Exchange Rate and Export Performance: Evidence from Serbia

This chapter contributes to the empirical literature on the role of exchange rate in a country’s trade performance. In particular, we investigate the effects of exchange rate misalignment on long-term export performance of the Serbian economy, by using monthly data for the last decade. International trade theories suggest that a deterioration of export performance should be expected in the conditions of real currency appreciation, while depreciated currency tends to benefit the exporters. However, statistical data on real effective exchange rate and aggregated data of Serbian exports indicate that the ambience of overvalued national currency did not harm export performance. Employing the Engle-Granger test of cointegration, we find no stable long-run relation between the time series data of exchange rate and export, while Granger causality test indicates a unidirectional causality that runs from exchange rate to export. These findings suggest that export dynamics is likely to be affected by a combination of various determinants, both demand- and supply-side variables. By estimating a multiple regression model, we test the potential influence of industrial production index, unit labor costs, fiscal balance, and world demand on aggregate export data. The findings confirm the insignificance of real exchange rate as a determinant of Serbian exports, disregarding the normative theory assumptions, while world demand and industrial achievement significantly impact the export performance. Our study offers potential explanations of export growth in the ambience of real currency appreciation and advocates for a flexible exchange rate policy that would take into account long-term effects on trade performance.