engleski

Do Fundamentals Explain the Behaviour of the Real Effective Exchange Rate in Croatia?

Exchange rate is one of the most important variables in Croatian economy, due to the long history of inflation and depreciation of domestic currency. For that reason it is necessary to understand what explains the behaviour of the exchange rate and is the exchange rate in the equilibrium or it is over or undervalued. Persistent exchange rate misalignment can generate severe macroeconomic disequilibrium which usually leads to costly external imbalances corrections. In this paper we are investigating using behavioural equilibrium exchange rate approach do fundamentals explain the behaviour of Croatian kuna and whether real effective exchange rate is misaligned. Results indicate that relative effective terms of trade, relative effective price ratio of tradables to nontradables and real interest rate differential are fundamentals that explain the behaviour of the real effective exchange rate in Croatia and that real effective exchange rate was very close to all analysed period to equilibrium exchange rate dictated by fundamentals in all analysed periods.

real effective exchange rate; fundamentals; misalignment; behavioural equilibrium exchange rate; Croatian kuna

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