, E22, E23 & E24.The values of E2 are calculated by applying the Hodrick-Prescottfilter methodology.
E3: “Estimated” Long-Run Value of AFor each A index we have a different E3: E31, E32, E33 & E34.Following cointegration analysis, the values of E3 are computed byconsidering the “actual” values of fundamentals.
E4: Long-Run Value of AFor each A index we have a different E4: E41, E42, E43 & E44.Following cointegration analysis, the values of E3 are computed byconsidering the “smoothed”, or long-run, values of fundamentals.
Long-Run Real Exchange Rate: Selected Es
November 2004 Misalignment (38/73)
Methodology Used to Calculate E3 & E4:
1. Time series properties of variables are investigated: Correlograms checked & ADF unit-root tests implemented
2. Integration degrees of series are determined: Nonstationarity in levels, I(1), and stationarity in first differences, I(0).
3. Investigated by using Johansen cointegration analysis whether series have more than one cointegrating vectors:Only one cointegrating vector found.
Long-Run Real Exchange Rate: E3 & E4
November 2004 Misalignment (39/73)
4. The Long-Run relationship between A indices and fundamentals are estimated by employing Engle-Granger approach:ln At = ß ln Ft + ut , F = (GOVGDPS, OPENS, TOT)
5. Tested whether the error terms are stationary:ADF unit-root tests showed that, in all equations, the error terms are stationary.
E3: computed by considering the “actual” values of fundamentals
E4: computed by considering the “smoothed”, or “long-run”, values of fundamentals.
MacDonald and Ricci (2003) are not in favor of the E3-type of definition. They argue that the E3 may only show the “short-run” equilibrium of A because of the effects of transitory shocks caused by fundamentals.
Long-Run Real Exchange Rate: E3 & E4
November 2004 Misalignment (40/73)
List of Potential Determinants of E3 and E4: Terms of trade (TOT) Productivity difference between tradables and nontradables sectors International differences between GDP growth rates Public sector expenditures to GDP (GOVGDP) Public sector investments to GDP Net exports to GDP Openness to international trade in goods (OPEN) Real world interest rates or international differences between real
interest rates Net foreign direct investments to GDP Net capital inflows from abroad to GDP Debt service to exports Absolute change in monetary base Public sector balance Net foreign assets of the central bank Public debts to GDP
Long-Run Real Exchange Rate: Fundamentals
November 2004 Misalignment (41/73)
Fundamentals Used to Explain Changes in E3 & E4:
Public Expenditures / GDP (GOVGDPSL)Sum of the real consumption and investment expenditures of the public sector divided by real GDPSource: SIS; authors’ calculations; log of the deseasonalized series
Openness to Trade in Goods (OPENSL)Total trade volume in current prices divided by nominal GDPSource : SIS; authors’ calculations; log of the deseasonalized series
External Terms-of-Trade (TOTL)Export price index divided by import price indexSource : SPO’s MEI, 1994=100; authors’ calculations; log of the TOT
Long-Run Real Exchange Rate: Fundamentals
November 2004 Misalignment (42/73)
2.3
2.4
2.5
2.6
2.7
2.8
2.9
3.0
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
GOVGDPS
Long-Run Level
3.2
3.4
3.6
3.8
4.0
4.2
4.4
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
OPENS
Long-Run Level
4.4
4.5
4.6
4.7
4.8
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
TOTS
Long-Run Level
Long-Run Real Exchange Rate: Fundamentals
GOVGDPSL
OPENSL
TOTL
November 2004 Misalignment (43/73)
Real Exchange Rate Real Exchange Rate Misalignment:Misalignment:
Estimation Results for Turkey, Estimation Results for Turkey, 1987.q1 1987.q1 –– 2003.q3 2003.q3
November 2004 Misalignment (44/73)
Real Exchange Rate Misalignment (M)
A1 A2 A3 A4
E1 M11=(A1–E11)/E11
M12=(A2–E12)/E12
M13=(A3–E13)/E13
M14=(A4–E14)/E14
E2 M21=(A1–E21)/E21
M22=(A2–E22)/E22
M23=(A3–E23)/E23
M24=(A4–E24)/E24
E3 M31=(A1–E31)/E31
M32=(A2–E32)/E32
M33=(A3–E33)/E33
M34=(A4–E34)/E34
E4 M41=(A1–E41)/E41
M42=(A2–E42)/E42
M43=(A3–E43)/E43
M44=(A4–E44)/E44
16 Different Measures of Misalignment According to 4 Different Actual Real Exchange Rate Indices and 4 Different Equilibrium Definitions
