Real exchange rate misalignments in CEECs: Have they hindered growth?
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Real exchange rate misalignments in CEECs: Have they hindered growth? Juan Carlos Cuestas1,2,3 · Estefanía Mourelle4 · Paulo José Regis5
© Springer Science+Business Media, LLC, part of Springer Nature 2019
Abstract We study the impact of exchange rate misalignment on economic activity in nine Central and Eastern European economies. Exchange rate misalignments are computed from country-specific long-run exchange rate relationships with determinants suggested by open macroeconomic models such as interest rate differentials or the Balassa–Samuelson effect. There was a clear reduction in misalignments, but this has been reversed to some extent after 2008. Exchange rate overvaluation has a negative impact on economic activity. The effect of misalignments on economic activity seems to be nonlinear, as overvaluation has a stronger effect than undervaluation. Other factors of economic activity, including institutions, also show nonlinear effects. Keywords Real exchange rate misalignments · Growth · Central and Eastern European countries · Panel smooth transition regression JEL Classification O11 · F41 · F15
1 Introduction This paper studies the relationship between real exchange rate misalignments and economic activity in nine Central and Eastern European (CEE) countries, namely Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia * Paulo José Regis [email protected] 1
Economics and Research Department, Eesti Pank, Tallinn, Estonia
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Department of Economics and Finance, Tallinn University of Technology, Tallinn, Estonia
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Department of Economics and IEI, Jaume I University, Castellón de la Plana, Spain
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Facultad de Ciencias Económicas y Empresariales, Universidade da Coruña, Ferrol, Spain
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Division of Economics, Xi’an Jiaotong-Liverpool University, 111 Ren’ai Road, Dushu Lake Higher Education Town, Suzhou 215123, China
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Fig. 1 Average real effective exchange rate. Notes: Data from Eurostat. Simple average of the real effective exchange rate, monthly observations (base: January 1994)
and Slovenia. There has been a lot of debate around the use of exchange rates as a policy instrument and the effectiveness of using exchange rate regimes as a development strategy. Movements in exchange rates may have lasting effects on economic activity through the Balassa–Samuelson effect, which links exchange rates and economic activity. In the various successful East Asian economies, the exchange rate has been at the centre of the policy debate. The exchange rate policy of China has, however, been associated with persistent current account surpluses, and debate still surrounds the question of currency undervaluation and competitiveness. Whether other emerging economies can adapt their exchange rate policies to catch up with more developed countries is an issue of some importance. The dynamics of real exchange rates has become a key macroeconomic concern in the Europ
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