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Real Effective Exchange Rate and Industrial Productivity in Croatia: Wavelet Coherence Analysis

Real Effective Exchange Rate and Industrial Productivity in Croatia: Wavelet Coherence Analysis This paper brings releationship between real effective exchange rate and industry production in Croatia. Research sample consists of monthly data from January 2000 up to June 2019. Following wavelet coher- ence approach, empirical results reveal the relationship across time and frequency domain. The empirical obtained from wavelet coherence analysis and confirmed with conventional correlation analysis suggested positive relationship between industrial productivity and real effective exchange rate in Croatia, with depre - ciation as a factor of positive influence on industrial productivity. Research results provided in the paper also contributes to the debate on exchange rate policy in Croatia, extending the discussion on national exchange rate policy implications. Keywords: real effective exchange rate, industrial productivity, wavelet coherence analysis, Croatia. JEL Classification: E52, F31 Mile Bošnjak, PhD (corresponding author) Assistant Professor 1. INTRODUCTION Faculty of Economics and Business Zagreb  University of Zagreb  There is a strong research interest on the interrela- Address: Trg J F. Kennedyja 6, 10 000 Zagreb, Croatia tion of real effective exchange rate and industrial pro - e-mail: mile.bosnjak76@gmail.com ductivity, resulting also in discussion on the optimality ORCID: 0000-0002-7663-198X of a chosen exchange rate regime and equilibrium ex- change rate against the most important trading part- Gordana Kordić, PhD ners. Furthermore, there is a wide body of literature Full Professor  on the connections between real effective exchange Department of Finance, Faculty of Economics and rate and different aspects of economic performance, Business Zagreb  including export growth, industrial productivity, com- University of Zagreb  petitiveness, etc. It is important to notice, since the pa- e-mail: gkordic@net.efzg.hr per is examining the croatian case, that the institution ORCID: 0000-0002-1914-2784 which is exclusively responsible for monetary policy and, consequently, exchange rate policy is Croatian Ivan Novak, PhD National Bank (CNB). CNB is a fully independent insti- Assistant Professor tution while exchange rate regime is de jure defined Faculty of Economics and Business Zagreb  as managed floating (with no officially pronounced University of Zagreb  bands), that is also referred as dirty floating, with price e-mail: inovak@efzg.hr stability as its main goal. The exchange rate policy in ORCID: 0000-0003-1473-7049 Croatia has been stabile during the whole period since Copyright © 2021 by the School of Economics and Business Sarajevo REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS independence, relying on deutsch mark/euro as ex- Based on the heterogenous panel common approach change rate anchor. Putting stability in a first place, used on time span 1995-2018 the authors concluded in connection with previously described limitations, that the impact of real effective exchange rate depre - results in a policy based on a rule and oriented to- ciation is lower for countries with more complex eco- wards fulfillment the goal, with generally less devel- nomic systems that stronger participate in global val- oping potential. Such stability oriented policy, with ue chains. Basarac Sertić et al. (2015) used panel data small fluctuations of exchange rate, does not develop analysis in order to detect the determinants of exports a full stimulating potential for national industry com- for manufacturing industry in EU member states. Real petitiveness. Central and Eastern European countres effective exchange rate and industrial production generally has experienced deindustrialisation and a are variables of interest, together with domestic and need of boosting coompetitivnes has been already foreign demand, labour costs and economic crisis, recognised (Stojčić and Aralica 2018). That is why the assuming that the depreciation of real effective ex - industrial productivity, including the causes and con- change rate will have a positive impact on exports, by sequences of deindustralisation and reindustralisa- lowering the prices. tion atrracts interest of researchers. As highlighted in Cuestas et al. (2019) analysed a sample of Central aforementioned paper, there are weak evidence on and Eastern European countries, focusing on real ex- the success of the old approach based on free mar- change rates and competitiveness. Authors investigat- ket development and foreign direct investments and ed real effective rate fundamentals and theirs’ long- export sophistication with product space clustering run interconnection with real exchange rate, adding might be a preffered strategy. As a result of central both supply- and demand-side effects. Research also planning Popov (2019) found inherited distortions in included capital inflows into the analysis, confirming industrial structure and interregional trade patterns. their positive influence on competitiveness, conclud- After the opening of national economies, high tech ing that more emphasis should be on those factors and secondary manufaturing industries that prevailed that contribute to depreciation. Hence, as capital in- in the observed countries, were incompetitive which flows reduced the prices that, cosequently, resulted in lowered their output. Further, the author concludes depreciation. Comunale (2017) studied real effective that the most effective ways to develop industry is exchange rate misalingnments on GDP growth in EU to undervaluate exchange rate and increase public focusing on its asymmetry. Research was based on a investments in areas of education and infrastructure. panel of 27 EU countries during 1994-2012 time span Undervaluated exchange rate should contribute to with annual frequency. The paper concluded that real the export competitiveness of tradable goods, and effective exchange rate in new member states has such policy has been succesfully used so far (for ex- been overvalued, while misalignments were associ- ample in East-Asia countries). ated with GDP growth. Ito and Shimizu (2015) devel- However, the role of real effective exchange rate for oped their research of industry-level export competi- production development in Croatia has been uderex- tiveness on unit labour costs and nominal effective amined. To overcome the existing gap in litarature this exchange rates in period 2001-2009 