November 2004 Misalignment (45/73)
E1-Type of Long-Run Real Exchange Rates
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A1
E11
K&K
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A2
E12
TNT
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A3
E13
Reuters
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A4
E14
SPO
November 2004 Misalignment (46/73)
E2-Type of Long-Run Real Exchange Rates
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A1
E21
K&K
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A2
E22
TNT
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A3
E23
Reuters
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A4
E24
SPO
November 2004 Misalignment (47/73)
E3-Type of Long-Run Real Exchange Rates
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A1
E31
K&K
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A2
E32
TNT
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A3
E33
Reuters
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A4
E34
SPO
November 2004 Misalignment (48/73)
E4-Type of Long-Run Real Exchange Rates
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A1
E41
K&K
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A2
E42
TNT
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A3
E43
Reuters
60
70
80
90
100
110
120
130
140
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
A4
E44
SPO
November 2004 Misalignment (49/73)
A1 Index & Alternative Measures of Long-Run Equilibrium
65
75
85
95
105
115
125
135
19
87
q1
19
88
q1
19
89
q1
19
90
q1
19
91
q1
19
92
q1
19
93
q1
19
94
q1
19
95
q1
19
96
q1
19
97
q1
19
98
q1
19
99
q1
20
00
q1
20
01
q1
20
02
q1
20
03
q1
A1
E11
E21
E31
E41
K&K
November 2004 Misalignment (50/73)
65
75
85
95
105
115
125
135
19
87
q1
19
88
q1
19
89
q1
19
90
q1
19
91
q1
19
92
q1
19
93
q1
19
94
q1
19
95
q1
19
96
q1
19
97
q1
19
98
q1
19
99
q1
20
00
q1
20
01
q1
20
02
q1
20
03
q1
A2
E12
E22
E32
E42
TNT
A2 Index & Alternative Measures of Long-Run Equilibrium
November 2004 Misalignment (51/73)
75
80
85
90
95
100
105
110
115
120
125
19
87
q1
19
88
q1
19
89
q1
19
90
q1
19
91
q1
19
92
q1
19
93
q1
19
94
q1
19
95
q1
19
96
q1
19
97
q1
19
98
q1
19
99
q1
20
00
q1
20
01
q1
20
02
q1
20
03
q1
A3
E13
E23
E33
E43
Reuters
A3 Index & Alternative Measures of Long-Run Equilibrium
November 2004 Misalignment (52/73)
75
85
95
105
115
125
135
145
19
87
q1
19
88
q1
19
89
q1
19
90
q1
19
91
q1
19
92
q1
19
93
q1
19
94
q1
19
95
q1
19
96
q1
19
97
q1
19
98
q1
19
99
q1
20
00
q1
20
01
q1
20
02
q1
20
03
q1
A4
E14
E24
E34
E44
SPO
A4 Index & Alternative Measures of Long-Run Equilibrium
November 2004 Misalignment (53/73)
M1 Misalignment for Four A Indices
-35
-25
-15
-5
5
15
25
35
45
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M11
M12
M13
M14
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (54/73)
M2 Misalignment for Four A Indices
-20
-10
0
10
20
30
40
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M21
M22
M23
M24
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (55/73)
M3 Misalignment for Four A Indices
-30
-20
-10
0
10
20
30
40
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M31
M32
M33
M34
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (56/73)
M4 Misalignment for Four A Indices
-30
-20
-10
0
10
20
30
40
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M41
M42
M43
M44
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (57/73)
Four Measures of M According to A1
-35
-25
-15
-5
5
15
25
35
45
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M11
M21
M31
M41
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (58/73)
Four Measures of M According to A2
-35
-25
-15
-5
5
15
25
35
45
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M12
M22
M32
M42
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (59/73)
Four Measures of M According to A3
-25
-15
-5
5
15
25
35
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M13
M23
M33
M43
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (60/73)
Four Measures of M According to A4
-25
-15
-5
5
15
25
35
45
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
No Misalignment (Equilibrium)
M14
M24
M34
M44
M > 0 => Real DepreciationM < 0 => Real Appreciation
November 2004 Misalignment (61/73)
Correlation between Different Misalignment Measures:
