Tihomir Stučka

The Impact of Exchange Rate Changes on the Trade Balance in Croatia

W - 11
October 2003

I use a reduced form model approach to estimate the merchandise trade balance response to permanent domestic currency depreciation. For this purpose I estimate the long run and short run effect, using three modeling methods along with two real effective exchange rate measures. On average, a 1% permanent depreciation improves the new trade balance equilibrium between 0.94% and 1.3%. This new equilibrium is established after approximately 2.5 years. I also find support for the J-curve effect. Overall, I doubt that permanent depreciation/devaluation is desirable to improve the trade balance, taking into account potential adverse effects on the rest of the economy.

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