The impact of the exchange rate on the foreign trade imbalance during the economic crisis in the new EU member states and the Western Balkan countries

Miloš Rajković, Predrag Bjelic, Danijela Jaćimović and Miroslav Verbič

Economic Research-Ekonomska Istraživanja, 2020, vol. 33, issue 1, 182-203

Abstract: This paper examines the relationship between the real exchange rate and the foreign trade imbalance in both the Western Balkan (WB) and Central and Eastern European (CEE) countries. During the most recent global economic crisis, examining the impact of the exchange rate on the balance of trade took on a particular importance. Countries used a variety of monetary policy regimes and, depending on their choice, they had different economic instruments available to deal with the crisis. The aim of the research was whether exchange rate devaluation and/or depreciation are capable of effectively and fully eliminating the negative effects of the global economic crisis, as well as the consequent poor export performance and contracted economic activity. Our findings show that during an economic crisis those countries that use their own currency cannot substantially adjust their trade deficit by depreciating their currency. Moreover, it is suggested that during the global economic crisis, the balance of payments deficit is not impacted significantly by the exchange rate, any more. In such cases, other factors play a more significant role, like as government spending, followed by foreign demand and direct investments.

Date: 2020
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DOI: 10.1080/1331677X.2019.1708771

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