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The Dirham’s Secret Value

A short post on Morocco’s most coveted economic secret: what is the currency board breakdown used by Bank Al Maghrib to determine our Dirham currency value?

 Speculations place the Euro well ahead between 60% and 80%. And that has a lot to do with the flow of goods and capital circulating between us and the other side of the Gibraltar detroit. Dollar should follow closely as well, with our main exports (Phosphate) and strategic imports (Oil and derivatives) labeled in Dollar.
And yet we should have a close idea of how the Dirham value is determined; it is after all a matter of transparency as well as credibility: the Dirham value tends to condition -up to a point- a significant part of the overall monetary policy, and many businesses are interacting daily with the decisions of Bank Al Maghrib.
The assumption behind this is simple and a bit restrictive: I assume the only determinant (or indeed the most significant) for the Dirham value is the amount of traded goods in  a year, which is an overly simplistic assumption, but one that makes sense, because discrepancies can be then established on the basis of capital flows, and only then residual differences can be attributed to policy arrangements (the so-called activist policy) furthermore, the initial assumption only establishes itself because the price of a currency is mainly function of the relative price of goods traded between one country and many others. This is all very classical (or neo-classical) but for a small, outward-oriented country that is Morocco, the theory applies, since the trade integration index went up from .38 in 1993, to .58 in 2010: (Exports + Imports)/GDP.
Even without a perfect hindsight of the currency portfolio behind it, the Dirham is firmly pegged against the Euro: the correlation in its exchange rate with the Dollar, and that between the latter and the Euro reaches staggering high levels (.97) either points to a fixed currency board -meaning, with no substantial changes in portfolio weightings, or with a semi-constant weighting for the Euro, and a random process determining the pegging against the Dollar and other major currencies to fill in the remaining slots. If such theory were to be vindicated, then any random generating process for, say the remaining 20% will not change that much the trend observed in the second graph.
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