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

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  • Taya Dumrongrittikul
  • Heather M. Anderson

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.

Suggested Citation

  • Taya Dumrongrittikul & Heather M. Anderson, 2013. "Do Policy-Related Shocks Affect Real Exchange Rates of Asian Developing Countries?," Monash Econometrics and Business Statistics Working Papers 12/13, Monash University, Department of Econometrics and Business Statistics.
    • Handle: RePEc:msh:ebswps:2013-12
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    File URL: http://business.monash.edu/econometrics-and-business-statistics/research/publications/ebs/wp12-13.pdf
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    References listed on IDEAS

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    Cited by:

    1. Rod Tyers & Ying Zhang, 2014. "Real exchange rate determination and the China puzzle," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 28(2), pages 1-32, November.
    2. Dumrongrittikul, Taya & Anderson, Heather & Vahid, Farshid, 2019. "The global effects of productivity gains in Asian emerging economies," Economic Modelling, Elsevier, vol. 83(C), pages 127-140.

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    Keywords

    Real exchange rates; exchange rate determination; vector error correction model; monetary policy shock; sign restrictions; penalty function;
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