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Trade, convergence and exchange rate regime: evidence from Bulgaria and Romania

  • Emilia Penkova-Pearson


    (Bulgarian National Bank, Senior Expert at the Research and Forecasting Directorate)

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    The aim of the paper is to reveal the similarities and differences of export and import demand functions of Bulgaria and Romania over the period 2000-2008 using quarterly data. On one hand, the countries are similar in respect to the convergence process with the euro area that they are undergoing, on the other hand they have different exchange rate regimes: Bulgaria has a currency board arrangement, Romania’s exchange rate regime is characterized by a managed float. The empirical analysis will therefore contribute to the debate if the countries with flexible exchange rates are in a more advantageous position concerning competitiveness compared to the countries with fixed exchange rates. The study shows that the export dynamics of Bulgaria and Romania over the period of investigation is largely explained by the EU growth, while the increasing market shares of the two countries are partly due to strong FDI inflows. A key conclusion of the paper is that the real exchange rate appreciation, which was more prominent in Romania than in Bulgaria, did not have significant impact on export developments of neither of the two countries. This is mainly due to the fact that the real exchange rate appreciation during this period of convergence is likely to reflect an upward movement in its equilibrium value, not a loss in competitiveness. Another important conclusion is that the convergence process in respect to trade in both economies is similar irrespective of their exchange rate regime, currency board or managed float.

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    Article provided by Central bank of Montenegro in its journal Journal of Central banking Theory and Practice.

    Volume (Year): 1 (2012)
    Issue (Month): 1 ()
    Pages: 107-139

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    Handle: RePEc:cbk:journl:v:1:y:2012:i:1:p:107-139
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    1. Ralf Ruhwedel & Michael Funke, 2000. "Export Variety and Export Performance: Empirical Evidence from East Asia," Quantitative Macroeconomics Working Papers 20006, Hamburg University, Department of Economics.
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    3. Christopher Adam & David Cobham, 2007. "Exchange Rate Regimes And Trade," Manchester School, University of Manchester, vol. 75(s1), pages 44-63, 09.
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    6. Carone, Giuseppe, 1996. "Modeling the U.S. demand for imports through cointegration and error correction," Journal of Policy Modeling, Elsevier, vol. 18(1), pages 1-48, February.
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    8. Paul Krugman, 1988. "Differences In Income Elasticities and Trends in Real Exchange Rates," NBER Working Papers 2761, National Bureau of Economic Research, Inc.
    9. Oscar Bajo & Maria Montero Mu–oz, 1999. "Foreign Direct Investment and Trade: A Causality Analysis," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 9902, Departamento de Economía - Universidad Pública de Navarra.
    10. Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
    11. Houthakker, Hendrik S & Magee, Stephen P, 1969. "Income and Price Elasticities in World Trade," The Review of Economics and Statistics, MIT Press, vol. 51(2), pages 111-25, May.
    12. Bernardina Algieri, 2004. "Price and Income Elasticities of Russian Exports," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 1(2), pages 175-193, December.
    13. Salas, Javier, 1982. "Estimation of the structure and elasticities of Mexican imports in the period 1961-1979," Journal of Development Economics, Elsevier, vol. 10(3), pages 297-311, June.
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