The Effects of Exchange Rate Change on the Trade Balance in Croatia

Tihomir Stucka

No 2004/065, IMF Working Papers from International Monetary Fund

Abstract: A reduced-form model approach was used to estimate the trade balance response to permanent domestic currency depreciation. For this purpose, long-run and short-run effects were estimated, using three modeling methods along with two real effective exchange rate measures. On average, a 1 percent permanent depreciation improves the equilibrium trade balance by between 0.94 percent and 1.3 percent. The new equilibrium is established after approximately 2.5 years. Evidence of the J-curve is also found. Overall, in the light of the results obtained, it is questionable whether permanent depreciation is desirable to improve the trade balance, taking into account potential adverse effects on the rest of the economy.

Keywords: WP; exchange rate; producer price index; J-curve; trade balance; transitional economies; J-curve effect; merchandise trade balance; trade balance response; trade balance improvement; critical value; version model; Real effective exchange rates; Exchange rates; Producer price indexes; Depreciation; Middle East (search for similar items in EconPapers)
Pages: 30
Date: 2004-04-01
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Citations: View citations in EconPapers (21)

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