Title: Heterogeneous common factor approach to examination of real effective exchange rate determinants

Authors: Mirjana Čizmović; Srdjan Redzepagic; Damien Bazin

Addresses: Faculty of Economics and Business, University of Mediterranean, Josip Broz bb, Podgorica, Montenegro ' CNRS, GREDEG, University Nice Sophia Antipolis, Université Côte d'Azur, Nice, France ' CNRS, GREDEG, Université Côte d'Azur, Nice, France

Abstract: Using a dataset of the Eastern European countries over the 1995–2015 period, we examine the determinants of the real effective exchange rates and their equilibrium path. In an attempt to address the econometric estimation uncertainty, we employ the recent panel time series estimators that deal with the panel with heterogeneous coefficients and can accommodate potential endogeneity and cross-sectional dependence. Using common factor representation of the equilibrium exchange rate, we manage to separately analyse the dynamics and evaluation of a common dynamic process that represents similar factors which drive the real effective exchange rate, with a differential impact across countries. After confirming the robustness of productivity and the terms of trade influence on the real exchange, we provide evidence that the relation productivity – the real effective exchange rate is nonlinear and turns negative after a certain threshold.

Keywords: real effective exchange rate; common factor; common dynamic process; productivity.

DOI: 10.1504/IJEPEE.2019.104634

International Journal of Economic Policy in Emerging Economies, 2019 Vol.12 No.4, pp.348 - 361

Received: 18 Oct 2018
Accepted: 19 May 2019

Published online: 22 Jan 2020 *

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