Lahcen Achy

The paper investigates future exchange rate policy of the Middle East and North African (MENA) countries vis‐à‐vis the euro aimed at fostering their manufactured exports towards Euroland. The exchange rate policy is captured through three different indicators: the real effective exchange rate changes, volatility, and misalignment. The investigation is conducted for 11 sectors over the period 1970–1997. The sample includes four North African countries (Algeria, Morocco, Tunisia, Egypt) and Turkey. The results show that exchange rate management plays a crucial role in providing incentives for manufactured exports toward Euroland. The food sector is weakly responsive to real exchange rate changes while the textile sector is highly responsive. Four growing sectors (electronic, electrical, mechanical, and vehicles) were also found to be highly sensitive to exchange rate changes. The results suggest that policymakers should be more concerned with misalignment than with volatility.

This article investigates purchasing power parity (PPP) in the specific context of middle income countries. To circumvent the low power of traditional stationarity tests (Augmented Dickey-Fuller and Phillips-Perron tests), it performs variance ratio and fractional integration tests in addition to Perron's test that accounts for potential structural changes in real exchange rate processes. Beyond estimating half-life shocks to PPP, this article attempts to explain these estimates using a set of country specific variables as suggested by economic theory. The evidence suggests that reversion to parity tends to be faster in high inflation countries and that productivity improvement leads to a higher level of persistence. Openness to trade tends to reduce the extent of deviations from parity but this result does not appear to be statistically robust. Evidence shows also that deviations are less persistent under a fixed exchange rate regime and under unrestricted capital mobility.