The Effect of Real Effective Exchange Rate on Imports and Exports: The Case of The Fragile Five

Abstract

Currently, exchange rates are among the most important macroeconomic indicators, especially because they reduce the foreign trade deficit through exports and imports and increase economic growth. In the economic literature, the long-term relationship between the real effective exchange rate and export-Import variables is explained by the J curve. According to the J curve, a decrease in the real effective exchange rate leads to an increase in exports and a decrease in imports in the long term. The Fragile Five countries are countries that expect that since 2013, the Central Bank of America's reduction in monetary expansion will lead to a decreasein exchange rates. Based on this situation, it has become very important to determine the long-term impact of the depreciation of national money in real terms on exports and imports in the Fragile Five countries. In this study, the effect of the real effective exchange rate on imports and exports in the long term from the point of view of the Fragile Five countries between 1994 and 2019 was examined by panel co-integration analysis. The findings show that a decrease in the real effective exchange rate in the Fragile Five countries reduces imports and does not affect exports.