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Do Policy-Related Shocks Affect Real Exchange Rates of Asian Developing Countries?

Taya Dumrongrittikul () and Heather Anderson

No 12/13, 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 and monetary policy for eight Asian developing countries. The analysis is based on a panel pseudo-Bayesian 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 short-lived. Real exchange rate responses to unexpected monetary tightening are consistent with the Dornbusch overshooting hypothesis and long-run neutrality of monetary policy. The evidence suggests that trade liberalization provides an effective device for driving exchange rate movements.

Keywords: Real exchange rates; exchange rate determination; vector error correction model; monetary policy shock; sign restrictions; penalty function (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-mon, nep-opm and nep-sea
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Citations: View citations in EconPapers (3)

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