THE RELATIONSHIP BETWEEN REER AND TRADE FLOWS IN THE CONTEXT OF THE EQUILIBRIUM EXCHANGE RATE Reimo Juks* November 2003 Working Papers of Eesti Pank No 9, 2003

The paper focuses on the time-series analysis of the traditional trade equations. The results from the cointegration, ARDL and Granger causality analyses of trade elasticities cast some doubt on the usefulness of the internal-external balance approach to the equilibrium exchange rate. The long-run impact of the REER on trade flows turned out to be statistically insignificant, being independent of method and specification of the model employed. The latter implies a secondary role for the REER in achieving a sustainable position of external balance.

* The paper was undertaken in Eesti Pank, where the author was a visiting researcher for 2 months participating in the project of Equilibrium Exchange Rate of the Estonian kroon. The author would like to thank other participants Marit Hinnosaar, Hannes Kaadu, Lenno Uusküla and Martti Randveer for their valuable comments and suggestions.

Author's e-mail address: c02jur01@student.ceu.hu

The views expressed are those of the author and do not necessarily represent the official view of Eesti Pank.

Table of Contents

1. Introduction

2. Estimation Technique and Data

3. Empirical Results

3.1. Stationarity Analysis

3.2. Cointegration Analysis

4. Alternative Specifications of Import and Export Demand Functions

5. Granger Causality Analysis

Conclusions

References

Appendix 1. Import and export demand variables

Appendix 2. The comparison of three different measures of exports and imports

Appendix 3. The results of ARDL model of import and export demand

The Relationship between REER and Trade Flows in the Context of the Equilibrium Exchange Rate, Working Papers of Eesti Pank No 9, 2003 (PDF*)

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