Does Misaligned Currency Affect Economic Growth? – Evidence from Croatia

• Main Authors: Tonći Svilokos, Meri Šuman Tolić
• Format: Article
• Language: English
• Published: The Institute of Economics, Zagreb 2014-12-01
• Series: Croatian Economic Survey
• Subjects: Croatia; currency misalignment; economic growth; fundamental equilibrium exchange rate; Granger causality; VAR
• Online Access: http://hrcak.srce.hr/file/194562

The main objective of this paper is to measure the currency misalignment of the Croatian kuna and to reveal whether it affects economic growth for the period 2001 (Q1) to 2013 (Q3). The estimate relies on recent cointegration techniques, VAR models and Granger causality tests. The findings show that there are two misalignment sub-periods for the Croatian kuna: undervaluation in the period from 2000Q1 to 2007Q4 and overvaluation in the period from 2008Q1 to 2013Q3. The evidence reveals that for the whole sample period, the Granger causality goes from misalignments (MISA) to GDP growth under the 10 percent significance level. However, for the two sub-periods no evidence of Granger causality from MISA to GDP growth or vice versa is found. The research also reveals that the currency misalignments in the observed period are relatively small.