What to do when effective exchange rates cannot be calculated for developing economies? PANIC?

David Neto

Finance Research Letters, 2018, vol. 27, issue C, 283-290

Abstract: This paper deals with the difficulty to calculate the nominal effective exchange rate (EER) when international trade data are not (immediately) available, does not exist for a given period, is incomplete or not reliable which can be the case for some emerging countries. We propose to extract an EER proxy using a factor model and apply a PANIC (Panel Analysis of Non-stationarity in Idiosyncratic and Common components) methodology. In addition we propose to use sparse principal component analysis to select the bilateral exchange rates for the EER estimate. We apply the proposed methodology to approximate EER of the BRICS economies and we show that the approximation is fairly good. Finally we propose an EER estimate for the Egyptian Pound which is not provided by traditional data sources.

Keywords: PANIC; Non-stationary factor model; Effective exchange rates; Developing economies; Sparse loadings; Model selection (search for similar items in EconPapers)
JEL-codes: C12 C18 C32 C33 F31 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:27:y:2018:i:c:p:283-290

DOI: 10.1016/j.frl.2018.03.010

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