International Journal of Economics and Financial Issues ISSN: 2146-4138 available at http: www.econjournals.com International Journal of Economics and Financial Issues, 2020, 10(4), 132-140. Moroccan Dirham Flexibilization and Equilibrium Exchange Rate: A Quest for Grail? Nicolas Moumni1, Salma Dasser2* 1UPJV-CRIISEA, Faculty of Economics and Management, Amiens, France, 2LEA-UM5, Faculty of Economic and Social Juridical Sciences-Agdal, Rabat, Morocco. *Email: [email protected] Received: 04 April 2020 Accepted: 19 June 2020 DOI: https://doi.org/10.32479/ijefi.9898 ABSTRACT The purpose of this study is to identify the Moroccan dirham misalignment phases over the period 1998T1-2017T4, related to an estimated equilibrium exchange rate, using an ad hoc behavioral equilibrium exchange rate econometric model. The overvaluation that may result from misalignments is one of the major arguments in the adoption of the flexibility regime by the Moroccan monetary authorities since 2018. We examine the relevance and the validity of the choice of this new regime in the case of Morocco. The observation of the misalignment graph leads us to the following findings: (1) The highest overvaluation is found in the early 2000s, reaching 35% by 2009 and then decreasing until 2012T2; (2) the largest undervaluation of about 15% is observed around 2014; then from the end of 2015, the misalignments did not exceed ± 15%. Keywords: Exchange Rate, Real Equilibrium Exchange Rate, ARDL JEL Classifications: C 22, F31 1. INTRODUCTION After the Morocco independence, its foreign trade with France represented about 47% of the total. In a context of low economic The Moroccan monetary authorities’ decision, in 2018, relating to and financial openness, the structural reforms initiated by the the Moroccan Dirham’s (MAD) exchange rate regime from fixity country had not mobilized the exchange rate as an instrument to flexibility was aimed, in particular, to establish an equilibrium of commercial competitiveness. This lack of an active foreign exchange rate by the exchange rate mechanisms market, in place exchange rate policy led to the Moroccan Dirham pegged exchange of the price mechanism administered by Bank Al Maghrib (BAM)1 rate to the French Franc when it was created in October 1957. (Moumni, 2019). Some independence increase in BAM’s monetary policy was also expected. According to the Main Stream, the Dirham But the shift of most developed countries to the floating rate regime move to the flexible exchange rate regime would allow Morocco (following the end of the Bretton Woods fixed exchange rate) and to finish with the trade-off between volatility and misalignments the dollar devaluation in 1973 undermine the Franc/Dirham parity. in relation to the equilibrium exchange rate. In this logic, the In May 1973, the Moroccan monetary authorities interruped the determination of the value of money by the market gives it the arrangement between the Dirham and the French Franc in favor natural role of an adjustment variable allowing the economy to cope of an administered regime defined by a basket of nine currencies with external asymmetric shocks (Aizenman and Hausmann, 2001). of the main economic partners of Morocco. Since this period, an active exchange rate policy has been put in place in order to 1 This issue has been the subject of blog posts (www.ledmaroc.ma) and an handle the effective stability of the national currency with a view article in Critique Economique n ° 38-39, Printemps-été 2019 by Nicolas to improving the competitiveness of Morocco’s foreign trade. In Moumni. 1980, the strong indebtedness of the country caused the first change This Journal is licensed under a Creative Commons Attribution 4.0 International License 132 International Journal of Economics and Financial Issues | Vol 10 • Issue 4 • 2020 Moumni and Dasser: Moroccan Dirham Flexibilization and Equilibrium Exchange Rate: A Quest for Grail? in the basket of currencies. Since then, the monetary authorities The theory of PPP is an important component of the exchange had made several changes in the basket and devaluations between rate literature. Although its methodological approach is 1990 and 2015 in search of the suitable exchange rate, in order to practical and useful, the empirical validation of its absolute re-establish Morocco’s commercial competitiveness. version has been the subject to a great extent debate, criticism and controversy. Indeed, it is based on restrictive assumptions In the context of greater international financial integration and suffers from numerous shortcomings. Among its main (Caporale et al., 2009), according to Edwards (1989), the limitations is the lack of reference to macroeconomic equilibrium exchange rate of a currency ensures both internal and equilibrium and the link between the real exchange rate and external equilibrium. An overvalued dirham would penalize price the country’s external position. competitiveness, the viability of Morocco’s external position and therefore its economic performance. Theoretically, the flexible This gap will be filled in 