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On the impact of kuna exchange rate on Croatian foreign trade results : Elasticity approach

This presentation explores the impact of the Kuna exchange rate on Croatian foreign trade using an elasticity approach. It covers motivation, data and econometric methods, theoretical background, literature review, empirical models, econometric results, and their implications. The findings suggest a worsening trade balance as a long-run result of Kuna depreciation.

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On the impact of kuna exchange rate on Croatian foreign trade results : Elasticity approach

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  1. On the impact of kuna exchange rate on Croatian foreign traderesults: Elasticityapproach Petar Sorić

  2. Presentation structure • Motivation and subject of research • Data & econometric methods • Theoretical background • Related literature review • Empirical models • Econometric results and their implications • Concluding remarks

  3. Motivation and subject of research

  4. Motivation and subject of research Series means are adjusted in order to fit on the graph • TB reaches it’s low point in 1997, Q4; stagnation from 2002 • rer’sfollow the tb trend line until 2003, when they diverge

  5. Data & econometric methods • Quarterly data, 1996Q1 to 2007Q4, seasonally adjusted and in logarithms • tb=ln(X)-ln(IM) • rer data obtained by correcting nominal exchange rate for the ratio of foreign and domestic price level (CPI) • rer increase=appreciation • Johansen’s approach used in order to obtain both the short run (VECM)and the long run elasticity coefficients(cointegration vector) J-curve analysis

  6. Theoretical background Marshall-Lernercondition J-curve

  7. Related literature review • Turkalj (2005): small (but expected) estimated imports and exports exchange rate elasticities (OLS) • Mervar (2003): income effect dominates over the exchange rate impact (PSS) • Stučka (2003): Existence of the J-curve, estimated long-run rer coefficient of 0.9-1.3% (ARDL, PSS, Bewley ARDL) • Analysis results differ with respect to the used method

  8. Empirical models • “Catch all” model tb = f(gdp_cro, gdp_de, gdp_aut, gdp_ita, rer_de, rer_aut, rer_ita) • Three disaggregated models (CRO vs.DE, CRO vs. ITA and CRO vs. AUT) tb = f(gdp_cro, gdp_de, rer_de) tb = f(gdp_cro, gdp_ita, rer_ita) tb = f(gdp_cro, gdp_aut, rer_aut)

  9. “Catch all” model Results of Johansen's cointegration test Source: Author's calculation Note: *denotesrejectionofthenullhypothesisof no cointegration at 1% significancelevel, ***denotesrejection at 10% significancelevel

  10. The following restrictions were imposed: • β tb =1 • α rer_aut= α gdp_ita = α gdp_aut = αgdp_cro=0 • β gdp_cro = -1; • α rer_aut = α rer_de • β gdp_aut =- β gdp_de • Above mentioned restrictions were jointly accepted by a LR test ( , p-value of 0.2670)

  11. Econometric results and their implications tbt = -153.60 + gdp_crot -2.88gdp_det + 2.88gdp_autt + 5.03 gdp_itat + 6.63rer_det+ 8.399rer_autt -11.88 rer_itat • Unexpected gdp_de and gdp_crosign: Croatian exports structure uncorrespondance to German imports demand • rer_de and rer_aut coefficients: tb worsening as a long-run result of kuna depreciation (exports is often generated byimports in Croatia, e.g. shipbuilding)

  12. VEC model

  13. Properties of VECM residuals

  14. Croatia vs. Germany Results of Johansen's cointegration test for CRO vs. DE model Source: Author's calculation Note: *denotes rejection of the null hypothesis of no cointegration at 1% significance level

  15. tbt= -0.39gdp_crot+ 2.27 gdp_det+ 1.43rer_det • GDP coefficients confirm economic theory • rer_de elasticity coefficient suggests tb deterioration in case of a devaluation • Uncompetitive economic structure • Import dependency of the Croatian economy

  16. Croatia vs. Italy Results of Johansen's cointegration test Source: Author's calculation

  17. Granger causality test results • Relationship direction opposed to the expected?

  18. Croatia vs. Austria Results of Johansen's cointegration test for CRO vs. AUT model Source: Author's calculation Note: *denotesrejectionofthenullhypothesisof no cointegration at 1% significancelevel,

  19. tbt= -0.82gdp_crot+ 1.91gdp_autt+ 0.71rer_autt • Confirmation of the CRO vs. DE model conclusions • rer_aut coefficient opposed to economic theory

  20. Concluding remarks • Marshall-Lerner condition & J-curve nonvalidity in Croatia? • Real economic problems should primarily be solved by real variables and measures? • Possible shortcomings: • short time span • the need of including other trade partners in the analysis • Kuna devaluation effects should be observed much wider

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