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The adverse effect of real effective exchange ratechange on trade balance in European transition countries

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  • Selena Begoviæ

    (School of Economics and Business, University of Sarajevo, Trg oslobodjenja 1, 71000 Sarajevo, Bosnia and Herzegovina)

  • Sead Kreso

    (School of Economics and Business, University of Sarajevo, Trg oslobodjenja 1, 71000 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.

Suggested Citation

  • Selena Begoviæ & Sead Kreso, 2017. "The adverse effect of real effective exchange ratechange on trade balance in European transition countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 35(1), pages 277-299.
  • Handle: RePEc:rfe:zbefri:v:35:y:2017:i:2:p:277-299
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    References listed on IDEAS

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    More about this item

    Keywords

    trade balance; real effective exchange rate; European transition countries;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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