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A new look into the prevalence of balance sheet or competitiveness effect of exchange rate depreciation in a highly euroised economy

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  • Marina Tkalec
  • Miroslav Verbič

Abstract

This article empirically tests the impact of exchange rate depreciation on sectoral performance proxied by investment or, alternatively, sales. It measures the balance sheet and the competitiveness effect in a country that records very high levels of liability euroisation. Panel data methodology is applied on a dataset of 20 Croatian non-financial sectors combining macroeconomic and sectoral financial information. Results confirm there are strong negative effects of liability euroisation on both investment and sales. Negative balance sheet effects and very small positive competitiveness effects are found as well, adding up to a negative overall exchange rate depreciation effect on sectoral performance. Moreover, we find evidence that the corporate sector does not hedge against exchange rate exposure and that the domestic financial system is a constraining factor for corporate investment growth. We also find evidence of size asymmetries related to bank lending relationships.

Suggested Citation

  • Marina Tkalec & Miroslav Verbič, 2013. "A new look into the prevalence of balance sheet or competitiveness effect of exchange rate depreciation in a highly euroised economy," Post-Communist Economies, Taylor & Francis Journals, vol. 25(2), pages 225-240, June.
    • Handle: RePEc:taf:pocoec:v:25:y:2013:i:2:p:225-240
    DOI: 10.1080/14631377.2013.787755
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