16 Misalignment Measures: Any Similarity?
A1 A2 A3 A4 A1 A2 A3 A4 A1 A2 A3 A4 A1 A2 A3 A4
E11 E12 E13 E14 E21 E22 E23 E24 E31 E32 E33 E34 E41 E42 E43 E44
M11 M12 M13 M14 M21 M22 M23 M24 M31 M32 M33 M34 M41 M42 M43 M44
M11 1.000
M12 0.932 1.000
M13 0.656 0.595 1.000
M14 0.186 0.191 0.782 1.000
M21 0.705 0.607 0.852 0.670 1.000
M22 0.639 0.709 0.747 0.630 0.880 1.000
M23 0.628 0.525 0.954 0.756 0.901 0.771 1.000
M24 0.606 0.542 0.917 0.802 0.867 0.785 0.955 1.000
M31 0.955 0.910 0.767 0.424 0.812 0.758 0.729 0.715 1.000
M32 0.893 0.978 0.645 0.339 0.665 0.780 0.577 0.601 0.931 1.000
M33 0.787 0.687 0.932 0.609 0.848 0.728 0.936 0.894 0.829 0.706 1.000
M34 0.634 0.534 0.867 0.674 0.761 0.642 0.885 0.924 0.671 0.550 0.921 1.000
M41 0.967 0.912 0.754 0.394 0.799 0.733 0.713 0.694 0.995 0.922 0.829 0.681 1.000
M42 0.900 0.984 0.640 0.321 0.652 0.766 0.566 0.587 0.929 0.997 0.699 0.552 0.925 1.000
M43 0.789 0.696 0.962 0.643 0.855 0.740 0.956 0.916 0.846 0.715 0.978 0.898 0.839 0.713 1.000
M44 0.684 0.618 0.931 0.750 0.838 0.758 0.942 0.986 0.768 0.660 0.927 0.947 0.753 0.651 0.950 1.000
averages M11-M14 M21-M24 M31-M34 M41-M44
M11-M14 0.557 1.00
M21-M24 0.706 0.860 0.90-.099
M31-M34 0.727 0.766 0.768 0.80-0.89
M41-M44 0.747 0.781 0.834 0.805 0.70-0.79
November 2004 Misalignment (62/73)
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
Maximum Misalignment
No Misalignment (Equilibrium)
Minimum Misalignment
M > 0 => Real DepreciationM < 0 => Real Appreciation
Degree of Differences between 16 M Measures
November 2004 Misalignment (63/73)
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
1987
q1
1988
q1
1989
q1
1990
q1
1991
q1
1992
q1
1993
q1
1994
q1
1995
q1
1996
q1
1997
q1
1998
q1
1999
q1
2000
q1
2001
q1
2002
q1
2003
q1
Maximum Misalignment
Alper & Sağlam (2000)
No Misalignment (Equilibrium)
Minimum Misalignment
M > 0 => Real DepreciationM < 0 => Real Appreciation
Degree of Differences between 16 M Measures
November 2004 Misalignment (64/73)
Real Exchange Rate Real Exchange Rate Misalignment and Misalignment and Currency Crises:Currency Crises:
How far was “A” away from How far was “A” away from “E” in 2003 in Turkey?“E” in 2003 in Turkey?
November 2004 Misalignment (65/73)
Currency Crisis
MarketSentiments
“Weak”
Macroeconomic
Fundamentals
International
Contagion
Effects
Unexpected
Events
“Weak” Financial
Structure
Moral Hazard
& Adverse
SelectionSpeculative
Attack& Herding Effect
Sharp
Depreciation
Loss of
Intern. Reserves
Sharp Increase
in Interest Rates
November 2004 Misalignment (66/73)
Real exchange rate misalignment is one of the most important leading indicators of currency crises: Empirical studies show that a domestic currency is usually overvalued before a currency crisis.