for Japan, China paper makes a step ahed. The reminder of the paper is and Korea. They confirmed the rise of relative prices as organised as follows: section 2 focuses on brief sum- a result of the higher unit labor costs and exchange mary of the existing literature. Section 3 further de- rate appreciation, with the highest impact of ap- scribes research data and methodology, while section preciation for Japan. Still, the effects differ between 4 provides empirical results and discussion. Finally, countries and industries that, the authors conclude, last section gives a research conclusion, including the also depend on market power and non-price competi- overview of the main findings. tiveness. Based on the same set of countries and their producer price indices during Jan2001-Feb2013 time span, Sato et al. (2013) constructed a dataset of an in- dustry specific real effective rate in order to explore 2. LITERATURE OVERVIEW the connection between exporters’ competitiveness- Researh findings from literature related to the is- es. Results, based on the vector autoregression model, sue under consideration pointed out the existence indicated that there is a significant impact of indus- of interrelation between excange rate and industrial try differences of cost competitiveness and changes productivity. Čizmović et al. (2021) analysed the rela- in nominal exchange rates on exports in Japan and tionship between real effective exchange rate and in- Korea. Rajput and Jain (2014), focusing on the case of dustrial production in terms of deindustrialisation or India from 2004 (April) to 2013 (September) confirmed reindustralisation in 25 Eastern European countries. the relationship between real effective exchange rate South East European Journal of Economics and Business, Volume 16 (1) 2021 31 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS and merchandise exports. Using different estimation found them to be counter-cyclical but with relatively techniques authors concluded that the increase in real weak correlation with real GDP. Still, some fine-tuning effective exchange rate has adverse effect on exports, actions might have reverse and destabilising effects resulting in its decrease, measured in dollars. The on national economy. case of non-financial firms in India has been in focus Pavlić et al. (2015) also focused on the case of in Sikarwar (2014) leading to a confirmation of losses Croatia, empirically (Johansen Maximum Likelihood in terms of appreciation of national currency. Fornero cointegration) investigating the relationship be- et al. (2020) focused on the case of Chile, concluding tween tourism, real effective exchange rate and eco - that the influence of foreign demand on manufactur - nomic growth, based on 1996-2013 quarterly data. ing exports was stronger than those arising from the Using cointegration analyses, ADF, PP and KPSS tests, exchange rate change. Wong (2019) contributes to Johansen cointegration test and VECM model authors the research of the effects of exchange rate misalign- indicated (among other factors) both short- and long- ments, using autoregressive distibuted lag (ARDL) term causality between real effective exchange rate approach on the example of Malaysia, concluding and GDP as a dependent variable. The paper high- that undervaluation has a positive impact on manu- lights the importance of tourism as a part of export on facturing sector. Inversely, influence of overvaluation croatian economy, but also research its influence on is proven to be negative. Furthermore, the period of exchange rate movements, detecting real effective ex - fixed exchange rate had a negative impact on na- change rate as a significant factor of tourism industry tional economy, while weakening of the regime had competitiveness. Tomić (2016) contributes to the dis- a positive impact. Zhang (2018) used a panel vector cussion on (possible) misalignment of exchange rate autoregression (VAR) approach in order to research in Croatia, discussing the terms of trade and confirm- the response of sectoral exports in Japan on exchange ing the S-curve hypothesis. The S-curve concept has rate shocks, considering financial constraints. Results been used to analyse the trade dynamics in Croatia, revealed that the response in the japanese case has contributing to the research of impact of currency been significant and negative. Internal and external fi- depreciation on trade balance. Further evaluation nancial constraints, though, significantly contributed. resulted in a conclusion that exchange rate changes Exports would benefit only from the easing of internal would cause stronger negative consequences on debt and external constraints at the same time. and economic than positive effects on trade balance Discussions on the (over)valued exchange rate and international competitiveness. Bošnjak (2018) in- in Croatia and the influence of exchange rate on in- dicated the phenomenon of financial euroisation as a dustrial productivity (and, consequently, economic constraint to monetary policy in Croatia, but also for growth) has been in place for the past few decades, its economy and competitiveness. The research con- since obtaining monetary independence. In earlier cluded that, in order to resolve this problem, there is a literature, Vukšić (2006) analysed the export perfor- need for overall macroeconomic stability, not just the mance of croatian manufacturing industry, primary stability of exchange rate. As described in further de- in terms of foreign direct investments, also including tail in Stojčić (2012), the concept of competitiveness the discussion on overvalution of national currency is rather complex, since it includes different indicators in his analysis. Tkalec and Vizek (2009) used quarterly and measures, while exchange rate is one of the fac- data 1998Q1-2008Q3 aiming to expore the impact of tors of influence. macroeconomic policies on manufacturing produc- tion, considering 22 manufacturing sectors. Among other examined factors, the effect of real effective 3. RESEARCH DATA AND METHODOLOGY exchange rate found to be significant for low techno - logical intensity industries. Dumičić et al. (2011) use Researh data consists of monthly data for real effec - linear regression model in order to measure depre- tive exchange rate against 19 eurozone member coun- ciation effects on croatian economy, considering the tries and industrial productivity (category C), covering competition effect and the wealth effect. Benazić and the period from January 2000 till June 2019. The data Tomić (2014) include exchange rate