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This paper examines the effect of the real exchange rate misalignment (RERMIS) on the collective economic growth of Egypt, Jordan, Morocco, and Tunisia. The paper constructs three measures of exchange rate misalignment based on purchasing power parity; a black market exchange rate; and a structured model. The empirical investigation confirmed the adverse effect of RERMIS on growth, using all measures of RERMIS, as predicted by endogenous growth models. The results also highlighted the role of other factors; specifically, capital growth and population have the theoretical signs predicted by the Solow growth model and are statistically significant.

Finance: General --- Foreign Exchange --- Open Economy Macroeconomics --- Macroeconomic Analyses of Economic Development --- Development Planning and Policy: Trade Policy --- Factor Movement --- Foreign Exchange Policy --- International Financial Markets --- Currency --- Foreign exchange --- Finance --- Exchange rates --- Exchange rate policy --- Currency markets --- Real exchange rates --- Financial markets --- Foreign exchange market --- Egypt, Arab Republic of

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Private finance --- South Korea

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Inflation (Finance)

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November 1998 To what extent did tightening monetary policy magnify the East Asian crisis through its adverse effects on credit supply? In the Republic of Korea, interest rate spreads, which capture credit channel effects, influence economic activity, and these effects are disproportionately larger for small and medium-size enterprises. So policymakers who neglect credit channel effects might be overkilling the economy and altogether overlooking the disproportionate effects of monetary and financial shocks on some sectors. The debates surrounding the recent East Asian crisis have focused not only on causes but also on policy actions in the wake of the initial shock. This has raised questions about the relationship between monetary policy and market confidence. Specifically, would rising interest rates bolster or depress market confidence? To answer this question requires assessing whether, and to what extent, monetary and financial shocks are magnified through the economy via the credit channel. Domaç and Ferri focus on the Republic of Korea-a particularly good case for testing credit channel effects-with two objectives: ° To ascertain whether and to what extent interest rate spreads could help predict subsequent fluctuations in real economic activity. ° To test whether small and medium-size enterprises suffer more than other businesses do from the adverse effects of the credit channel. The authors'empirical findings support the hypothesis that spreads that capture credit channel effects do indeed influence economic activity. Specifically, spreads contain significant information for predicting the future course of industrial production. The effect is, as one might have assumed, disproportionately larger for small and medium-size enterprises. Thus policymakers, in Korea and elsewhere, who neglect credit channel effects might be overkilling the economy and altogether overlooking the disproportionate effects of monetary and financial shocks on various segments of the economy. This paper-a product of the Poverty Reduction and Economic Management Sector Unit and the Financial Sector Development Sector Unit, East Asia and Pacific Region-is part of a larger effort in the region to analyze the patterns and consequences of the East Asian crisis, with particular reference to the link between the real and financial sectors. The authors may be contacted at idomac@worldbank.org or gferri@worldbank.org.

Financial crises. --- Capital costs.