Abstract
This paper examines the relationship between the real exchange rate and the foreign trade imbalance in both the Western Balkan (WB) and Central and Eastern European (CEE) countries. During the most recent global economic crisis, examining the impact of the exchange rate on the balance of trade took on a particular importance. Countries used a variety of monetary policy regimes and, depending on their choice, they had different economic instruments available to deal with the crisis. The aim of the research was whether exchange rate devaluation and/or depreciation are capable of effectively and fully eliminating the negative effects of the global economic crisis, as well as the consequent poor export performance and contracted economic activity. Our findings show that during an economic crisis those countries that use their own currency cannot substantially adjust their trade deficit by depreciating their currency. Moreover, it is suggested that during the global economic crisis, the balance of payments deficit is not impacted significantly by the exchange rate, any more. In such cases, other factors play a more significant role, like as government spending, followed by foreign demand and direct investments.
Highlights
When considering the theoretical aspect of the balance of payments equilibrium, we are referring to a situation that is sustainable without any government intervention due to selected economic policy measures
The results demonstrate that exchange rate flexibility contributes to a reduction in trade disequilibrium; this is only true under normal operating conditions and not during the period of the global economic crisis
The initial goal of this paper is to evaluate the impact of the exchange rate on the balance of payments disequilibrium during the global economic crisis period
Summary
When considering the theoretical aspect of the balance of payments equilibrium, we are referring to a situation that is sustainable without any government intervention due to selected economic policy measures. Many authors have pointed out that a trade imbalance requires an exchange rate adjustment. Freund and Warnock (2007) assert that an unadjusted exchange rate is the major reason for current account deficits, while noting that a higher level of deficit requires a longer period of time for the adjustment to take effect. The appropriate exchange rate regime varies depending on the specific circumstances of the country in question, including the classical optimum currency area criteria, and depending on the circumstances of the time period involved. A high level of trade deficit is a serious challenge faced by the majority of European countries. As stated by the European Central Bank in an analysis conducted by Winkler, Mazzaferro, Nerlich, and Thimann (2004), the majority of dollarized countries face difficulty in relation to the sustainability of the balance of trade. As stated by the European Central Bank in an analysis conducted by Winkler, Mazzaferro, Nerlich, and Thimann (2004), the majority of dollarized countries face difficulty in relation to the sustainability of the balance of trade. Calvo and Reinhart (2002) point out the discrepancy between the exchange rate regime classification used by the IMF and the regimes that are applied in some countries
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