establish the country suffers from DD. Furthermore, institutions have no clear policies and aid against DD. A unit increase in the share of governmental investment into assets in don’t the GDP decreases the REER. It is an indicator of positive governmental policy to avoid spending The negative sign of the relationship speaks of investment with high import contents, which have a negative effect on the trade of balance, meaning that a policy to avoid spending effects been established. M2, on the other hand, is an indicator of negative hasn’t governmental policy, since increasing cash flow into the market is a method of manipulating the REER the decrease. The empirical model found two co-integrated relations, since there is causality between REER and NFA variables. The causality lies in the foreign investments: a low RER makes domestic assets less attractive for both domestic and foreign investment, because the assets offer lower real rates of return. On the other hand, a reduction in foreign investment into assets decreases the demand for the domestic currency, thus increasing REER. Policies: Achieving a mere decline in REER are not sufficient measures to eliminate DD. DD lies in the manufacturing sector decline. The investment into developing this sector is the structural change needed to achieve a more stable economy. Countries with DD have had different approaches in fighting DD. Netherlands, alongside with investment into manufacturing sector, made investments in international assets, thus diversifying the economy. Australia dealt with the condition by eliminating tariffs and subsidizing a certain sectors of the manufacturing industry. The government of Norway developed several policies to avoid DD, including funding of the manufacturing sector to sustain it, creating of the Government Pension Fund designed to hedge against petroleum revenue and investment in technological advancement and research. For case several steps are necessary. Governmental spending affects the Armenia’s resource revenue greatly (Katz et al, 2004), thus a fiscal policy must be established to control
establish the country suffers from DD. Furthermore, institutions have no clear policies and don’t aid against DD. A unit increase in the share of governmental investment into assets in the GDP decreases the REER. It is an indicator of positive governmental policy to avoid spending The negative sign of the relationship speaks of investment with high import contents, which have a negative effect on the trade of balance, meaning that a policy to avoid spending effects hasn’t been established. M2, on the other hand, is an indicator of negative governmental policy, since increasing cash flow into the market is a method of manipulating the REER the decrease. The empirical model found two co-integrated relations, since there is causality between REER and NFA variables. The causality lies in the foreign investments: a low RER makes domestic assets less attractive for both domestic and foreign investment, because the assets offer lower real rates of return. On the other hand, a reduction in foreign investment into assets decreases the demand for the domestic currency, thus increasing REER. Policies: Achieving a mere decline in REER are not sufficient measures to eliminate DD. DD lies in the manufacturing sector decline. The investment into developing this sector is the structural change needed to achieve a more stable economy. Countries with DD have had different approaches in fighting DD. Netherlands, alongside with investment into manufacturing sector, made investments in international assets, thus diversifying the economy. Australia dealt with the condition by eliminating tariffs and subsidizing a certain sectors of the manufacturing industry. The government of Norway developed several policies to avoid DD, including funding of the manufacturing sector to sustain it, creating of the Government Pension Fund designed to hedge against petroleum revenue and investment in technological advancement and research. For Armenia’s case several steps are necessary. Governmental spending affects the resource revenue greatly (Katz et al, 2004), thus a fiscal policy must be established to control
w1510.docx