The Determinants of Real Exchange Rates in Transition Economies
24 Pages Posted: 11 Sep 2019
Date Written: July 10, 2019
Real exchange rates in the transition region have been relatively volatile over the past two decades, with major variation across countries and over time. In most countries, there was a shift between the pre-global crisis period, when the region saw significant real appreciation of currencies, and the post-crisis period during which real exchange rates have been mostly stable or depreciating. In broad terms, real exchange rates have tended to move in line with GDP growth and productivity rates, albeit with important exceptions. Our empirical results show some support for the traditional Balassa-Samuelson hypothesis, according to which real appreciation is driven by productivity differentials in the traded goods sector. Other factors, including government consumption, terms of trade, and capital inflows, do not seem to be significant drivers of real exchange rate movements.
Keywords: Real exchange rates, Balassa-Samuelson, transition economies
JEL Classification: F31, P2
Suggested Citation: Suggested Citation