Appendix: Incorporating Uncertainty
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Calibration detail for all of the model’s parameters are available from the author on request.
The computations are derived using data that were maintained in the IMF’s Research Department to support the assessment of real effective exchange rates. However, it is necessary to use the 1995–2004 period to proxy the evolution of productivity over the last decade because this database is no longer updated due to the high cost.
Given the significant disruptions to world trade that occurred during the global financial crisis, the 1997 to 2007 period was assumed to better capture the underlying trends in world trade used as a basis for this analysis.
This is not the case for emerging Asia where the parameters that determine the commodity intensity of nontradable goods are ¾ of the size of the parameters that determine the commodity intensity of tradable goods. As emerging Asia urbanizes, infrastructure and housing, which are commodity intensive, represent a significant share of nontradables.
The terms-of-trade proxy contained in the figures is based on starting period volumes and actual period prices. An alternative measure based on actual volumes and prices shows a much larger increase in the terms of trade for all blocks except emerging Asia, where the terms of trade decline. The ideal chain-weighted index would lie somewhere between the two, but is too complex to add to already complicated model code.
In the very long run, the required appreciation to the 50 percent increase in emerging Asia’s real GDP is 6 percent in this simulation and 12 percent in the previous simulation. If demand for emerging Asia’s manufactured export good was also exogenously increased in the block of remaining countries, as was done in the previous simulation, the required appreciation would be a little larger than 6 percent in the long run.
One factor that could moderate the required depreciation would be if emerging Asia’s exports continued to gain market share beyond that given by the model’s properties, as was implemented in the two previous unbalanced growth simulations. However, preliminary analysis suggests that this would modestly reduce the magnitude of the required real effective exchange rate adjustment, not reverse the sign.