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

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  • NETO, David

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.

Suggested Citation

  • NETO, David, 2018. "What to do when effective exchange rates cannot be calculated for developing economies? PANIC?," Finance Research Letters, Elsevier, vol. 27(C), pages 283-290.
    • Handle: RePEc:eee:finlet:v:27:y:2018:i:c:p:283-290
    DOI: 10.1016/j.frl.2018.03.010
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    References listed on IDEAS

    as
    1. Jushan Bai & Serena Ng, 2004. "A PANIC Attack on Unit Roots and Cointegration," Econometrica, Econometric Society, vol. 72(4), pages 1127-1177, July.
    2. Marc Klau & San Sau Fung, 2006. "The new BIS effective exchange rate indices," BIS Quarterly Review, Bank for International Settlements, March.
    3. Zivot, Eric & Andrews, Donald W K, 2002. "Further Evidence on the Great Crash, the Oil-Price Shock, and the Unit-Root Hypothesis," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 25-44, January.
    4. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    PANIC; Non-stationary factor model; Effective exchange rates; Developing economies; Sparse loadings; Model selection;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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