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Are Exchange Rates Less Important for Trade in a More Globalized World? Evidence for the New EU Members

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  • Boris Fisera

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic
    Slovak Academy of Science, Stefanikova 49, 814 38, Bratislava, Slovak Republic)

  • Roman Horvath

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University Opletalova 26, 110 00, Prague, Czech Republic)

Abstract

We evaluate the effect of exchange rate misalignments on the balance of trade and the role that global value chain participation plays in this effect for 11 new European Union member states. Using heterogeneous panel cointegration methods, we first estimate the real equilibrium exchange rate and detect episodes of currency misalignment. We find asymmetric effects of real currency misalignments: overvaluation has a negative effect, but undervaluation has no effect on the trade balance. Additionally, we find that global value chain participation weakens the effect of currency misalignments on the balance of trade. Therefore, our results suggest that globalization reduces the role of exchange rates in stimulating the domestic economy.

Suggested Citation

  • Boris Fisera & Roman Horvath, 2020. "Are Exchange Rates Less Important for Trade in a More Globalized World? Evidence for the New EU Members," Working Papers IES 2020/10, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Apr 2020.
    • Handle: RePEc:fau:wpaper:wp2020_10
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    File URL: https://ies.fsv.cuni.cz/en/veda-vyzkum/working-papers/6234
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    More about this item

    Keywords

    Balance of trade; exchange rates; global value chains; export sophistication; panel cointegration;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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