IDEAS home Printed from https://ideas.repec.org/a/rfe/zbefri/v35y2017i2p277-299.html
   My bibliography  Save this article

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

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.efri.uniri.hr/sites/efri.uniri.hr/files/cr-collections/2/01-begovic-kreso-2017-2-1513970055.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Reinhart, Carmen, 2002. "A Modern History of Exchange Rate Arrangements: The Country Histories, 1946-2001," MPRA Paper 13191, University Library of Munich, Germany.
    2. Michael Bleaney & Mo Tian, 2014. "Exchange Rates and Trade Balance Adjustment: A Multi-Country Empirical Analysis," Open Economies Review, Springer, vol. 25(4), pages 655-675, September.
    3. Mr. Tihomir P Stucka, 2004. "The Effects of Exchange Rate Change on the Trade Balance in Croatia," IMF Working Papers 2004/065, International Monetary Fund.
    4. repec:wsr:ecbook:2008:i:i-013 is not listed on IDEAS
    5. Menzie D. Chinn & Shang-Jin Wei, 2013. "A Faith-Based Initiative Meets the Evidence: Does a Flexible Exchange Rate Regime Really Facilitate Current Account Adjustment?," The Review of Economics and Statistics, MIT Press, vol. 95(1), pages 168-184, March.
    6. Mohsen Bahmani-Oskooee & Ali Kutan, 2009. "The J-curve in the emerging economies of Eastern Europe," Applied Economics, Taylor & Francis Journals, vol. 41(20), pages 2523-2532.
    7. Ghosh, Atish R. & Qureshi, Mahvash S. & Tsangarides, Charalambos G., 2013. "Is the exchange rate regime really irrelevant for external adjustment?," Economics Letters, Elsevier, vol. 118(1), pages 104-109.
    8. Martin Berka & Michael B. Devereux & Charles Engel, 2012. "Real Exchange Rate Adjustment in and out of the Eurozone," American Economic Review, American Economic Association, vol. 102(3), pages 179-185, May.
    9. Sabine Herrmann, 2009. "Do We Really Know That Flexible Exchange Rates Facilitate Current Account Adjustment? Some New Empirical Evidence for CEE Countries," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 55(4), pages 295-312.
    10. Christopher F Baum, 2006. "An Introduction to Modern Econometrics using Stata," Stata Press books, StataCorp LP, number imeus, March.
    11. Auboin, Marc & Ruta, Michel, 2011. "The relationship between exchange rates and International Trade: A review of economic literature," WTO Staff Working Papers ERSD-2011-17, World Trade Organization (WTO), Economic Research and Statistics Division.
    12. Yashodha Warunie Senadheera, 2015. "Impact of the Effective Exchange Rate on the Trade Balance of Sri Lanka: Evidence from 2000 to 2013," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 9(2), pages 93-108, May.
    13. Pavle Petrović & Mirjana Gligorić, 2010. "Exchange Rate and Trade Balance: J-curve Effect," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(1), pages 23-41, March.
    14. Howard Davies & David Green, 2010. "Banking on the Future: The Fall and Rise of Central Banking," Economics Books, Princeton University Press, edition 1, number 9154.
    15. Arize, Augustine C. & Malindretos, John & Igwe, Emmanuel U., 2017. "Do exchange rate changes improve the trade balance: An asymmetric nonlinear cointegration approach," International Review of Economics & Finance, Elsevier, vol. 49(C), pages 313-326.
    16. Alessandro Nicita, 2013. "Exchange rates, international trade and trade policies," International Economics, CEPII research center, issue 135-136, pages 47-61.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gupta, Shagufta & Ghosh, Poulomi & Sridhar, V., 2022. "Impact of data trade restrictions on IT services export: A cross-country analysis," Telecommunications Policy, Elsevier, vol. 46(9).
    2. Fišera, Boris & Horváth, Roman, 2022. "Are exchange rates less important for trade in a more globalized world? Evidence for the new EU members," Economic Systems, Elsevier, vol. 46(1).
    3. Dao, Kieu Oanh & Nguyen, V.C. & Dinh, Si Tri Nhan, 2020. "Real Effective Exchange Rate, Broad Money Supply, and Trade Balance in Vietnam: An Empirical Analysis from Bounds Test to a Cointegration Approach," OSF Preprints ze89s, Center for Open Science.
    4. Zainuddin, Muhamad Rias K V & Shukor, Md Shafiin & Zulkifli, Muhamad Solehuddin & Abdullah, Amirul Hamza, 2021. "Dynamics of Malaysia’s Bilateral Export Post Covid-19: A Gravity Model Analysis," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 55(1), pages 51-69.
    5. Srðan Marinkoviæ & Zenaida Šabotiæ & Dragiæ Bankoviæ, 2018. "EU enlargement: Does economics of regional integration matter?," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 36(2), pages 881-904.
    6. Muhammad Ali Nasir & Mary Leung, 2021. "US trade deficit, a reality check: New evidence incorporating asymmetric and non‐linear effects of exchange rate dynamics," The World Economy, Wiley Blackwell, vol. 44(3), pages 818-836, March.
