Assessing the Impact of the Euro on the Economies of Some MENA Countries: An Empirical Investigation Utilizing a Time-Varying Model to Forecast the Level and Volatility of the Us Dollar/Euro Exchange Rate

Abstract

This paper analyzes qualitatively the impact of changes in the level and variability of the US dollar/EURO exchange rate on the real GDP growth rate and trade balance positions of three MENA countries, namely Egypt, Jordan and Morocco. First, the analytical framework is presented by developing explicit relationships between (1) output growth and the variability of the nominal exchange rate; (2) per capita GDP and the variability and realignment of the real exchange rate; and (3) commodity prices and nominal exchange rate volatility. Then, based on these models, the impacts of (1) an appreciation of the US dollar against the EURO and (2) an increase in the volatility of the US dollar/EURO rate are derived. Our results indicate that an appreciation of the US dollar/EURO rate or an increase in the volatility of this rate leads to a lower real GDP growth rate and worsening of the trade balance positions for Egypt and Jordan, that effectively peg their currencies to the US dollar, and the opposite for Morocco, that effectively pegs its currency to the EURO. In contrast, an appreciation of the EURO against the US dollar encourages imports to and discourages exports from the EMU region to countries that peg their currencies to the US dollar. This appreciation, however, tends to lower inflation in countries with EURO-denominated products, partly because of lower costs for the imported components. In general, a EURO appreciation results in higher economic activity growth of countries that have US dollar-denominated products, and puts competitiveness pressures on countries that have EURO-denominated products.