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The Analysis of the Dynamic Relationships between Real Exchange Rates and Macroeconomic Variables in Selected Countries with Targeted Inflation: Evidence from Linear and Non-Linear ARDL Models

Author

Listed:
  • Đorđe ĐUKIĆ

    (University of Belgrade, Faculty of Economics, Kamenička 6, 11000 Belgrade, Serbia.)

  • Mustafa ÖZER

    (Anadolu Üniversitesi: Eskisehir, 26470 Tepebaşı/Eskişehir, Turkey.)

  • Mališa ĐUKIĆ

    (Belgrade Banking Academy – Faculty of banking, finance and insurance, Zmaj Jovina 12, 11000 Belgrade, Serbia.)

Abstract

The paper uses linear and non-linear autoregressive distributed lag (ARDL and NARDL) models to examine the short-and long-term impacts of real effective exchange rate (REER) on industrial production, exports and imports in Hungary, Poland, Romania and Serbia over the period of 2000Q1–2022Q4. Also, we carry out Granger causality tests as a robustness checking of ARDL and NARDL results. Finally, we conduct a volatility analysis of REER based on the estimates of the GARCH and EGARCH models. The results of bounds tests of ARDL and NARDL indicate the existence of linear and nonlinear cointegrations between industrial production and selected macroeconomic variables. Short-run and long-run Granger causality test results do support the results of ARDL and NARDL models. It is of exceptional importance for the policymakers to observe the influence of REER volatility on industrial production and exports after the onset of the global financial crisis, by comparing the average values of volatility and the inter-annual growth rates of the mentioned aggregates. REER and its volatility is one of the key variables in sample countries to affect the industrial production, exports and imports. Policies aiming to influence these variables should take into account dynamic relations between REER and other variables. The results show that the long-term application of free-floating exchange rate (case of Poland with high REER volatility) is adequate in terms of providing an incentive for export and industry growth. When applying managed floating and floating exchange rate (Hungary, Romania and Serbia) the impact of REER volatility depends on case-by-case basis especially after the outbreak of the global financial crisis. High REER volatility in Hungary did not have a negative impact on the growth of its exports and industrial production. Low REER volatility in Serbia and Romania was followed by lowest growth rates of industrial production in Serbia while it was not the case in Romania.

Suggested Citation

  • Đorđe ĐUKIĆ & Mustafa ÖZER & Mališa ĐUKIĆ, 2023. "The Analysis of the Dynamic Relationships between Real Exchange Rates and Macroeconomic Variables in Selected Countries with Targeted Inflation: Evidence from Linear and Non-Linear ARDL Models," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 104-124, June.
    • Handle: RePEc:rjr:romjef:v::y:2023:i:2:p:104-124
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    References listed on IDEAS

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G01 - Financial Economics - - General - - - Financial Crises

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