5/2018 Juan Carlos Cuestas, Estefania Mourelle and Paulo José Regis. Real exchange rate misalignments in CEECs: Have they hindered growth?

Working Papers of Eesti Pank 5/2018

We study the impact of exchange rate misalignment on economic activity in nine Central and Eastern European (CEE) 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.

JEL Codes: O11, F41, F15

Keywords: real exchange rate misalignments, growth, Central and Eastern European countries, panel smooth transition regression

DOI: 10.23656/25045520/052018/0157

The views expressed are those of the authors and do not necessarily represent the official views of Eesti Pank, the European Central Bank or the Eurosystem.