Economic Review, Vol. 74 No. 4, 2023.
Preliminary communication
https://doi.org/10.32910/ep.74.4.4
ASYMMETRICAL EFFECTS OF REAL EFFECTIVE EXCHANGE RATE OF KUNA ON FOREIGN TRADE BALANCE IN REPUBLIC OF CROATIA
Filip Novinc
Abstract
This paper strives on giving an answer to whether assymetrical effects of real effective exchange rate of kuna, J-curve and Marshall-Lerner condition exist in the Republic of Croatia. Price rigidity, capacity constraints, and adjustment costs are just some reasons why depreciation and appreciation of the real effective exchange rate do not necessarily have equally strong effect of the opposite direction on net exports. Econometric estimation by nonlinear autoregressive distributed lags method (NARDL) enables separation of positive (appreciation) from negative (depreciation) changes in the real effective exchange rate, showing that its changes do not affect net exports symmetrically and linearly. Existence of J-curve and positive impact of the real effective exchange rate depreciation on trade balance (Marshall–Lerner condition) are confirmed, while appreciation has no significant effect. Results obtained in this paper point out that Croatia ‘s foreign trade balance can be improved by real effective exchange rate depreciation. However, this should be taken with caution given that nominal depreciation leads to growing external indebtedness of domestic economy, affects expectations, especially those related to inflation, import prices (therefore domestic prices), risk premium, returns on financial assets, and there are indications that depreciation of nominal and real exchange rate in Croatia have a contractional effect on domestic economic activity, so costs of such a policy may far outweigh the benefits of currency weakening. In addition, research limitations include low variability of the real effective exchange rate (which might make it difficult to obtain econometric relevant estimates), the problem of choosing representative exchange rate measures, and the choice of proxy variables for domestic and foreign income. In the observed period, appreciation and depreciation of the real effective exchange rate were relatively mild, so the conclusions are not necessarily valid in the case of a sudden and large fluctuations in it. Compared to previous research, asymmetric effect of the real effective exchange rate is confirmed on the balance of goods and services (not only balance of goods), and possible causes of nonlinearity in the response of foreign trade balance to changes in the real effective exchange rate are discussed.
Keywords
depreciation; Marshall-Lerner condition; J-curve; NARDL model
Hrčak ID:
304625
URI
Publication date:
23.6.2023.
Visits: 335 *