Science, Technologies, Innovations №2(18) 2021, 25-38 p

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http://doi.org/10.35668/2520-6524-2021-2-04

Gasimli Vusal — Doctor of Economics, Professor, Executive Director, Center for Analysis of Economic Reforms and Communication, Professor of Economics at the Public Administration Academy under the President of Azerbaijan, Baku, Azerbaijan; +994503328466; qasimlivusal@yahoo.com; ORCID: 0000-0003-2345-6214

Jafarova Vusala — Postgraduate Student at the Institute for Scientific Research on Economic Reforms of Ministry of Economy of the Republic of Azerbaijan, Baku, Azerbaijan, +994503572276; vusala.jafarova@ereforms.gov.az; ORCID: 0000-0002-4711-4609

THE REAL EQUILIBRIUM EXCHANGE RATE IN A COMMODITY-EXPORTING ECONOMY: THE EXPERIENCE OF AZERBAIJAN

Abstract. The case of Azerbaijan serves to study the adequacy of exchange-rate policy in a resource-rich economy. This paper analyses the behavior of Azerbaijan’s external accounts over the past twenty years. Declining oil prices made an existing exchange-rate peg unsustainable and led to a large devaluation in 2015. Since then, the current account balance has improved, but by less than expected. We use the EBA-Lite method to derive regression-based estimates of the equilibrium real exchange rate, and relate misalignments to measures of “policy gaps”. Our findings suggest that only a few years after the devaluation, Azerbaijan’s currency has once more become overvalued. Moreover, the equilibrium real exchange rate is volatile and hardly compatible with a long-run exchange rate peg. Exchange rate policy should try to accommodate shifts in the fundamental determinants such as relative productivity and real oil prices.

Key words: Equilibrium real exchange rate; CA gap and REER gap; EBA lite model, Azerbaijan economy.

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