Are Devaluations Expansionary or Contractionary in Transition Economies

Abstract

This paper examines the effects of changes in the real effective exchange rate on output for sixteen transition economies using cointegration tests with quarterly data. In addition, impulse response and variance decomposition analyses are also used to identify the significance of the real effective exchange rate, money supply, fiscal policy, and foreign income on output. The results suggest that devaluation is expansionary in the long-run in Estonia, Georgia, Russia, Ukraine, Poland, Romania and Slovakia; contractionary in Latvia, Lithuania, Armenia, Moldova, Croatia, the Czech Republic, Hungary and Slovenia; and has no long-run effect on output in Bulgaria. In addition, monetary and fiscal policies and foreign income seem to be important determinants of the long-run level of output in most of the cases.