The Effects of Exchange Rate Change on the Trade Balance in Croatia
April 1, 2004
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Summary
A reduced-form model approach was used to estimate the trade balance response to permanent domestic currency depreciation. For this purpose, long-run and short-run effects were estimated, using three modeling methods along with two real effective exchange rate measures. On average, a 1 percent permanent depreciation improves the equilibrium trade balance by between 0.94 percent and 1.3 percent. The new equilibrium is established after approximately 2.5 years. Evidence of the J-curve is also found. Overall, in the light of the results obtained, it is questionable whether permanent depreciation is desirable to improve the trade balance, taking into account potential adverse effects on the rest of the economy.
Subject: Depreciation, Exchange rates, Foreign exchange, International trade, National accounts, Prices, Producer price indexes, Real effective exchange rates, Trade balance
Keywords: critical value, Depreciation, exchange rate, Exchange rates, J-curve, J-curve effect, merchandise trade balance, Middle East, producer price index, Producer price indexes, Real effective exchange rates, trade balance, trade balance improvement, trade balance response, transitional economies, version model, WP
Pages:
30
Volume:
2004
DOI:
Issue:
065
Series:
Working Paper No. 2004/065
Stock No:
WPIEA0652004
ISBN:
9781451848717
ISSN:
1018-5941
