Do Domestic Currencies Depreciation Worsen The Deficit Of Trade Balance? Evidence In Central East European Countries

Central East European Countries (CEECs) may have reliance to import commodities and barriers to export their competitive products after the integration as European Union members. CEECs may also have negative exposure to the economic crisis after their integration in the EU. Foreign Exchange Rate (FER) as a significant factor which is still argued by the previous researchers possibly will impact the trade balance. The interesting perspective in this research is to analyze the condition of FER and trade balance in CEECs after their integration in the EU. CEECs countries may use Euro or USD to trade with their international trade partner. The fluctuation of FER in term of appreciation or depreciation may have influenced foreign trade. This research purposes to examine the direction of fluctuating FER on the trade balance. Data used in this research are used secondary data namely FER, Export, and Import during 5 years from January 2014 until September 2018. The tool of analysis used in the analysis is a regression. In the last five years, Hungary, Poland, Romania have domestic depreciations denominated in Euro. On the other hand, Albania, Croatia, and Czech have domestic appreciations compared to Euro. The fluctuations of the FER in CEECs also have an influence on their balance of trade. The highest determination coefficient denoted in Croatia is 38,8 per cent referring to the variation of FER determining the trade balance. The research hypothesis is accepted in the countries case namely Albania, Croatia, Lithuania, Poland, and Romania. The coefficient result shows two paths of depreciation and appreciation. First, depreciation of domestic currencies may increase the deficit of trade balance with the inelastic price of import and elastic price of export products demand in the same moment. Second, the appreciation of FER may also increase the deficit of trade balance through the elastic price of the import and export commodities demand at a similar time. Finally, the depreciation may also lead to a surplus of trade balance through the elastic price of export and import products assumption. It entails that the countries explicitly the Czech Republic, Hungary, Poland, Slovak, and Slovenia who have a surplus in the trade balance retain and endure the export quantity.