The Asymmetric Effects of the Determinants of Real Exchange Rate in Jordan: The Role of Price Index Selection
Abstract
This study examines the asymmetric effect of real exchange rate (RER) determinants on RER. Workers' remittances (REM), foreign reserves (RES), government expenditures (EXP) and terms of trade (TOT) were chosen as determinants of the RER, which was measured with four different price indices; (CPIU.S/CPIJOR, GDP Def. rU.S/GDP Def.JOR, IPIU.S/GDP Def. JOR , PPIU.S/GDP Def. JOR). Quarterly data were applied from Jordan for the period of (2004-2017) using nonlinear autoregressive distributed lag (NARDL) model.
The results indicate that the choice of the price index affect significantly the symmetry/asymmetry patterns of the RER determinants, thus, the choice of the price index should be directly linked to the purpose of the study to gain accurate results.
Moreover, expansive fiscal policy may increase TOT by causing a country’s currency to depreciate. However, TOT was the only determinant that resulted in symmetrical behavior regardless of the price index chosen as a basis for measuring a currency’s RER. Contrary to the study’s hypothesis, fluctuations in Jordanian imports and exports do not fluctuate with RER.
With respect to the short-run symmetry, foreign reserves (RES), governmental expenditures (EXP) and TOT may influence RER asymmetrically leading to possibility to peg RER in the short-run. The expansionary economic policy may have a greater impact on RER than the contractionary policy, which may in turn increase TOT. Hence, overvaluation of RER may hamper economic growth. This may be particularly true for emerging economies, such as Jordan’s, this may be particularly true for emerging [or emerging-market] economies, such as Jordan’s, which are overseen by weak institutions and plagued by market failure.
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