in their discussion for real effective exchange rate against 19 eurozone on coordination between croatian monetary and fis- member countries were retreived from Eurostat while cal policy. Authors tested the hypothesis of monetary the data for industrial production index were obtaine and fiscal policy coordination in Croatia, finding nu- for Croatian Beureau of Statistics. Development of in- merous internal (exchange rate stability, fiscal auster - dustrial productivity and real effective exchange rate ity) and external (Maastricht criteria, Fiscal Stability (REER) is presented in Figure 1. in the Appendix, while Treaty) limitations to their efficiency, although they descriptive statistics is summarised in Table 1. in the 32 South East European Journal of Economics and Business, Volume 16 (1) 2021 �� � �� � 𝜓𝜓 �𝑡𝑡 ��  𝑒𝑒 𝑒𝑒    � ���������� � ��� 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �� � 𝑥𝑥 �𝑡𝑡 �ψ� �𝑑𝑑𝑡𝑡    ��� √� � ���������� 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 ��𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �   �� � � �� � � ���� � �𝜏� �� �� 𝟐𝟐 Appendix. Increase in REER index is a sign of real de- Pearson squared correlation coefficient). Still, wavelet 𝑅𝑅 �𝜏𝜏𝜏𝜏𝜏 ��     �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � preciation, and the opposite, decrease is a sign of real coherence analyses includes also phase differences appreciation. between time series under consideration that is pro- Wavelet coherence approach provides observa- vided in equation (5): tions in time and frequency domain that makes a fur- ��� ��𝜏��� �� ther step from the conventional approaches of time �� (5) � � 𝜑𝜑 𝜏𝜏𝜏𝜏𝜏 � 𝑡𝑡�� � �   � � ��� �𝜏� � �� series. For the purpose of the research provided in this paper, we started with the Morlet wavelet as in equa- tion (1) that enables us to determine time dependent In the equation (5), represents the real part, while ℜ ℑ  amplitude and phase for different frequencies. ℜ ℑ represents imaginary part of the cross wavelet transformation, as presented in equation (3). In wavelet coherence analyses arrows represent �� � �� � � (1) phase difference. When time series are positively corre - 𝜓𝜓 �𝑡𝑡 ��  𝑒𝑒 𝑒𝑒    lated and move together it is considered a zero phase difference. Positive correlation is presented when ar - In equation (1) the marks are as follows: t repre- rows pointed right and, on the contrary, arrows point- sents time, while ω is a central frequency of a num- ed left indicate negative correlation. Furthermore, ar- � � ������������� � � �� 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 � � 𝑥𝑥 𝑡𝑡 ψ� �𝑑𝑑𝑡𝑡    ber of oscilla � tions. The later are limited to six, as in rows pointing up means that the first time series leads ��� � � economic studies provided in literature (Vacha and the second by the right angle. Arrows pointing down Barunik 2012). A wavelet approach allows valuable in- indicate that the second time series leads the first by �� sigh � ts in co-mo ��vemen � ts between variables in time as the right angle. It should also be noted that these are �� � 𝜓𝜓 𝑡𝑡 �  𝑒𝑒 𝑒𝑒    ���������� well as in frequenc � y domain. the corner cases, while the position of arrows might 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 ���𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �   �� � � Using equation (2) we provide continuous wavelet indicate a combination of these two positions. transform: � � ������������� �� 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �� 𝑥𝑥 �𝑡𝑡 �ψ� �𝑑𝑑𝑡𝑡    (2) � � � ���� � �𝜏� �� � �� 4. EMPIRICAL RESULTS AND DISCUSSION ��� 𝟐𝟐 � � 𝑅𝑅 �𝜏𝜏𝜏𝜏𝜏 ��     �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � Besides aforementioned research data and meth- In equation (2), x(t) stands for the time series ob- odology, we have also analyzed Pearson Correlation �� ser�ved, s is the scale �� � , while ���������� τ represents location, de- coefficient and p-values. � � � � � � 𝑊𝑊 �𝜏𝜏𝜏�𝜏𝜏 �𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 𝜏𝜏𝜏𝜏𝜏    𝜓𝜓 𝑡𝑡 �  𝑒𝑒 𝑒𝑒    �� � � termining the position of the w � avelet. Observed time ��� ��𝜏��� �� �� � � 𝜑𝜑 𝜏𝜏𝜏𝜏𝜏 � 𝑡𝑡�� � �   series x(t) is then decomposed in terms of wavelets. � � ��� �𝜏� � �� Table 2. Pearson Correlation coefficient: estimate and test Then, the size and significance of correlation between industrial productivit��y and real effective exchange ���� � ��𝜏���� �� � � ������������� 𝟐𝟐 Pearson Corr. coefficient = 0.5233248 � � 𝑅𝑅 𝜏𝜏𝜏𝜏𝜏 �     r ate ar � e obser � ved as t�w�o time ser � � ies. 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 � � 𝑥𝑥 𝑡𝑡 ψ 𝑑𝑑𝑡𝑡    � �� � �� ��� ���� |� ��𝜏��| ����� �� ��𝜏���� � � Equation (3) is used to calculate the cross wavelet �� t = 9.3542 p-value < 2.2e-16 � �� � transformation of tw�o time series x(t) and y(t) 𝜓𝜓 �𝑡𝑡 ��  𝑒𝑒 𝑒𝑒    Source: own estimations ���������� (3) � � � � � � 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏    �� � ��� ���𝜏��� �� �� 𝜑𝜑 �𝜏𝜏𝜏𝜏𝜏 �� 𝑡𝑡�� � �   ��� ��𝜏��� �� Following the results obtained and presented in � � ������������� � � �� 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 � � 𝑥𝑥 𝑡𝑡 ψ� �𝑑𝑑𝑡𝑡    �Continuous wavelet transformation of the ob- Table 2 we confirm positive and statistically significant ��� √� � served time series x(t)�� is presented with W (τ, s) while correlation between REER and industrial productivity ���� � ��𝜏���� �� 𝟐𝟐 � � 𝑅𝑅 𝜏𝜏𝜏𝜏𝜏 �     W (τ, s) represents complex conjugate continuous in Croatia. �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � wavelet transform for time series y(t). |W (τ, s)| is the The wavelet coherence is presented in Figure 2. xy ���������� cr𝑊𝑊 oss w �𝜏𝜏𝜏𝜏𝜏 av� elet po �𝑊𝑊 � w𝜏𝜏𝜏𝜏𝜏 er� .𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �   �� � � The squared wavelet coherent coefficient is given The wavelet coherence identifies the co-movement in equation (4): of industrial productivity and real effective exchange ��� ��𝜏��� �� �� 𝜑𝜑 �𝜏𝜏𝜏𝜏𝜏 �� 𝑡𝑡�� � �   rate during the period observed. Horizontal axis cov- ��� ��𝜏��� � �� �� � � ers the time period of research, while vertical axis ���� � �𝜏� �� �� 𝟐𝟐 𝑅𝑅 �𝜏𝜏𝜏𝜏𝜏 ��     (4) shows the scale in manner that frequency is higher on �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � lower points of the scale. As presented on the right- in which S represents a smoothing operator that is hand scale, dark red colored regions indicate stronger within the range from zero to one (similarly to the correlation, while blue-colored area marks weaker ��� ��𝜏��� �� �� � � 𝜑𝜑 𝜏𝜏𝜏𝜏𝜏 � 𝑡𝑡�� � �   � � ��� �𝜏� � �� South East European Journal of Economics and Business, Volume 16 (1) 2021 33 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS Figure 2. – Wavelet coherence: industrial productivity vs. REER: case of Croatia Source: own estimations correlation between the observed variables. Long- Conclusively, research results clearly point out the term correlation is presented in higher scales while, role of the real effective exchange rate in develop - on the contrary, lower scales indicate short-term cor- ment of the Croatian industry and real depreciation relation. Furthermore, as described above, an arrow of Croatian kuna makes Croatian industry product in figure points to the leading or lagging role of the more competitive in term of prices. Recalling the re- variable in co-movements of the two variables. Arrows sults from Bošnjak (2018) among others, there is a pointing to the right indicate positive correlation and prominent financial euroisation in Croatian financial since the arrows are pointing down that puts the real system limiting the space for nominal depreciation of effective exchange rate depreciation as the leading Croatian kuna against euro. The other possibility to in- variable in Croatia. In that case, there has been a posi- fluence price competitiveness would be management tive correlation between the two variables (deprecia- inflation but it seems as a second goal of monetary au- tion of REER leads to growth in industrial productiv- thorizes (Mance et al. 2015). Furthermore, Croatia has ity). Outside the bounded region the significance level been EU member country since the 2013 and Bošnjak is 5% that makes them non-significant. et al. (2019) illustrated convergence of import prices Analyzing the time span, the correlation was strong between Croatia and EMU members. Nonetheless, between 2002-2007 and 2010-2015, while significant Croatia is on its path to the EMU and proper selection and high correlations were observed at middle scales, of exchange rate level at point of joining EMU might between 8 and 16. Depreciation of real effective ex - play a role. As suggested in Stojčić and Aralica (2018) change rate resulted in industrial productivity growth. there is a need to improve competitiveness of industry On the contrary, from 2000-2003 arrows are pointing production in Croatia. Results from this paper sugest to the right and up, indicating that the leading vari- that real effective exchange rate ssould be included able is industrial productivity. During the 2007-2010, in policy mix aimed to improve industry performance covering the period of global financial crisis, the mod- and its competitivenes. el did not found any significant relationship while the correlations for the period after 2015 did not last long- er than two years. 34 South East European Journal of Economics and Business, Volume 16 (1) 2021 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS 5. CONCLUSION REFERENCES The analyses presented in the paper is focused on Basarac Sertić, M., Vučković, V. and Škrabić Perić, B. 2015. real effective exchange rate movements and interre - Determinants of manufacturing industry exports in lation with industrial productivity in Croatia. It high- European Union member states: a panel data analysis. lights the complexity of the national competitiveness Economic research-Ekonomska istraživanja, 28(1), 384- and variables that might be used to improve it, con- 397., https://doi.org/10.1080/1331677x.2015.1043781 sidering the discussions on exchange rate policy that Benazić, M. and Tomić, D. 2014. The evaluation of fiscal has been the question of interest in Croatia for past and monetary policy in Croatia over a business cycle. decades. 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Procjena učinaka presented in this paper, real depreciation of Croatian konkurentnosti i bogatstva kao posljedica promjene kuna could improve price competitiveness of Croatian realnog deviznog tečaja na hrvatsko gospodarstvo. industry products and boost the industry develop- Zbornik Ekonomskog fakulteta u Zagrebu, 9(2), 35-52. ment in Croatia. However, there are constraints arising Fornero, J. A., Fuentes D. M. A. and Gatty Sangama, A. 2020. from financial sector rooted in high level of financial How do manufacturing exports react to the real ex- euroization. Further research should be directed to- change rate and foreign demand? The Chilean case. The wards finding non-price competitiveness of Croatian World Economy, 43(1), 274-300., industry. The findings might also help the policy mak - https://doi.org/10.1111/twec.12891 ers during the accession process to the European Ito, K. and Shimizu, J. 2015. Industry‐Level Competitiveness, monetary union, in terms of better preparation for Productivity and Effective Exchange Rates in East Asia. full (monetary and economic) integration on single Asian Economic Journal, 29(2), 181-214., market. https://doi.org/10.1111/asej.12054 Further research should also include determination Mance, D., Žiković, S. and Mance, D. 2015. Econometric of country-specific factors influencing industrial pro - Analysis of Croatia’s Proclaimed Foreign Exchange ductivity on one side and real effective exchange rate Rate.  South East European Journal of Economics and on the other. Role of external shocks should be consid- Business, 10(1), 7-17., ered too, including also the changes in exchange rate https://doi.org/10.1515/jeb-2015-0001 policy arising from the membership in ERM II and the Pavlić, I., Svilokos, T. and Šuman Tolić, M. 2015. Tourism, real crisis of global economy caused by the corona virus. effective exchange rate and economic growth: Empirical South East European Journal of Economics and Business, Volume 16 (1) 2021 35 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS evidence for Croatia. International Journal of Tourism Tkalec, M. and Vizek, M. 2009. The impact of macroeco- Research, 17(3), 282-291., nomic policies on manufacturing production in Croatia. https://doi.org/10.1002/jtr.1986 Privredna kretanja i ekonomska politika, 19(121), 61-93. Popov, V. 2019. Successes and failures of industrial policy: Tomić, D. 2016. An alternative approach to the trade dy- Lessons from transition (post-communist) economies of namics in Croatia. Journal of Economic and Social Europe and Asia., MPRA Paper No. 95332, https://mpra. Development, 3(2), 16. ub.uni-muenchen.de/95332/ (January 13th, 2021) Vacha, L. and Barunik, J. 2012. Co-movement of energy com- Rajput, N. and Jain, S. 2014. Effect of REER on exports: An an- modities revisited: Evidence from wavelet coherence ecdote from India. International Journal of Management, analysis. Energy