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Are exchange rates less important for trade in a more globalized world? Evidence for the new EU members

Boris Fisera and Roman Horvath

Economic Systems, 2022, vol. 46, issue 1

Abstract: We evaluate the effect of exchange rate misalignments on the balance of trade and the role that global value chain participation plays in this effect for 11 new European Union member states. Using heterogeneous panel cointegration methods, we first estimate the real equilibrium exchange rate and detect episodes of currency misalignment. We find asymmetric effects of real currency misalignments: overvaluation has a negative effect, but undervaluation has no effect on the trade balance. Additionally, we find that global value chain participation weakens the effect of currency misalignments on the balance of trade. Therefore, our results suggest that globalization reduces the role of exchange rates in stimulating the domestic economy.

Keywords: Balance of trade; Exchange rates; Currency misalignments; Global value chains; Panel; Cointegration (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Date: 2022
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Working Paper: Are Exchange Rates Less Important for Trade in a More Globalized World? Evidence for the New EU Members (2020) Downloads
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DOI: 10.1016/j.ecosys.2021.100868

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