Real Effective Exchange Rates and deindustrialization: Evidence from 25 Post-Communist Eastern European countries

Abstract

ABSTRACT For the past three decades, Eastern European countries have exhibited a noticeable decline in their share of the industrial production sector overall, but not uniformly. Simultaneously, trade liberalisation and integration in international production networks were intensified, bringing different export sophistication levels and economic development to countries in this region. This paper aims to examine the real effective exchange rate (REER) impact on the deindustrialisation or reindustrialisation process in 25 post-communist Eastern European countries. The paper employs a 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 the REER–industrial production relationship. The results establish a heterogeneous yet significant negative relationship between currency strengthening and industrial production. Our findings also indicate that this negative effect of appreciation is less pronounced with the country’s higher economic complexity and its broader participation in global value chains.