Uganda's Equilibrium Real Exchange Rate and its Implications for Non-Traditional Export Performance

"Pursuit of an exchange rate policy that promotes the competitiveness of exports would be greatly facilitated if the policy maker were able to establish the level of misalignment of the exchange rate and thereby try to correct for it. The motivation of this study for Uganda was therefore to derive the equilibrium exchange rate path, determine the levels of misalignment of the exchange rate and assess their impact on the performance of non-traditional exports. Estimating the equilibrium real exchange rate (ERER) involved: (a) estimation of the real effective exchange rate (REER) by the cointegration and the error correction mechanism (ECM) approaches, (b) filtering transitory factors from the “fundamentals” using the Hodrick–Prescott filter approach and the Elbadawi moving average (MA) methodology, and (c) estimating the ERER using the permanent components of the fundamentals."