Real Effective Exchange Rates and Deindustrialization: Evidence from 25 Post-Communist Eastern European Countries

Abstract

For the past three decades, Eastern European countries overall, but not uniformly, have exhibited a noticeable decline in their share of the industrial production sector. At the same time, trade liberalization and integration in international production networks were intensified, bringing different levels of economic development of countries in this region. The objective of this paper is to examine the impact of the real effective exchange rate (REER) on the deindustrialization or reindustrialization process in 25 post-communist Eastern European countries. The paper employs heterogeneous panel common factor approach for the period 1995-2018 to exploit the effect of diverse levels of export complexity, stage of economic development, and intensity of participation in global value chains on REER- industrial production relationship. The results establish a heterogeneous yet significant negative relationship between REER and industrial production. Our findings indicate that higher economic complexity and participation in global value chain reduces the effect of depreciation on industry development.https://www.textfixer.com/tools/remove-line-breaks.php