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Dutch Disease, Real Effective Exchange Rate Misalignments and their effect on GDP growth in the EU

Mariarosaria Comunale

No 26, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: In this article we study the impact of real effective exchange rate misalignments, based on determinants, including different types of foreign capital inflows, on GDP growth in the EU. This can provide a useful contribution to understanding the causal link between inflows, real effective exchange rate disequilibria and GDP growth during both the boom and the crisis period. For this analysis, we use a panel of 27 EU countries for the period 1994–2012, with annual frequency. We find that the core countries have been mostly undervalued from the crisis onwards, while the periphery (excluding Ireland) were overvalued starting from 2003–2004, as expected. Concerning the new Member States, these are persistently overvalued for the entire time span. The results seem to be generally driven by the inflows of banking loans more than by FDIs or portfolio investments. In the second stage, we study the influence of exchange rate misalignments and volatilities on growth. We argue that the real effective exchange rate misalignments associated with the inflows have been a further cause for decline in GDP, in a long-run perspective, while they do not play a role in the short run. The exchange rate volatilities and the undervaluation dummy are not robust in affecting GDP growth, while spillovers and global factors seem to matter in all the specifications both in the short and long run.

Keywords: real effective exchange rate; behavioural effective exchange rate; foreign capital inflows; FDIs; Dutch Disease; GDP growth; European Union (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pr~
Date: 2016-05-05
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Related works:
Journal Article: Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in EU (2017) Downloads
Working Paper: Dutch disease, real effective exchange rate misalignments and their effect on GDP growth in the EU (2016) Downloads
Working Paper: Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growh in the EU (2016) Downloads
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