The real exchange rate and the output response in four EU accession countries

2006-03-29T10:34:58Z (GMT) by Terence C. Mills Eric J. Pentecost
This paper estimates the response of output to changes in the real exchange rate in four transitional economies. The theoretical effect is ambiguous since the demandside effect works against the supply-side effect. On the demand-side, a depreciation of the real exchange rate should improve competitiveness and enhance the demand for output, whereas the supply-side effect suggests that output may fall as competitiveness improves since this makes imported inputs more expensive, thereby raising the cost of production. The econometric results show that, inter alia, the real exchange rate is not an important determinant of the long-run level of GDP in the Czech Republic or Hungary, but that a real appreciation leads to a persistent fall in output in Poland and a sustained rise in output in Slovakia. A short run real appreciation leads to a temporary decline in output growth in both the Czech Republic and Slovakia.