Economics, 34(1), 241-247., IT and Engineering, 4(6), 154-168 https://doi.org/10.1016/j.eneco.2011.10.007 Sato, K., Shimizu, J., Shrestha, N. and Zhang, S. 2013. Industry‐ Vukšić, G. 2006. Impact of Foreign Direct Investment on specific Real Effective Exchange Rates and Export Price Croatian Manufacturing Exports. Occasional Paper Competitiveness: The Cases of Japan, China, and Korea. Series-Institute of Public Finance, (27), 5. Asian Economic Policy Review, 8(2), 298-321., Wong, H. T. 2019. Real exchange rate misalignment and https://doi.org/10.1111/aepr.12032 economy. Journal of Economic Studies, 46(1), 211-227., Sikarwar, E. 2014. A re-examination of exchange rate ex- https://doi.org/10.1108/jes-07-2017-0181 posure: Industry-level analysis of Indian firms. Global Zhang, S. 2018. Industry‐specific Exchange Rate Fluctuations, Business Review, 15(4), 867-882., Japanese Exports and Financial Constraints: Evidence https://doi.org/10.1177/0972150914543416 from Panel Vector Autoregressive Analysis. Asian Stojčić, N. 2012. Theoretical foundations and measurement Economic Journal, 32(2), 125-145., of competitiveness. Poslovna izvrsnost: znanstveni https://doi.org/10.1111/asej.12145 časopis za promicanje kulture kvalitete i poslovne iz- vrsnosti, 6(2), 143-165. Stojčić, N. and Aralica, Z. 2018. (De) industrialisation and lessons for industrial policy in Central and Eastern Europe. Post-communist economies, 30(6), 713-734., https://doi.org/10.1080/14631377.2018.1443251 36 South East European Journal of Economics and Business, Volume 16 (1) 2021 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS Appendix Figure 1. Industrial productivity and REER development, case of Croatia Source: authors Table 1. Descriptive statistics for industrial productivity and REER, case of Croatia IND REER Min. 73.40 85.55 1st Qu. 95.75 93.33 Median 102.85 96.14 Mean 102.51 95.36 3rd Qu. 109.28 97.38 Max. 125.40 101.46 Source: own estimations South East European Journal of Economics and Business, Volume 16 (1) 2021 37 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png South East European Journal of Economics and Business de Gruyter

Real Effective Exchange Rate and Industrial Productivity in Croatia: Wavelet Coherence Analysis

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de Gruyter
Copyright
© 2021 Mile Bošnjak et al., published by Sciendo
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2233-1999
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2233-1999
DOI
10.2478/jeb-2021-0003
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Abstract

This paper brings releationship between real effective exchange rate and industry production in Croatia. Research sample consists of monthly data from January 2000 up to June 2019. Following wavelet coher- ence approach, empirical results reveal the relationship across time and frequency domain. The empirical obtained from wavelet coherence analysis and confirmed with conventional correlation analysis suggested positive relationship between industrial productivity and real effective exchange rate in Croatia, with depre - ciation as a factor of positive influence on industrial productivity. Research results provided in the paper also contributes to the debate on exchange rate policy in Croatia, extending the discussion on national exchange rate policy implications. Keywords: real effective exchange rate, industrial productivity, wavelet coherence analysis, Croatia. JEL Classification: E52, F31 Mile Bošnjak, PhD (corresponding author) Assistant Professor 1. INTRODUCTION Faculty of Economics and Business Zagreb  University of Zagreb  There is a strong research interest on the interrela- Address: Trg J F. Kennedyja 6, 10 000 Zagreb, Croatia tion of real effective exchange rate and industrial pro - e-mail: mile.bosnjak76@gmail.com ductivity, resulting also in discussion on the optimality ORCID: 0000-0002-7663-198X of a chosen exchange rate regime and equilibrium ex- change rate against the most important trading part- Gordana Kordić, PhD ners. Furthermore, there is a wide body of literature Full Professor  on the connections between real effective exchange Department of Finance, Faculty of Economics and rate and different aspects of economic performance, Business Zagreb  including export growth, industrial productivity, com- University of Zagreb  petitiveness, etc. It is important to notice, since the pa- e-mail: gkordic@net.efzg.hr per is examining the croatian case, that the institution ORCID: 0000-0002-1914-2784 which is exclusively responsible for monetary policy and, consequently, exchange rate policy is Croatian Ivan Novak, PhD National Bank (CNB). CNB is a fully independent insti- Assistant Professor tution while exchange rate regime is de jure defined Faculty of Economics and Business Zagreb  as managed floating (with no officially pronounced University of Zagreb  bands), that is also referred as dirty floating, with price e-mail: inovak@efzg.hr stability as its main goal. The exchange rate policy in ORCID: 0000-0003-1473-7049 Croatia has been stabile during the whole period since Copyright © 2021 by the School of Economics and Business Sarajevo REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS independence, relying on deutsch mark/euro as ex- Based on the heterogenous panel common approach change rate anchor. Putting stability in a first place, used on time span 1995-2018 the authors concluded in connection with previously described limitations, that the impact of real effective exchange rate depre - results in a policy based on a rule and oriented to- ciation is lower for countries with more complex eco- wards fulfillment the goal, with generally less devel- nomic systems that stronger participate in global val- oping potential. Such stability oriented policy, with ue chains. Basarac Sertić et al. (2015) used panel data small fluctuations of exchange rate, does not develop analysis in order to detect the determinants of exports a full stimulating potential for national industry com- for manufacturing industry in EU member states. Real petitiveness. Central and Eastern European countres effective exchange rate and industrial production generally has experienced deindustrialisation and a are variables of interest, together with domestic and need of boosting coompetitivnes has been already foreign demand, labour costs and economic crisis, recognised (Stojčić and Aralica 2018). That is why the assuming that the depreciation of real effective ex - industrial productivity, including the causes and con- change rate will have a positive impact on