To analyze the effects of the real exchange rate volatility and misalignments on exports, consistent with the existing studies, we run the long-run export supply regressions (Equa-tion 6) with different measures of volatility and misalignment.
Table 10 summarizes the results for the quarterly real exports regressions. Overall the results are in line with the theoretical prediction, and all expected signs are in correct direction. As expected export supply price elasticities are positive and significantly
dif-Table 10: Export Supply Equations: Error Correction Model Results
dep.var: Volatility dep.var: Misalignment
rxt with δ1 with δ2 with δ3 rxt with mis1 with mis2
Constant 2.00** 1.18 1.07 Constant 1.35** 2.04***
(2.44) (1.44) (1.32) (2.94) (5.64)
Adjustment Speed Adjustment Speed
rxt−1 orut−1 -0.98*** -0.88*** -0.88*** rxt−1 or ut−1 -0.75*** -0.86***
(-5.55) (-5.48) (-4.93) (-4.13) (-6.03)
rgdt -0.02 -0.07 -0.07 rgdt -0.30 - 0.04
(-0.06) (-0.25) (-0.24) (-1.02) (-1.29)
rert 1.65** 1.84** 1.82** mai,t 0.006** 0.006**
(2.39) (2.22) (2.40) (2.06) (2.31)
δi,t -0.98 -0.07 -0.06 δi,t -0.53 -0.69
(-1.51) (-0.32) (-0.05) (-0.62) (-1.38)
d96 -0.13 0.03 0.03 d96 -0.05 -0.27***
(-0.66) (0.20) (0.22) (-0.31) (-3.25)
R2 0.74 0.70 0.70 R2 0.75 0.78
DW 2.10 2.04 2.04 DW 1.92 2.45
Notes: The numbers in parentheses are t-statistics. DW – the Durbin-Watson statistic. Significant at the ***1%, **5% and *10% level. The dependent variable is ∆rert. ut−1– error term. Misalignment indicator is converted tordtwhich indicates the estimated depreciation or appreciation required to bring the actual real exchange to the equilibrium level, and calculated as following: rdt= (rer∗t/rert−1)·100.
Source: Authors’ calculations.
ferent from zero at the 5% level in all three regressions (with δ1, δ2 and δ3). Despite the theoretically correct signs on the coefficients of other independent variables, such as the domestic activity term (rgdt) and the exchange rate volatility (δt), they are not significant in any of the three regressions for reasonable statistical levels of significance.
Similar to the above discussed import demand regressions’ case, the estimated adjust-ment coefficient of the cointegrating vector is for all models ranges from -0.88 to -0.98 and significantly different from zero in all equations, suggesting stability of the error correction mechanism, and a relatively quick adjustment to the past disequilibrium in export trade volumes.
Majority of empirical studies documented that, in developing countries a depreciation of the real exchange rate leads to strong increased export supply. In contrast, an appreci-ation of the real exchange rate could lead to a large deteriorappreci-ation in export performance of economies. Reviewing the exiting literature, Ghei and Pritchett (2001) arrive at a con-clusion that a reasonable range for the aggregate price elasticities of export supply tend
Table 11: Comparative Table: Price Elasticity of Aggregate Export Supply
Countries Exports Period covered Price elasticity
Non-oil-exporting developing countries TME 1963:1981 2.01
Pooled SSA countries TME 1965:1982 1.01
7 developed countries TE – 1.10 : 6.60
Uzbekistan TE 1994q3:2005q2 1.65 : 1.84
Uzbekistan (currency rationing policy) TE 1996q3:2003q3 1.24 : 1.57
TE and TME are for total and total merchandize exports, respectively. SSA – Sub-Saharan African countries. Source: Adapted from Ghei and Pritchett (2001), p.489. For the Uzbek case authors’
calculations.
to be in the range of 1.0 to 2.0 (see Table 11). In our case, the estimated price elasticity for Uzbek economy ranges from 1.65 to 1.84 (with the period average of 1.77) implying a considerable magnitude of the potential response of aggregate exports to the real exchange variability.
We also computed ’indicative’ price elasticity range for the period of the Government’s currency rationing policy (1.24 – 1.57 with the period average of 1.45). These relatively lower elasticities indicate that due to Government’s restrictive export policy14 large de-valuations, most likely, did not generate the expected improvements in the overall export performance.
The possible impact of the real exchange rate misalignments on exports is analyzed using modified specification of Equation 6. In particular, the real exchange rate misalign-ments (mat) are substituted for real exchange rate levels (rert) i.e. rx =f(rgd, maj, δi, d96).