Source for the Figure: Kibritçioğlu (2004), monthly data.
M23-Type Misalignment before Currency Crises in Turkey
-15
-10
-5
0
5
10
15
20
25
30
-24-22-20-18-16-14-12-10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24
Pre-CrisisWindow
before July 1988crisis
before Jan. 1991crisis
before Feb. 1994crisis
before Dec. 1995crisis
before Feb. 2001crisis
Threshold = -6.8
cri
sis
pre-crisis window
The Relation between Misalignment and Currency Crises
November 2004 Misalignment (67/73)
Degree of Real Appreciation of the Turkish liraprior to 1994 & 2001 Currency Crises (%)
Negative signed figures above indicate the degree of real appreciation of the Turkish lira, while positive ones imply a real depreciation. That is, negative-signed figures show to what extent the relevant A index is below its equilibrium level, and vice versa.
M11 M12 M13 M14
1993 (annual average) -18.0 -16.2 -11.1 -12.4
2000 (annual average) -24.1 -16.1 -9.7 6.0
2003.I -12.9 -13.1 -9.7 0.6
2003.II -22.7 -24.3 -17.9 -10.4
2003.III -29.7 -32.6 -22.9 -15.2
2003 (annual average) -21.8 -23.3 -16.8 -8.3
M21 M22 M23 M24
1993 (annual average) -12.5 -10.5 -6.2 -6.3
2000 (annual average) -10.2 -5.0 -5.2 -3.1
2003.I 5.6 6.3 -0.4 -4.5
2003.II -6.0 -6.6 -8.7 -14.2
2003.III -14.1 -16.0 -13.7 -18.1
2003 (annual average) -4.8 -5.4 -7.6 -12.3
M31 M32 M33 M34
1993 (annual average) -15.4 -14.2 -5.8 -4.5
2000 (annual average) -14.0 -8.1 -6.1 -3.2
2003.I -1.4 -4.8 -5.3 -8.4
2003.II -14.7 -18.2 -12.4 -13.9
2003.III -22.0 -26.8 -17.2 -18.5
2003 (annual average) -12.7 -16.6 -11.6 -13.6
M41 M42 M43 M44
1993 (annual average) -15.1 -13.8 -5.2 -4.9
2000 (annual average) -14.5 -8.7 -6.5 -2.9
2003.I -1.6 -4.4 -4.0 -6.7
2003.II -12.8 -16.8 -12.4 -16.7
2003.III -20.7 -25.9 -17.6 -21.1
2003 (annual average) -11.7 -15.7 -11.3 -14.8
The Relation between Misalignment and Currency Crises
November 2004 Misalignment (68/73)
ConcludingConcludingRemarksRemarks
November 2004 Misalignment (69/73)
Overall Results of the Study
Selection of A for a Specific E Definition: The degree of the misalignment calculated is highly affected by the preferred “A”.
Note that the SPO’s index (A4) exhibits a significantly different development path in comparison to other A indices, particularly after 1996.
Selection of E for a Specific A Index: The degree of the misalignment calculated is highly affected by the definition of equilibrium used in the study.
The 16 measures of misalignment considered in this study show that the differences between these alternative measures vary between 6.5 and 36.5 percent points.
Since the degree of the real misalignment is one of the important leading indicators of currency crises, the reliability of measures of M is highly crucial for policy-makers.
November 2004 Misalignment (70/73)
Appendix:Appendix:Misalignment Estimations in Misalignment Estimations in
Previous StudiesPrevious Studies
November 2004 Misalignment (71/73)
Alper & Sağlam (2000), 1987-1999
Source: http://www.sba.luc.edu/orgs/meea//volume2/alper.html
November 2004 Misalignment (72/73)
Civcir (2002), 1987-2000
Source: http://www.erf.org.eg/9th%20annual%20conf/9th%20PDF%20Background/Finance/F-B%20Irfan%20Civir%20(Before).pdf
CPI based actualand equilibrium RERs(log. scale)
November 2004 Misalignment (73/73)
Özlale & Yeldan (2002), 1994-2001
Source: http://www.bilkent.edu.tr/~yeldane/ozlale&yeldan2002.pdf