Real exchange rate misalignments in CEECs: Have they hindered growth?

Abstract

[Abstract]: We study the impact of exchange rate misalignment on economic activity in nine Central and Eastern European (CEE) economies. Exchange rate misalignments are computed from country-specific long-run exchange rate relationships with determinants suggested by open macroeconomic models such as interest rate differentials or the Balassa-Samuelson effect. There was a clear reduction in misalignments, but this has been reversed to some extent after 2008. Exchange rate overvaluation has a negative impact on economic activity. The effect of misalignments on economic activity seems to be nonlinear, as overvaluation has a stronger effect than undervaluation. Other factors of economic activity, including institutions, also show nonlinear effects.