The second part of the Table 10 summarizes the error correction model estimation results for import demand equations. All the explanatory variables in all model specifications carry the expected signs. Regarding the real exchange rate misalignment impact, both regressions generated almost similar estimates for elasticity coefficients. In particular, the implied elasticity shows that a 100% depreciation of the real exchange would increase exports only by 0.6%.
The estimated results also allow us to analyze possible implications of the Governments
14Recall the Government used an overvalued official exchange rate to tax exporting sectors (cotton and gold production) in order to subsidize imports of capital and priority consumer goods.
Figure 6: Uzbekistan: Actual vs. Predicted Trade Flows
1995q3 1997q1 1998q3 2000q1 2001q3 2003q1 2004q3 actual
1995q3 1997q1 1998q3 2000q1 2001q3 2003q1 2004q3 actual predicted
(b) Exports
Note: ’Predicted values’ of imports and exports are calculated assuming that there is no currency rationing policy, volatility and misalignment (dashed line). Source: Author’s calculations.
currency rationing policy for dynamics of import and export flows. For this purpose, we predict the real imports using the first model specification with mis1, and assuming the there is no currency rationing policy, volatility and misalignment. In similar manner, we estimate the predicted real exports. During the period of 1996-2002 the Governments currency rationing policy was lessening the volatility (Figure 6).
6 Conclusions
The present study attempted to produce a quantitative analysis of exchange rate volatilities and misalignment in Uzbekistan for the period of 1994–2005. The econometric estimation strategy consists of three main steps. First step involves computing several alternative proxies of the real exchange volatility. Then in the second we estimate the equilibrium exchange rate and misalignment using a two step Engle-Granger method. We followed Edwards (1989) in using the term “misalignment” to denote the gap between the real exchange rate and the equilibrium exchange rate. Finally, we investigate to which extent, empirically, the real exchange affects foreign trade flows in Uzbekistan.
The results of the analysis suggest that there is clear evidence of exchange rate move-ments’ impact on foreign trade flows in Uzbekistan. Below, we have tried to group the main conclusions drawn from the econometric analysis presented in this study.
1. The determinants of the long run real exchange rate in Uzbekistan. In general the estimated long run parameters of the real exchange rate are consistent with the predic-tions from theory. In particular, the government consumption has an appreciating impact on the real exchange rate. The effect is particularly strong and significant in the model estimated including the 1996 policy change dummy variable, suggesting that most gov-ernment spending is directed toward nontradables. Besides, the positive coefficient on this dummy variable is consistent, and confirms that the Government’s currency rationing policy substantially appreciated the real exchange rate.
Investment has a negative effect on the real exchange rate, suggesting that an increasing share of investment in GDP shifts spending toward tradable goods in the long term. This shift, other things equal, would depreciate the real exchange rate. For example, the implied elasticity suggests that a 10% increase in the investment share in GDP would depreciate the real exchange rate by at least 1.4%-2.0%. The estimated openness coefficient is positive and significant, suggesting that trade liberalization policy would appreciate the long-run equilibrium real exchange rate in Uzbekistan. Seemingly, this is a theoretically ambitious result, and needs for further research.
2. The real exchange rate misalignment. During the Government’s currency rationing policy period (late 1996–2000), our analysis reveals a substantial overvaluation (9% period average) and a widening gap between the actual and the estimated equilibrium real ex-change rates. The period from 1999q4 to 2000q4 was , when the estimated overvaluation reached up to 38% in the first quarter of 2000 (25% period average).
The Government managed to reverse substantial real overvaluation by the end of 2002.
After several devaluations the real exchange rate was very close to the estimated equilibrium level. In particular, in the fourth quarter of 2002 the real exchange rate was undervalued only by 1%. The average undervaluation of the real exchange rate during the post 2002-year period was equal to 1%.
3. The real exchange rate volatility. The real exchange rate volatility is likely to be an increasing concern for foreign trade policy in Uzbekistan. The implied elasticity suggests that a 10% increase in the volatility would cause a decrease of imports by at least 1.5%
– 2.0%. At the same time the results indicate that the Governments currency rationing policy was lessening the volatility proving that the policy-induced changes in exchange rate
has a stabilizing effect on trade flows.
Comparing the fluctuations of the predicted real exchange rate with the fluctuations of the actual real exchange rate allows us to estimate to what extent government policy in particular periods was mitigating the volatility or, on the contrary, increasing this volatility.
