Original scientific paper
https://doi.org/10.18045/zbefri.2017.2.277
The adverse effect of real effective exchange rate change on trade balance in European transition countries
Selena Begović
; School of Economics and Business, University of Sarajevo, Sarajevo, Bosnia and Herzegovina
Sead Kreso
; School of Economics and Business, University of Sarajevo, Sarajevo, Bosnia and Herzegovina
Abstract
Most European transition countries have fixed or highly managed flexible exchange
rate regimes. This exchange rate rigidity is sometimes argued to worsen the trade
balance by keeping the currency overvalued. However, there is no unambiguous
evidence that currency depreciation/devaluation positively affects trade balance and
leads towards the adjustment, even in the short-run. Therefore, we examine the effect
of real effective exchange rate (hereafter REER) on trade balance in European
transition economies over the period 2000-2015. By using fixed effect model for
static and generalised method of moments for dynamic estimation, we find that there
is an adverse effect of the REER on trade balance in European transition countries
over the period 2000-2015. Namely, depreciation of REER deteriorates trade
balance in European transition countries, which could be explained by high import
dependence and low export capacity. This implies that policymakers in European
transition countries should not use exchange rate policy to improve trade balance.
This is important in the light of their accession towards European economic and
monetary integration, implying that these countries should focus more on using
fiscal, rather than monetary (and exchange rate), policy to adjust trade balance,
which is one of the required real convergence towards the EU standards.
Keywords
trade balance; real effective exchange rate; European transition countries
Hrčak ID:
191370
URI
Publication date:
22.12.2017.
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