REAL EXCHANGE RATE, FOREIGN TRADE AND REAL OUTPUT GROWTH: THE CASE OF SPAIN, 1970-2009

Yu Hsing and Maria-Carmen Guisan

Applied Econometrics and International Development, 2011, vol. 11, issue 1

Abstract: We analyze the evolution of the exchange rate with Dollar, real output and foreign trade balance in Spain, during the period 1970-2009. We present the estimation of en econometric model that related output growth and real exchange rate with other variables. Applying the monetary policy reaction function and employing the dummy variable technique, this paper finds that real GDP and the expected real effective exchange rate (REER) exhibit a J-shaped relationship. Thus, recent appreciation of the euro, for the period 2001-2007, would work in favor of Spain, provided that economic policies support a positive evolution of industrial production, exports and other main variables. Other findings of this model are that a higher real stock price, a higher real euro interest rate, and a lower expected inflation rate would raise real output for Spain whereas deficit-financed government spending has a little negative impact on real output. We also analyze the effect of foreign trade balance of Spain on the evolution of the exchange rate and economic growth, having into account the important positive role of industrial production to guarantee economic development in this country. Finally we present some recommendations in order to get a fast recovery of Spain after the economic crisis of the period 2008-2010.

Keywords: Monetary Policy Reaction Function; MPRF; Uncovered Interest Parity; UIP; expected real depreciation or appreciation; government deficit; world interest rate; expected inflation; Spanish output growth 1970-2009; Foreign Trade and Development; Real exchange rate Euro/Dollar; REER (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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