During the period of 1996-2002 the Governments currency rationing policy was lessening the volatility. On the contrary, gradual liberalization of the foreign exchange and trade regimes, aimed at establishing a realistic and single market rate, led to substantial increase of this volatility (the post 2002 period).
4. Exchange rate variability and trade flows. In most of developing (transition) coun-tries, in particular in Uzbekistan, exchange rate adjustment policy is considered as an essential element of trade policy. Therefore, reasonably accurate and precise estimates of import and export price elasticities can be used by policy advisors and practitioners in applied economic policy analysis, and in designing of development strategies. Following this logic, below we have tried to shed light into possible effects of the real exchange rate movements on export and import flows in Uzbekistan.
The exiting empirical literature concluded that a reasonable range for the aggregate price elasticities of export supply tend to be in the range of 1.0 to 2.0. In our case, the estimated price elasticity for Uzbek economy ranges from 1.65 to 1.84 (with the period average of 1.77) implying a considerable magnitude of the potential response of aggregate exports to the real exchange variability.
We also computed ’indicative’ price elasticity range for the period of the Government’s currency rationing policy (1.24 – 1.57 with the period average of 1.45). These relatively lower elasticities indicate that due to Government’s restrictive export policy large deval-uations, most likely, did not generate the expected improvements in the overall export performance.
We also provided an empirical evidence of negative impact of the Government’s 1996 measures on exports. As it was expected the 1996 policy change had a negative impact on export volumes, and increased imports. The implied elasticity shows that a 100%
depreciation of the real exchange would lead to little impact on both imports and exports, and would decrease (increase) imports (exports) only by 0.7% (0.6%).
References
Baffes, J., I. Elbadawi, and S. O’Connell. 2001. Chapter 10 of Exchange rate misalign-ment: concepts and measurement for developing countries, edited by L. Hinkle and P. Montiel, 405–463. A World Bank Research Publication, Oxford University Press.
Begg, D., L. Halpern, and Ch. Wyplosz. 1999. “Monetary and Exchange Rate Policies, EMU and Central and Eastern Europe.” CEPR and EastWest Institute Forum Report on the Economic Policy Initiative, vol. 5.
Calderon, C. 2004. “Trade Opennes and Real Exchange Rate Volatility: Panel Data Evidence.” Central Bank of Chile, vol. WP 294.
Caporale, T., and K. Doroodian. 1994. “Exchange Rate Variability and the Flow of International Trade.” Economic Letters 46:49–54.
Cottani, J., D. Cavallo, and M. Khan. 1990. “Real Exchange Rate Behavior and Economic Performance in LDCs.” Economic Development and Cultural Change 39:61–76.
Csajbok, A. 2003. “The Equilibrium Real Exchange Rate in Hungary: Results from Alternative Approaches.” Paper presented at the 2nd workshop on Macroeconomic Policy Research. Magyar Nemzeti Bank.
Devlin, R., A. Estevadeordal, P. Giordano, J. Monteagudo, and R. Saez. 2001. “Macroe-conomic Stability, Trade and Integration.” Integration and Trade 5(13):35–96.
Dollar, D. 1992. “Outward-Oriented Developing Economies Really Do Grow More Rapidly.” Economic Development and Cultural Change 40(3):545–566.
Edwards, S. 1989. “Real Exchange Rates, Devaluation, and Adjustment.” Cambridge, Mass.: MIT Press.
Egert, B. 2003. “Assessing Equilibrium Exchange Rates in CEE Acceding Countries: Can We Have DEER with BEER without FEER? A Critical Survey of the Literature.”
Focus on Transition 2:38–106.
Engle, R., and C. Granger. 1987. “Co-integration and error correction: Representation, estimation and testing.” Econometrica 55:251–276.
Feenstra, R., and J. Kendall. 1991. “Exchange Rate Volatility and International Prices.”
National Bureau of Economic Research, Working Paper, vol. 3644.
Frait, J., L. Komarek, and M. Melecky. 2005. “The Real Exchange Rate Misalignment in the Five Central European Countries.” Warewick Economic Research Papers, The Univeristy of Warwick, vol. No 739.
Frankel, J., and Sh-J. Wei. 1993. “Trade Blocs and Currency Blocs.” National Bureau of Economic Research, Working Paper, vol. 4335.
Ghei, N., and L. Pritchett. 2001. Chapter 11 ofExchange rate misalignment: concepts and measurement for developing countries, edited by L. Hinkle and P. Montiel, 464–496.
A World Bank Research Publication, Oxford University Press.
