Economic growth and real exchange rate misalignments in the European Union

Abstract

We investigate the relationship between economic growth and real exchange rate (RER) misalignments within the European Union (EU) during the period of 1995–2016. In addition to the relative price level of GDP, we quantify an alternative indicator for the RER: the internal relative price of services to goods. We interpret RER misalignments as deviations from the levels consistent with the levels of economic development among the EU countries. Using pooled OLS and dynamic panel techniques, we find that within the EU over- (under-) valuations are associated with lower (higher) growth. This is mainly due to developments in the countries operating under the fixed exchange rate regimes. Our results indicate that the level of development does not influence the strength of the growth-misalignment relationship within the EU. Regarding the price level of GDP, we find that the positive relationship between undervaluation and growth diminishes with the degree of undervaluation. We find that overvaluation has a statistically significant negative effect on export market shares and private investments, indicating that both the competitiveness and the investment channels play a role in the relationship between growth and RER misalignments. As an extension, we show that the effects of “wage misalignments” from levels consistent with productivity are also negatively related to economic growth. The policy implications of the analysis point to the importance of a growth strategy avoiding overvaluation on the one hand, and to the futility of aiming at excessive undervaluation, on the other.

Exchange Rate (MIS-) Alignment: An Application of the Behavioural Equilibrium Exchange Rate (beer) Approach to Zimbabwe (1990-2018)

“…This is why this study chose to use the BEER model. From 1995 to 2016, Krekó and Oblath (2020) examined the connection underlying real exchange rate deviation and growth in the European Union. They discovered that, within the EU, overvaluation or undervaluation was correlated with lower or greater growth, which is mostly attributable to changes in countries with fixed exchange rate regimes, using pooled Ordinary Least Squares (OLS) and dynamic panel approaches.…”

PVAR model with collapsed instruments in the real exchange rates misalignment's analysis

“…Most of the studies involving panel analysis of the real exchange rates misalignment's are concentrated on a single equation approach [21,27], such as panel ARDL (panel autoregressive distributed lag model) or DOLS (dynamic OLS panel model), while others neglect panel structure of the data by using euro area aggregated variables, see e.g. [30].…”

“…As far as we know from the previous studies, several authors have already found interactions between real exchange rates misalignment's and various macroeconomic variables, see e.g. [21,27,30], but there is no similar empirical study that considers the PVAR methodology within EU members and handles the instrument proliferation.…”

A nominális felzárkózás időben változó összetevői: reálgazdasági és árszintfelzárkózás az Európai Unióban 1995 és 2019 között

“…18 Az EU-n belül lényegesen szorosabb a fejlettségi szint és az árszint közötti pozitív kapcsolat, mint ami világméretben tapasztalható; lásd erről Krekó & Oblath, 2018. Ebből pedig egyenesen következik az, amit az ábra fekete keresztmetszeti trendvonala mutat: ugyanebben az évben a nominális fejlettség a reálfejlettségnek csaknem pontosan négyzetes függvénye volt. A koefficiensek 1 százalékon szignifikánsak, és az ábrán is látható determinációs együtthatók rendkívül magasak.…”