REAL EFFECTIVE EXCHANGE RATE AND UNEMPLOYMENT ACROSS POST-TRANSITION EUROPE: EVIDENCE FROM WAVELET COHERENCE ANALYSIS

Abstract

Purpose: The aim of this paper is to examine the co-movement between the real effective exchange rate and unemployment across post-transition Europe.

Methodology: The research data sample in this paper consists of monthly data from 2000M1 to 2019M6 for ten European post-transition countries. After standard correlation analysis, the research followed a wavelet coherence approach, provided time-series analysis in the time-frequency domain and illustrated evolution of the co-movements in the observed period.

Results: Conventional approach research results suggest no significant correlation between variables under consideration in cases of Poland and Lithuania. In cases of Latvia and Slovenia, standard correlation coefficients were positive and not in line with the theory. Correlation coefficients supported the theoretical assumption in six other countries included in the study. Wavelet coherence analysis results provided deeper insights into the relationship over time and the frequency domain. Empirical results gained in this research revealed a decline in the unemployment rate accompanied by depreciation of the real effective exchange rate as a prominent pattern at the beginning of the observation period suggesting pro-cyclical monetary policy.

Conclusion: During the crisis of 2008 no link between variables under consideration was confirmed, while after the crisis empirical results were in line with the theoretical assumption, suggesting that depreciation of the real effective exchange rate might be used as an instrument to boost employment.