Measuring real exchange rate misalignment in Croatia: cointegration approach

Abstract

Abstract. The purpose of the paper is to analyze misalignment of the real exchange rate in Croatia. The misalignment analysis is conducted using the permanent equilibrium exchange rate approach. The equilibrium real exchange rate is computed using the cointegration approach whereby the real exchange rate and its fundamentals, namely terms of trade, net foreign assets and the ratio of prices of tradables to non-tradables are included in cointegration analysis. The Hodrick and Prescott filter is used to obtain permanent values of the equilibrium real exchange rate. The real exchange rate misalignment is computed as the deviation of the RER from its permanent equilibrium level. Four overvaluation periods and three undervaluation periods are recorded in Croatia in the observed period. Overvaluation periods are more often and of longer duration than undervaluation periods. However, the real exchange rate does not deviate largely from its estimated equilibrium value in the observed period, and it is neither overvalued nor undervalued constantly, but the periods alternate. Considering the results of the analysis, together with the empirical characteristics of Croatian economy, namely the high foreign currency indebtedness, highly euroized economy and underdeveloped export oriented sector, the depreciation of the real exchange rate is not recommended to economic policy makers and the current Croatian exchange rate policy is appropriate.

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

“…The real exchange rate misalignment is well-known as a discrepancy of the actual real exchange rate from its long-run equilibrium, see e.g. [25], but the issue of establishing an equilibrium real exchange rate remains unsolved. Conforming to [8] several approaches of the equilibrium exchange rate exist: 1) purchasing power parity (PPP), 2) fundamental equilibrium exchange rate (FEER), 3) behavioral equilibrium exchange rate (BEER), and 4) permanent equilibrium exchange rate (PEER).…”

“…PPP most common criticisms are focused on real exchange rate oscillations that theory holds constant or approximately equal in the medium and longer period. FEER approach engages with price elasticities that are not easy to estimate, as well as current account targets that should be achieved, which in turn is its main drawback [25]. Due to [11], the critique of the most commonly employed BEER and PEER approaches suggests that economic fundamentals used in equilibrium exchange rate estimation do not necessarily have to be at equilibrium level, which consequently results in a poor estimation.…”

Nexus between real effective exchange rate misalignment and rubber export in Nigeria

“…Most studies on the nexus between exchange rate and agricultural export concentrated on the exchange rate volatility without examining the effect of maintaining the REER at equilibrium and its departure from equilibrium value on the agricultural export performance (e.g. Also, past studies on ERER and REERM did not investigate its effect on agricultural trade performance (e.g., Barbosa, Jayme, & Missio, 2018;Elbadawi, Kaltani, & Soto, 2012;Essien et al, 2017;Gan, Ward, Ting, & Cohen, 2013;Khomo & Aziakpono, 2020;Libman, 2018;Mahraddika, 2020;Nouira & Sekkat, 2015;Nwachukwu et al, 2016;Palić, Dumičić, & Šprajaček, 2014;Saadaoui, Mazier, & Aflouk, 2013;Udah & Ite, 2016) Alegwu et al (2018) investigated the effects of exchange rate fluctuation or volatility on agricultural export in Nigeria using the vector error correction model (VECM). The study revealed that exchange rate volatility affected agricultural exports negatively.…”

The analysis of the impact of depreciation on external debt in long run: evidence from Croatia

“…Since the implementation of Stabilization Program in October 1993 by the Croatian government, there has been comprehensive discussion about managing the exchange rate level, taking into account high level of import dependency, high degree of openness, high level of external debt and extremely euroised financial system [2]. Nevertheless, the Croatian National Bank achieves its primary goal, namely price stability, by maintaining the stability of Croatian kuna to euro.…”