engleski

Is there linear or nonlinear cointegration relationship between income terms of trade and exchange rate in Croatia?

Despite the poor predictive power of exchange rate modelling, real exchange rates usually do not move randomly i.e. they react to some variables. One such important macroeconomic variable is terms of trade. The aim of this paper is to look into relationship between income terms of trade and real exchange rate in Croatia. Some studies have shown that real exchange rate co-moves with terms of trade in the long-run, however it is also important to find out whether such relationships in Croatia exists if we observe income terms of trade. Income terms of trade measure reveals would the country end up with net gain or net loss as a result of changes in terms of trade and export volume, which de facto depends on the elasticity of demand for its export or in broader terms on Marshall-Lerner condition. Hence it would be interesting to observe if changes in income terms of trade can determine Croatian long-term economic prospect in respect to possible exchange rate movements, and vice versa. Empirical estimation relies on linear and nonlinear cointegration analysis and covers quarterly data from 1997 to 2010. Following results that are not consistent with the theory, a brief explanation is offered.

income terms of trade; real effective exchange rate; Johansen cointegration method; threshold cointegration; Croatia

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