exports, by sequences of deindustralisation and reindustralisa- lowering the prices. tion atrracts interest of researchers. As highlighted in Cuestas et al. (2019) analysed a sample of Central aforementioned paper, there are weak evidence on and Eastern European countries, focusing on real ex- the success of the old approach based on free mar- change rates and competitiveness. Authors investigat- ket development and foreign direct investments and ed real effective rate fundamentals and theirs’ long- export sophistication with product space clustering run interconnection with real exchange rate, adding might be a preffered strategy. As a result of central both supply- and demand-side effects. Research also planning Popov (2019) found inherited distortions in included capital inflows into the analysis, confirming industrial structure and interregional trade patterns. their positive influence on competitiveness, conclud- After the opening of national economies, high tech ing that more emphasis should be on those factors and secondary manufaturing industries that prevailed that contribute to depreciation. Hence, as capital in- in the observed countries, were incompetitive which flows reduced the prices that, cosequently, resulted in lowered their output. Further, the author concludes depreciation. Comunale (2017) studied real effective that the most effective ways to develop industry is exchange rate misalingnments on GDP growth in EU to undervaluate exchange rate and increase public focusing on its asymmetry. Research was based on a investments in areas of education and infrastructure. panel of 27 EU countries during 1994-2012 time span Undervaluated exchange rate should contribute to with annual frequency. The paper concluded that real the export competitiveness of tradable goods, and effective exchange rate in new member states has such policy has been succesfully used so far (for ex- been overvalued, while misalignments were associ- ample in East-Asia countries). ated with GDP growth. Ito and Shimizu (2015) devel- However, the role of real effective exchange rate for oped their research of industry-level export competi- production development in Croatia has been uderex- tiveness on unit labour costs and nominal effective amined. To overcome the existing gap in litarature this exchange rates in period 2001-2009 for Japan, China paper makes a step ahed. The reminder of the paper is and Korea. They confirmed the rise of relative prices as organised as follows: section 2 focuses on brief sum- a result of the higher unit labor costs and exchange mary of the existing literature. Section 3 further de- rate appreciation, with the highest impact of ap- scribes research data and methodology, while section preciation for Japan. Still, the effects differ between 4 provides empirical results and discussion. Finally, countries and industries that, the authors conclude, last section gives a research conclusion, including the also depend on market power and non-price competi- overview of the main findings. tiveness. Based on the same set of countries and their producer price indices during Jan2001-Feb2013 time span, Sato et al. (2013) constructed a dataset of an in- dustry specific real effective rate in order to explore 2. LITERATURE OVERVIEW the connection between exporters’ competitiveness- Researh findings from literature related to the is- es. Results, based on the vector autoregression model, sue under consideration pointed out the existence indicated that there is a significant impact of indus- of interrelation between excange rate and industrial try differences of cost competitiveness and changes productivity. Čizmović et al. (2021) analysed the rela- in nominal exchange rates on exports in Japan and tionship between real effective exchange rate and in- Korea. Rajput and Jain (2014), focusing on the case of dustrial production in terms of deindustrialisation or India from 2004 (April) to 2013 (September) confirmed reindustralisation in 25 Eastern European countries. the relationship between real effective exchange rate South East European Journal of Economics and Business, Volume 16 (1) 2021 31 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS and merchandise exports. Using different estimation found them to be counter-cyclical but with relatively techniques authors concluded that the increase in real weak correlation with real GDP. Still, some fine-tuning effective exchange rate has adverse effect on exports, actions might have reverse and destabilising effects resulting in its decrease, measured in dollars. The on national economy. case of non-financial firms in India has been in focus Pavlić et al. (2015) also focused on the case of in Sikarwar (2014) leading to a confirmation of losses Croatia, empirically (Johansen Maximum Likelihood in terms of appreciation of national currency. Fornero cointegration) investigating the relationship be- et al. (2020) focused on the case of Chile, concluding tween tourism, real effective exchange rate and eco - that the influence of foreign demand on manufactur - nomic growth, based on 1996-2013 quarterly data. ing exports was stronger than those arising from the Using cointegration analyses, ADF, PP and KPSS tests, exchange rate change. Wong (2019) contributes to Johansen cointegration test and VECM model authors the research of the effects of exchange rate misalign- indicated (among other factors) both short- and long- ments, using autoregressive distibuted lag (ARDL) term causality between real effective exchange rate approach on the example of Malaysia, concluding and GDP as a dependent variable. The paper high- that undervaluation has a positive impact on manu- lights the importance of tourism as a part of export on facturing sector. Inversely, influence of overvaluation croatian economy, but also research its influence on is proven to be negative. Furthermore, the period of exchange rate movements, detecting real effective ex - fixed exchange rate had a negative impact on na- change rate as a significant factor of tourism industry tional economy, while weakening of the regime had competitiveness. Tomić (2016) contributes to the dis- a positive impact. Zhang (2018) used a panel vector cussion on (possible) misalignment of exchange rate autoregression (VAR) approach in order to research in Croatia, discussing the terms of trade and confirm- the response of sectoral exports in Japan on exchange ing the S-curve hypothesis. The S-curve concept has rate shocks, considering financial constraints. Results been used to analyse the trade dynamics in Croatia, revealed that