Do changes in the real exchange rate affect the trade balance? Evidence from European countries

• Main Authors: Felipe, Jesus, Perez-Montiel, Jose Antonio, Ozcelebi, Öguzhan
• Format: text
• Published: Animo Repository 2024
• Subjects: causality tests, effective exchange rate, Europe, unit labor costs
• Online Access: https://animorepository.dlsu.edu.ph/res_aki/195; https://animorepository.dlsu.edu.ph/context/res_aki/article/1193/viewcontent/DLSU_AKI_Working_Paper_Series_2024_02_091.pdf
• Institution: De La Salle University

We use five time and frequency domain causality tests to study whether unit labor costs-based real exchange rate depreciations / appreciations caused improvements / deteriorations in the trade balances of ten Eurozone economies, and thus contributed to closing trade imbalances, during 1995-2019. The methods we use deal with the inherent nonlinearity, and structural shifts in the time series. They also take into account asymmetry and regime changes. The non-parametric approach avoids the possible bias associated to the identification strategy. Test results indicate that there is no evidence of such a causal relationship.