Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growth in the EU

44 Pages Posted: 23 May 2016

See all articles by Mariarosaria Comunale

Mariarosaria Comunale

Bank of Lithuania - Economics Department

Multiple version iconThere are 3 versions of this paper

Date Written: May 20, 2016

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

JEL Classification: F31, F43, C23

Suggested Citation

Comunale, Mariarosaria, Dutch Disease, Real Effective Exchange Rate Misalignments and Their Effect on GDP Growth in the EU (May 20, 2016). CEIS Working Paper No. 379. Available at SSRN: https://ssrn.com/abstract=2782501 or http://dx.doi.org/10.2139/ssrn.2782501

Mariarosaria Comunale (Contact Author)

Bank of Lithuania - Economics Department ( email )

Totoriu 4
Vilnius, LT-01121
Lithuania

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