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A Comparative Analysis of Exchange Rate Fluctuations and Economic Activity: The Cases of Egypt and Turkey

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  • Magda Kandil

    (International Monetary Fund)

  • Nazire Nergiz Dincer

    (State Planning Organization)

Abstract

The paper examines the effects of exchange rate fluctuations on real output, the price level, and the real value of components of aggregate demand in Egypt and Turkey. The theoretical model decomposes movements in the exchange rate into anticipated and unanticipated components. Unanticipated currency fluctuations determine aggregate demand through exports, imports, and the demand for domestic currency, and aggregate supply through the cost of imported intermediate goods and producers’ forecasts of relative competitiveness. In Turkey, anticipated exchange rate appreciation has significant adverse effects, contracting the growth of real output and the demand for investment and exports, while raising price inflation. Further, unanticipated exchange rate fluctuations have asymmetric effects that highlight the importance of unanticipated depreciation in shrinking output growth and the growth of private consumption and investment, despite an increase in export growth. In Egypt, anticipated exchange rate appreciation decreases export growth. Given asymmetry, the net effect of unanticipated exchange rate fluctuations decreases real output and consumption growth and increases export growth, on average over time.

Suggested Citation

  • Magda Kandil & Nazire Nergiz Dincer, 2007. "A Comparative Analysis of Exchange Rate Fluctuations and Economic Activity: The Cases of Egypt and Turkey," Working Papers 0722, Economic Research Forum, revised Dec 2007.
    • Handle: RePEc:erg:wpaper:0722
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