Impact of the Real Exchange Rate on Trade, Structural Change and Growth

As regards economic transition countries as well as EU accession countries, one can observe that they have recorded a long term real appreciation vis-à-vis the Euro and other currencies. Long term appreciation does not exclude considerable short term real exchange rate dynamics where stages of temporary nominal and real currency depreciation can be an element of a long term real appreciation process. One thus has to ask which role volatility — including potential overshooting — plays on the one hand. On the other hand, the focus is on the impact of the real exchange rate trend on economic development.

From a theoretical perspective, the real exchange rate affects trade, structural change and economic growth in an interdependent way. In the medium term the real exchange rate will affect the trade volume, the product mix of exports and imports plus the current account position. Moreover, the structure of output will be affected; this will partly be linked to sectoral productivity growth. In the medium term and in the long run, there will be direct and indirect effects on national income and per capita income. Those changes will in turn affect structural change and trade. In an open economy, the picture would be incomplete if one did not consider the effects of exchange rate dynamics on capital inflows as well as the stock market. To the extent that there is an increase of capital inflows and in particular foreign direct investment inflows, there will be effects on the production potential and productivity growth (see Fig. below). From a policy perspective one must ask whether and which impulses are coming from regional integration and economic globalization. Moreover, the question arises as to which EU policy impulses are relevant and which national policy measures could be adopted to spur growth and a stable economic development.