Ghura, D., and T. Grennes. 1993. “The Real Exchange Rate and Macroeconomic Per-formance in Sub-Saharan Africa.” Journal of Development Economics 42:155–174.
Hausmann, R., U. Panizza, and R. Rigobon. 2004. “The Long-Run Volatility Puzzle of the Real Exchange Rate.” NBER Working Paper, vol. WP 10751.
IMF. 2000. “Republic of Uzbekistan: Recent Economic Developments.” Staff Country Report 00/36.
Kaminsky, G., S. Lizondo, and C. Reinhart. 1998. “Leading Indicators of Currency Crises.” IMF Papers 45:1–48.
Kim, B., and I. Korhonen. 2002. “Equilibrium Exchange Rates in Transition Countries:
Evidence from Dynamic Heterogeneous Panel Models.” BOFIT Discussion Papers, vol. 15.
Kroner, K., and W. Lastrapes. 1993. “The Impact of Exchange Rate Volatility on International Trade: Reduced From Estimates Using the GARCH-in-Mean Model.”
International Money and Finance 12:298–318.
Lahreche-Revil, A., and A. Benassy-Quere. 2001. “The Impact of Exchange Rate Strate-gies on Trade and Foreign Direct investment in China.” Technical Report, Paper presented at the workshop on China’s Economy, organized by the CEPII in Paris on December 12, 2001.
Lane, Ph., and G. Milesi-Ferretti. 8-9 June 2001. “External Wealth, the Trade Bal-ance, and the Real Exchange Rate.” EEA/NBER International Seminar on Macroe-conomics, Dublin.
Lee, J. 1999. “The Effect of Exchange Rate Volatility on Trade in Durables.” Review of International Economics 7(2):189–201.
McKenzie, M. 1999. “The Impact of Exchange Rate Volatility on International Trade Flows.” Journal of Economic Surveys 13(1):71–106.
Montiel, P. 1997. “Exchange Rate Policies and Macroeconomic Management in ASEAN Countries.” IMF.
Mordecki, G. 2000. “Uruguayan Trade and The Real Exchange Rate: VAR Analysis 1990–1998.” Instituto de Economia, Universidad de la Republica.
Nabli, M., and M. Veganzones-Varoudakis. 2002. “Exchange Rate Regime and Competi-tiveness of Manufactured Exports: The Case of MENA Countries.” World Bank, vol.
Working Paper Series No.27.
Ofair, R., and S. Collins. 1997. “Real Exchange Rate Misalignments and Growth.”NBER Working Paper, vol. WP 6174.
Pickard, J. 2003. “Exchange Rate Volatility and Bilateral Trade Flows: An Analysis of U.S. demand for Certain Steel Products from Canada and Mexico.” Master’s Thesis, Faculty of the Virginia Polytechnic Institute and State University.
Popov, V., and V. Polterovich. 2004. “Accumulation of Foreign Exchange Reserves and Long Term Growth.” New Economic School, Moscow, Russia.
Rose, A. 1991. “The Role of Exchange Rates in a Popular Model of International Trade: Does the Marshall-Lerner Condition Hold?” Journal of International Eco-nomics 31:301–316.
. 2000. “One Money, One Market : the Effect of Common Currencies on Trade.”
Economic Policy 30:7–47.
Sapir, A., K. Sekkat, and A. Weber. 1994. “Tunisia-Export Growth: Determinants and Prospects.” Cepr discussion paper 1041, The Impact of Exchange-Rate Fluctuations on European Union Trade.
Sauer, C., and A. Bohara. 2001. “Exchange Rate Volatility and Exports: Regional Differences between Developing and Industrialized Countries.”Review of International Economics 9(1):133–152.
Sekkat, K. 1998. “Exchange Rate Variability and EU Trade.”Economic Papaers, vol. 127.
Sekkat, Kh., and A. Vaoudakis. 1999. “Incentive Policies and Manufactured exports in North Africa.” ERF Working Paper, vol. 9922.
Wang, K-Li., and C. Barrett. 2002. “A New Look At The Trade Volume Effects of Real Exchange Rate Risk.” Department of Applied Economics and Management, Working Paper, vol. 2002-41.
Weliwita, A., E. Ekanayake, and H. Tsujii. 1999. “Real Exchange Rate Volatility and Sri Lanka’s Exports to the Developed Countries, 1978–96.” Journal of Economic Development 24, no. 1.
Yotopoulos, P. 1996. “Exchange rate Parity for Trade and Development: Theory, Tests, and Case Studies.” Technical Report, Cambridge University Press.