Do changes in the real exchange rate affect the trade balance? Evidence from European countries

The Institute of Economics will hold a seminar meeting as part of its Seminar Series on Tuesday, October 25th, 2022: Jesus Felipe from the Asian Development Bank and the De La Salle University and Jose Antonio Perez from the University of Balearic Islands will give a talk on  " Do changes in the real exchange rate affect the trade balance? Evidence from European countries".

Abstract

We use time and frequency domain causality tests to study whether unit labor costs-based real exchange rate dynamics (depreciations/appreciations) caused changes (improvements/deteriorations) in the trade balances of eight eurozone economies, and thus contributed to closing imbalances, during 1995-2019. We find no robust evidence of a causal relationship from changes in real exchange rates to changes in the trade balances. The implication is that changes in the real exchange rate based on unit labor costs have not helped correct trade imbalances within the eurozone economies considered.

The webinar will be fully online and accessible at the following link.