The impacts of productivity differentials and oil price on the real exchange rate misalignment: Evidence from a developing country

Abstract

This study examines the impact of oil price and productivity differentials on real exchange rate (RER) misalignment in Syria from 1980 to 2010. In order to do that, this research develops an index for productivity differential by applying the Autoregressive Distributed Lag (ARDL) bounds test for cointegration proposed by Pesaran et al. (2001). The empirical results found that there is a positive and significant relationship between productivity differentials, oil price, gross capital formation and RER appreciation while government expenditure has an opposite impact. Stability tests show that RER adjusts towards its equilibrium path. The empirical results further conclude that a flexible exchange rate raise the adjustment speed towards the equilibrium in the long run. Consequently, Syria's monetary policy economy should achieve a flexible exchange rate regime to ease the convergence of the exchange rate after a shock occurs. 2019 Inderscience Enterprises Ltd.