the response in the japanese case has contributing to the research of impact of currency been significant and negative. Internal and external fi- depreciation on trade balance. Further evaluation nancial constraints, though, significantly contributed. resulted in a conclusion that exchange rate changes Exports would benefit only from the easing of internal would cause stronger negative consequences on debt and external constraints at the same time. and economic than positive effects on trade balance Discussions on the (over)valued exchange rate and international competitiveness. Bošnjak (2018) in- in Croatia and the influence of exchange rate on in- dicated the phenomenon of financial euroisation as a dustrial productivity (and, consequently, economic constraint to monetary policy in Croatia, but also for growth) has been in place for the past few decades, its economy and competitiveness. The research con- since obtaining monetary independence. In earlier cluded that, in order to resolve this problem, there is a literature, Vukšić (2006) analysed the export perfor- need for overall macroeconomic stability, not just the mance of croatian manufacturing industry, primary stability of exchange rate. As described in further de- in terms of foreign direct investments, also including tail in Stojčić (2012), the concept of competitiveness the discussion on overvalution of national currency is rather complex, since it includes different indicators in his analysis. Tkalec and Vizek (2009) used quarterly and measures, while exchange rate is one of the fac- data 1998Q1-2008Q3 aiming to expore the impact of tors of influence. macroeconomic policies on manufacturing produc- tion, considering 22 manufacturing sectors. Among other examined factors, the effect of real effective 3. RESEARCH DATA AND METHODOLOGY exchange rate found to be significant for low techno - logical intensity industries. Dumičić et al. (2011) use Researh data consists of monthly data for real effec - linear regression model in order to measure depre- tive exchange rate against 19 eurozone member coun- ciation effects on croatian economy, considering the tries and industrial productivity (category C), covering competition effect and the wealth effect. Benazić and the period from January 2000 till June 2019. The data Tomić (2014) include exchange rate in their discussion for real effective exchange rate against 19 eurozone on coordination between croatian monetary and fis- member countries were retreived from Eurostat while cal policy. Authors tested the hypothesis of monetary the data for industrial production index were obtaine and fiscal policy coordination in Croatia, finding nu- for Croatian Beureau of Statistics. Development of in- merous internal (exchange rate stability, fiscal auster - dustrial productivity and real effective exchange rate ity) and external (Maastricht criteria, Fiscal Stability (REER) is presented in Figure 1. in the Appendix, while Treaty) limitations to their efficiency, although they descriptive statistics is summarised in Table 1. in the 32 South East European Journal of Economics and Business, Volume 16 (1) 2021 �� � �� � 𝜓𝜓 �𝑡𝑡 ��  𝑒𝑒 𝑒𝑒    � ���������� � ��� 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �� � 𝑥𝑥 �𝑡𝑡 �ψ� �𝑑𝑑𝑡𝑡    ��� √� � ���������� 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 ��𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �   �� � � �� � � ���� � �𝜏� �� �� 𝟐𝟐 Appendix. Increase in REER index is a sign of real de- Pearson squared correlation coefficient). Still, wavelet 𝑅𝑅 �𝜏𝜏𝜏𝜏𝜏 ��     �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � preciation, and the opposite, decrease is a sign of real coherence analyses includes also phase differences appreciation. between time series under consideration that is pro- Wavelet coherence approach provides observa- vided in equation (5): tions in time and frequency domain that makes a fur- ��� ��𝜏��� �� ther step from the conventional approaches of time �� (5) � � 𝜑𝜑 𝜏𝜏𝜏𝜏𝜏 � 𝑡𝑡�� � �   � � ��� �𝜏� � �� series. For the purpose of the research provided in this paper, we started with the Morlet wavelet as in equa- tion (1) that enables us to determine time dependent In the equation (5), represents the real part, while ℜ ℑ  amplitude and phase for different frequencies. ℜ ℑ represents imaginary part of the cross wavelet transformation, as presented in equation (3). In wavelet coherence analyses arrows represent �� � �� � � (1) phase difference. When time series are positively corre - 𝜓𝜓 �𝑡𝑡 ��  𝑒𝑒 𝑒𝑒    lated and move together it is considered a zero phase difference. Positive correlation is presented when ar - In equation (1) the marks are as follows: t repre- rows pointed right and, on the contrary, arrows point- sents time, while ω is a central frequency of a num- ed left indicate negative correlation. Furthermore, ar- � � ������������� � � �� 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 � � 𝑥𝑥 𝑡𝑡 ψ� �𝑑𝑑𝑡𝑡    ber of oscilla � tions. The later are limited to six, as in rows pointing up means that the first time series leads ��� � � economic studies provided in literature (Vacha and the second by the right angle. Arrows pointing down Barunik 2012). A wavelet approach allows valuable in- indicate that the second time series leads the first by �� sigh � ts in co-mo ��vemen � ts between variables in time as the right angle. It should also be noted that these are �� � 𝜓𝜓 𝑡𝑡 �  𝑒𝑒 𝑒𝑒    ���������� well as in frequenc � y domain. the corner cases, while the position of arrows might 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 ���𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �   �� � � Using equation (2) we provide continuous wavelet indicate a combination of these two positions. transform: � � ������������� �� 𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �� 𝑥𝑥 �𝑡𝑡 �ψ� �𝑑𝑑𝑡𝑡    (2) � � � ���� � �𝜏� �� � �� 4. EMPIRICAL RESULTS AND DISCUSSION ��� 𝟐𝟐 � � 𝑅𝑅 �𝜏𝜏𝜏𝜏𝜏 ��     �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � Besides aforementioned research data and meth- In equation (2), x(t) stands for the time series ob- odology, we have also analyzed Pearson Correlation �� ser�ved, s is the scale �� � , while ���������� τ represents location, de- coefficient and p-values. � � � � � � 𝑊𝑊 �𝜏𝜏𝜏�𝜏𝜏 �𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 𝜏𝜏𝜏𝜏𝜏    𝜓𝜓 𝑡𝑡 �  𝑒𝑒 𝑒𝑒    �� � � termining the position of the w � avelet. Observed time ��� ��𝜏��� �� �� � � 𝜑𝜑 𝜏𝜏𝜏𝜏𝜏 � 𝑡𝑡�� � �   series x(t) is then decomposed in terms of wavelets. � � ��� �𝜏� � �� Table 2. Pearson Correlation coefficient: estimate and test Then, the size and significance of correlation between industrial productivit��y and real effective exchange ���� � ��𝜏���� �� � � ������������� 𝟐𝟐 Pearson Corr. coefficient = 0.5233248 � � 𝑅𝑅 𝜏𝜏𝜏𝜏𝜏 �     r ate ar � e obser � ved as t�w�o time ser � � ies. 