Wednesday, February 02, 2011

One more study of the value of the Dram

A recent IMF working paper addresses the value of the Dram. The paper discusses various methodological aspects of estimation techniques as it replicates previous findings.

Here is the abstract:
This paper uses a range of different methodologies to estimate the equilibrium real exchange rate in Armenia with both single-country and panel estimation techniques. We estimate a country specific autoregressive distributed lag model and then proceed with the estimation of a cointegrated panel consisting of transition economies in Europe and Central Asia. This addresses cross section dependence by using common correlated effects estimators. While our analysis focuses on Armenia, the methods are applicable to a large number of transition economies, and the paper thus provides an overview of methods that can be used to assess a country’s equilibrium exchange rate.


Anonymous said...

I would rather use simple PPP analysis for estimating the scope of overvaluation. Oomes and Minasyan showed 30 percent overvaluation in 2008 based on PPP aproach, which I think makes more sense. Since real exchange rate as of end 2010 is more or less the same as before the crisis, I would speculate that the magnitude of overvaluation now is even bigger.

less important point - according to authors "There was a shift away from precious stones and metals to non-precious metals and minerals.
This shift is likely to be linked to a decrease in exports of the diamond processing industry
and could be caused by both price effects and exhaustion of the natural resource. Thus, it is
not necessarily a sign of a loss of competitiveness". If I understood correctly authors believe Armenia extracts diamonds. Funny. More seriously, in fact, diamond processing is one of the most price/exchange rate sensitive industries as the margin is tiny and competitors are mostly low-wage. In 2005-07 diamond industry was cursing the Central Bank for appreciation....


David said...

Yes, it does look like the effective exchange rate is on the rise again, back to where it was prior to Nov 2008. But with foreign exchange reserves stable, what is driving this?

Anonymous said...

Foreign exchange reserves are declining, I mean net foreign assets. Central Bank never stopped selling dollars since the crisis, and, in addition, commercial banks are using their foreign exchange reserves at the Central Bank for loan, which again goes to cover the current account deficit. The situation seems unprecedented and incomprehensible - appreciation in the time of reserve loss.