The Asymmetric Effects of Exchange Rate Changes on Output: Evidence from Asian Countries

ABSTRACT

This article examines the asymmetric effects of real exchange rate changes on the domestic output of selected Asian countries. To account for asymmetries, we separate currency appreciation from depreciation and utilize the nonlinear autoregressive distributed lag (NARDL) model. Employing annual data (1973 to 2018), we find evidence of short-run and long-run asymmetries in the effects of real exchange changes on the domestic output of all the countries. This means that currency appreciations have different effects from currency depreciations on the output of the countries. Overall, the results suggest that both currency appreciations and depreciations are contractionary in most cases.

KEYWORDS:

• Asian countries
• asymmetry
• output
• exchange rates
• nonlinear ARDL

Acknowledgments

The author is deeply grateful to two anonymous referees for their valuable suggestions and comments. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ In this article, we use the terms devaluation and depreciation interchangeably. However, it should be noted that in practice the two terms are not the same. Specifically, devaluation is a result of a policy step, whereas depreciation is usually a result of market forces. Therefore, devaluations and depreciations may impact output differently (see, for example, Ahmed et al. 2002; Kočenda, Maurel, and Schnabl 2013).

² The study also included Chile and Mexico with the results suggesting contractionary devaluation.

³ Using higher frequency data (e.g., quarterly data) is preferable to using annual data. However, the use of annual data in this study is governed by the availability of data. Consistent and sufficiently long quarterly data is not available for most of the variables for the countries studied in this article.

⁴ The data that support the findings of this study are openly available from the World Bank Development Indicators Database at https://databank.worldbank.org/source/world-development-indicators and from the International Financial Statistics of the International Monetary Fund at https://data.imf.org/?sk=4C514D48-B6BA-49ED-8AB9-52B0C1A0179B.

⁵ Except for Japan, wage data is not available for the Asian countries studied in this article. Therefore, the real wage is excluded from the model in our case.

⁶ Dubai crude oil price is used because Asian countries import about 75% of their oil from the Middle East (Mitchell 2014), which makes it the benchmark oil price for Asian countries. Besides, crude oil prices are highly correlated, moving in the same direction. Therefore, using a different oil price would not produce significantly different results (Nusair 2019).

⁷ Although, these studies did not use the ARDL model.