    7. Mario Pečarić & Tino Kusanović & Pavle Jakovac, 2021. "The Determinants of FDI Sectoral Structure in the Central and East European EU Countries," Economies, MDPI, vol. 9(2), pages 1-16, April.
    8. Yu Hsing, 2019. "Is Currency Appreciation or Depreciation Expansionary in Kosovo?," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 22(1), pages 47-54, May.
    9. Petronela Mateescu, 2020. "The Effect of Exchange Rate Risk on Foreign Trade," Anuarul Universitatii „Petre Andrei” din Iasi / Year-Book „Petre Andrei” University from Iasi, Fascicula: Drept, Stiinte Economice, Stiinte Politice / Fascicle: Law, Economic Sciences, Political Scien, Editura Lumen, Department of Economics, vol. 26, pages 34-54, December.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Muhammad Ali Nasir & Mary Leung, 2021. "US trade deficit, a reality check: New evidence incorporating asymmetric and non‐linear effects of exchange rate dynamics," The World Economy, Wiley Blackwell, vol. 44(3), pages 818-836, March.
    2. An, Jiyoun & Park, Bokyeong, 2016. "External adjustment and trading partners’ exchange rate regimes," Japan and the World Economy, Elsevier, vol. 37, pages 47-54.
    3. Gnimassoun, Blaise & Coulibaly, Issiaka, 2014. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," Economic Modelling, Elsevier, vol. 40(C), pages 208-226.
    4. Ethan Ilzetzki & Carmen M Reinhart & Kenneth S Rogoff, 2019. "Exchange Arrangements Entering the Twenty-First Century: Which Anchor will Hold?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(2), pages 599-646.
    5. Issiaka Coulibaly & Blaise Gnimassoun, 2013. "Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter?," Working Papers hal-04141160, HAL.
    6. Atish R Ghosh & Mahvash S Qureshi & Charalambos G Tsangarides, 2019. "Friedman Redux: External Adjustment and Exchange Rate Flexibility," The Economic Journal, Royal Economic Society, vol. 129(617), pages 408-438.
    7. Harkmann, Kersti & Staehr, Karsten, 2021. "Current account drivers and exchange rate regimes in Central and Eastern Europe," Journal of International Money and Finance, Elsevier, vol. 110(C).
    8. Eguren Martin, Fernando, 2016. "Exchange rate regimes and current account adjustment: An empirical investigation," Journal of International Money and Finance, Elsevier, vol. 65(C), pages 69-93.
    9. Atish R Ghosh & Jonathan D Ostry & Mahvash S Qureshi, 2015. "Exchange Rate Management and Crisis Susceptibility: A Reassessment," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 63(1), pages 238-276, May.
    10. Alberto Behar & Armand Fouejieu, 2018. "External adjustment in oil exporters: The role of fiscal policy and the exchange rate," The World Economy, Wiley Blackwell, vol. 41(3), pages 926-957, March.
    11. Gnimassoun, Blaise, 2015. "The importance of the exchange rate regime in limiting current account imbalances in sub-Saharan African countries," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 36-74.
    12. Kersti Harkmann & Karsten Staehr, 2019. "Current account dynamics and exchange rate regimes in Central and Eastern Europe," Bank of Estonia Working Papers wp2018-08, Bank of Estonia, revised 23 Jan 2019.
    13. Zoran Grubišiæ & Sandra Kamenkoviæ & Aleksandar Zdravkoviæ, 2018. "Impact of government balance and exchange rate regime on current account during the economic cycle: evidence from CEE countries," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics and Business, vol. 36(1), pages 309-336.
    14. Jo‐wei Wu & Jyh‐Lin Wu, 2018. "Does The Launch Of The Euro Hinder The Current Account Adjustment Of The Eurozone?," Economic Inquiry, Western Economic Association International, vol. 56(2), pages 1116-1135, April.
    15. Olivier Habimana, 2017. "Do flexible exchange rates facilitate external adjustment? A dynamic approach with time-varying and asymmetric volatility," International Economics and Economic Policy, Springer, vol. 14(4), pages 625-642, October.
    16. Nadav Ben Zeev, 2017. "Exchange Rate Regimes And Sudden Stops," Working Papers 1712, Ben-Gurion University of the Negev, Department of Economics.
    17. José Antonio Ocampo, 2016. "Global macroeconomic cooperation and the exchange rate system," WIDER Working Paper Series wp-2016-49, World Institute for Development Economic Research (UNU-WIDER).
    18. Nieminen, Mika & Heimonen, Kari & Tohmo, Timo, 2017. "Current accounts and coordination of wage bargaining," BOFIT Discussion Papers 20/2017, Bank of Finland Institute for Emerging Economies (BOFIT).
    19. Yu Hsing, 2017. "Is Real Depreciation And More Government Spending Expansionary? The Case Of Montenegro," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 20, pages 103-113, December.
    20. Carl Grekou, 2016. "Does the exchange rate regime shape currency misalignments in emerging and developing countries?," Working Papers hal-04141583, HAL.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rfe:zbefri:v:35:y:2017:i:2:p:277-299. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Danijela Ujcic (email available below). General contact details of provider: https://edirc.repec.org/data/efrijhr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.