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 � � 𝑥𝑥 𝑡𝑡 ψ 𝑑𝑑𝑡𝑡    � �� � �� ��� ���� |� ��𝜏��| ����� �� ��𝜏���� � � Equation (3) is used to calculate the cross wavelet �� t = 9.3542 p-value < 2.2e-16 � �� � transformation of tw�o time series x(t) and y(t) 𝜓𝜓 �𝑡𝑡 ��  𝑒𝑒 𝑒𝑒    Source: own estimations ���������� (3) � � � � � � 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 �𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏    �� � ��� ���𝜏��� �� �� 𝜑𝜑 �𝜏𝜏𝜏𝜏𝜏 �� 𝑡𝑡�� � �   ��� ��𝜏��� �� Following the results obtained and presented in � � ������������� � � �� 𝑊𝑊 𝜏𝜏𝜏𝜏𝜏 � � 𝑥𝑥 𝑡𝑡 ψ� �𝑑𝑑𝑡𝑡    �Continuous wavelet transformation of the ob- Table 2 we confirm positive and statistically significant ��� √� � served time series x(t)�� is presented with W (τ, s) while correlation between REER and industrial productivity ���� � ��𝜏���� �� 𝟐𝟐 � � 𝑅𝑅 𝜏𝜏𝜏𝜏𝜏 �     W (τ, s) represents complex conjugate continuous in Croatia. �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � wavelet transform for time series y(t). |W (τ, s)| is the The wavelet coherence is presented in Figure 2. xy ���������� cr𝑊𝑊 oss w �𝜏𝜏𝜏𝜏𝜏 av� elet po �𝑊𝑊 � w𝜏𝜏𝜏𝜏𝜏 er� .𝑊𝑊 �𝜏𝜏𝜏𝜏𝜏 �   �� � � The squared wavelet coherent coefficient is given The wavelet coherence identifies the co-movement in equation (4): of industrial productivity and real effective exchange ��� ��𝜏��� �� �� 𝜑𝜑 �𝜏𝜏𝜏𝜏𝜏 �� 𝑡𝑡�� � �   rate during the period observed. Horizontal axis cov- ��� ��𝜏��� � �� �� � � ers the time period of research, while vertical axis ���� � �𝜏� �� �� 𝟐𝟐 𝑅𝑅 �𝜏𝜏𝜏𝜏𝜏 ��     (4) shows the scale in manner that frequency is higher on �� � �� ��� |� ��𝜏��| ���� �� ��𝜏���� � � lower points of the scale. As presented on the right- in which S represents a smoothing operator that is hand scale, dark red colored regions indicate stronger within the range from zero to one (similarly to the correlation, while blue-colored area marks weaker ��� ��𝜏��� �� �� � � 𝜑𝜑 𝜏𝜏𝜏𝜏𝜏 � 𝑡𝑡�� � �   � � ��� �𝜏� � �� South East European Journal of Economics and Business, Volume 16 (1) 2021 33 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS Figure 2. – Wavelet coherence: industrial productivity vs. REER: case of Croatia Source: own estimations correlation between the observed variables. Long- Conclusively, research results clearly point out the term correlation is presented in higher scales while, role of the real effective exchange rate in develop - on the contrary, lower scales indicate short-term cor- ment of the Croatian industry and real depreciation relation. Furthermore, as described above, an arrow of Croatian kuna makes Croatian industry product in figure points to the leading or lagging role of the more competitive in term of prices. Recalling the re- variable in co-movements of the two variables. Arrows sults from Bošnjak (2018) among others, there is a pointing to the right indicate positive correlation and prominent financial euroisation in Croatian financial since the arrows are pointing down that puts the real system limiting the space for nominal depreciation of effective exchange rate depreciation as the leading Croatian kuna against euro. The other possibility to in- variable in Croatia. In that case, there has been a posi- fluence price competitiveness would be management tive correlation between the two variables (deprecia- inflation but it seems as a second goal of monetary au- tion of REER leads to growth in industrial productiv- thorizes (Mance et al. 2015). Furthermore, Croatia has ity). Outside the bounded region the significance level been EU member country since the 2013 and Bošnjak is 5% that makes them non-significant. et al. (2019) illustrated convergence of import prices Analyzing the time span, the correlation was strong between Croatia and EMU members. Nonetheless, between 2002-2007 and 2010-2015, while significant Croatia is on its path to the EMU and proper selection and high correlations were observed at middle scales, of exchange rate level at point of joining EMU might between 8 and 16. Depreciation of real effective ex - play a role. As suggested in Stojčić and Aralica (2018) change rate resulted in industrial productivity growth. there is a need to improve competitiveness of industry On the contrary, from 2000-2003 arrows are pointing production in Croatia. Results from this paper sugest to the right and up, indicating that the leading vari- that real effective exchange rate ssould be included able is industrial productivity. During the 2007-2010, in policy mix aimed to improve industry performance covering the period of global financial crisis, the mod- and its competitivenes. el did not found any significant relationship while the correlations for the period after 2015 did not last long- er than two years. 34 South East European Journal of Economics and Business, Volume 16 (1) 2021 REAL EFFECTIVE EXCHANGE RATE AND INDUSTRIAL PRODUCTIVITY IN CROATIA: WAVELET COHERENCE ANALYSIS 5. CONCLUSION REFERENCES The analyses presented in the paper is focused on Basarac Sertić, M., Vučković, V. and Škrabić Perić, B. 2015. real effective exchange rate movements and interre - Determinants of manufacturing industry exports in lation with industrial productivity in Croatia. It high- European Union member states: a panel data analysis. lights the complexity of the national competitiveness Economic research-Ekonomska istraživanja, 28(1), 384- and variables that might be used to improve it, con- 397., https://doi.org/10.1080/1331677x.2015.1043781 sidering the discussions on exchange rate policy that Benazić, M. and Tomić, D. 2014. The evaluation of fiscal has been the question of interest in Croatia for past and monetary policy in Croatia over a business cycle. decades. 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Descriptive statistics for industrial productivity and REER, case of Croatia IND REER Min. 73.40 85.55 1st Qu. 95.75 93.33 Median 102.85 96.14 Mean 102.51 95.36 3rd Qu. 109.28 97.38 Max. 125.40 101.46 Source: own estimations South East European Journal of Economics and Business, Volume 16 (1) 2021 37

Journal

South East European Journal of Economics and Businessde Gruyter

Published: Jun 1, 2021

Keywords: real effective exchange rate; industrial productivity; wavelet coherence analysis; Croatia; E52; F31

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