1985 by Williamson who developed exchange rate regime is supposed to reduce the misalignments, the medium-term macroeconomic approach, the fundamental which penalize economic performances, of the observed exchange equilibrium exchange rate (FEER) (Bouveret and Sterdyniak, rate compared to an assumed equilibrium exchange rate (Plihon, 2005). This is a static model where the equilibrium exchange rate 1991). For the standard current, the equilibrium exchange rate is estimated following the definition of a “sustainable” target of must be determined by market forces (FMI, 2017). the current balance. The model is based on the assumption of a convergence of the observed exchange rate towards its equilibrium The purpose of this study is to try to identify Dirham misalignment value. Following a similar approach, Edwards (1989) suggests phases over the period 1998T1-2017T4, compared to an estimated that the equilibrium exchange rate ensures, at the same time, equilibrium exchange rate, using an ad hoc econometric model the internal and external balances of the country. The internal behavioral equilibrium exchange rate (BBER) by Clark and MacDonald (1997). The overvaluation that may result from balance is the level of production that leads to full employment misalignments is one of the major arguments in the adoption of and sustainable inflation. External equilibrium refers to the level the flexibility regime. It will then be necessary to conclude on of the current account that can be financed by foreign capital in the role of the Dirham to facilitate the expected adjustment of the medium term. the new regime. In 1997, Clark and MacDonald developed the BBER model, We organize this work in two sections. First, we will review briefly entitled BBER. This ad hoc econometric model tries to explain the main theoretical models of the equilibrium exchange rate, rather empirically the trajectory of the real long-term exchange as well as the results of some empirical studies similar to ours. rate according to a vector of fundamental macroeconomic Secondly, we will present and analyze our empirical study. In variables (public expenditure, degree of openness of the economy, this quantitative part, we will analyze the behavior of the dirham productivity, the money supply... etc.). exchange rate in terms of misalignment, by subjecting it to the empirical tests of the BBER model. Using the cointegration relationship, the model determines the misalignment by calculating the difference between the current 2. EQUILIBRIUM EXCHANGE RATE exchange rate and its long-term estimated equilibrium value. This is the approach we use in our empirical study (cf partie 2.1). THEORIES AND EMPIRICAL CHECKS In the pure empirical model, Stein and Allen (1997) have proposed 2.1. Long-term Equilibrium Exchange Rate Models a theory of the Natural Real Exchange Rate (NATREX). In The determination of the proper (optimal) exchange rate refers to this dynamic model, the NATREX allows balance of payments the equilibrium exchange rate concept, which continues to refer equilibrium in the absence of cyclical factors, flows of speculative to the relative purchasing power parity (PPP) theory developed capital and changes in foreign exchange reserves. by Cassel as early as 1916. After this overview of the theoretical models of the equilibrium The PPP is based on the law of the single price2. According to exchange rate, it is necessary to reappraisal the empirical results this approach, the forward exchange rate of a national currency of some studies concerning the Moroccan Dirham. against a foreign currency depends on the inflation differential between both currencies. As a result, any deviation from the current exchange rate against an estimated baseline is interpreted 2.2. Empirical Studies on the Dirham Equilibrium as a deviation of the exchange rate from its equilibrium value, Exchange Rate and its Misalignments subject to verification of certain strong assumptions3. The project of Moroccan monetary authorities to move the exchange rate regime towards flexibility took a while to 2 This law stipulates that when the production function of a basket of goods is materialize. During this time period, a number of empirical studies identical in two countries and that consumers have the same utility function, have been conducted. We summarize below the main results of in the absence of transaction costs and in a situation of equilibrium, the these studies. price of basket of goods must be the same in both economies. 3 Among these assumptions, there is the absence of transaction costs, tariffs and tariff barriers as well as the homogeneity of consumer tastes from one The study carried out in 2004 by Bouoiyour et al. on the effective country to another. long-term equilibrium real exchange rate of the Dirham vis-à- International Journal of Economics and Financial Issues | Vol 10 • Issue 4 • 2020 133 Moumni and Dasser: Moroccan Dirham Flexibilization and Equilibrium Exchange Rate: A Quest for Grail? vis the European Union countries4 over the period 1967-2000 diversification of exports.