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

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.