International Financial Integration and Real Exchange Rate Long-Run Dynamics in Emerging Countries: Some Panel Evidence

21 Pages Posted: 2 Mar 2009

See all articles by Guglielmo Maria Caporale

Guglielmo Maria Caporale

Brunel University London - Department of Economics and Finance; London South Bank University; CESifo (Center for Economic Studies and Ifo Institute); German Institute for Economic Research (DIW Berlin)

Thouraya Hadj Amor

Economic Research Forum (ERF); University of Monastir - FSEGM

Christophe Rault

IZA Institute of Labor Economics; University of Orleans; CESifo (Center for Economic Studies and Ifo Institute)

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Abstract

The aim of this paper is to provide new empirical evidence on the impact of international financial integration on the long-run Real Exchange Rate (RER) in 39 developing countries belonging to three different geographical regions (Latin America, Asia and MENA). It covers the period 1979-2004, and carries out 'second-generation' tests for non-stationary panels. Several factors, including international financial integration, are shown to drive the long-run RER in emerging countries. It is found that the new financial environment characterised by international financial integration leads to a depreciation of the RER in the long run. Further, RER misalignments take the form of an under-valuation in most MENA countries and an over-valuation in most Latin American and Asian countries.

Keywords: emerging economies, real exchange rate, financial integration, misalignment, second-generation panel unit root and cointegration tests

JEL Classification: E31, F0, F31, C15

Suggested Citation

Caporale, Guglielmo Maria and Hadj Amor, Thouraya and Rault, Christophe and Rault, Christophe, International Financial Integration and Real Exchange Rate Long-Run Dynamics in Emerging Countries: Some Panel Evidence. IZA Discussion Paper No. 4038, Available at SSRN: https://ssrn.com/abstract=1351201 or http://dx.doi.org/10.2139/ssrn.1351201

Guglielmo Maria Caporale (Contact Author)

Brunel University London - Department of Economics and Finance ( email )

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London South Bank University ( email )

Centre for Monetary and Financial Economics
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CESifo (Center for Economic Studies and Ifo Institute)

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German Institute for Economic Research (DIW Berlin) ( email )

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Thouraya Hadj Amor

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University of Monastir - FSEGM ( email )

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Christophe Rault

IZA Institute of Labor Economics

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CESifo (Center for Economic Studies and Ifo Institute)

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Germany

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