What the study found
The study found no statistically significant effect of real effective exchange rate (REER) appreciations or depreciations on trade balances in EU economies. Instead, domestic absorption, especially consumption and investment, was associated with large and robust negative effects on trade balances.
Why the authors say this matters
The authors conclude that external adjustment policies in the EU should focus on domestic demand management, structural competitiveness, and inflation discipline rather than relying on REER movements. The study also suggests that exchange-rate-led adjustment is not empirically relevant in a highly integrated monetary union.
What the researchers tested
The researchers analyzed annual panel data for 20 EU countries from 2000 to 2024. They used fixed-effects and dynamic system Generalized Method of Moments estimators within elasticity-based and absorption-based adjustment frameworks, while explicitly controlling for domestic absorption.
What worked and what didn't
REER appreciations and depreciations did not show statistically significant effects on trade balances. Domestic absorption had strong negative effects, inflation had a weak but consistently adverse influence, and structural features appeared to shape any possible price-based adjustment.
What to keep in mind
The authors note that aggregate panel data may hide country-specific or sector-specific adjustment mechanisms and heterogeneous structural shocks. The abstract does not provide other limitations.
Key points
- REER appreciations and depreciations were not statistically linked to trade balance changes.
- Domestic absorption, especially consumption and investment, had large negative effects on trade balances.
- Inflation showed a weak but consistently adverse influence.
- The analysis used annual panel data from 20 EU countries covering 2000 to 2024.
- The authors say EU adjustment policy should emphasize domestic demand management and structural competitiveness.
Disclosure
- Research title:
- REER changes do not significantly affect EU trade balances
- Authors:
- Noah Mutai, Nol Krasniqi, Kehinde Oluseyi Olagunju, Cyrus Mutuku, Ekrem Gjokaj, Marcos Ferasso
- Institutions:
- Berlin School of Economics and Law, Berlin School of Economics and Law, Department of Agriculture and Rural Development, Information and Communication Technology Authority, Universidad Autónoma de Chile, University of Prishtina
- Publication date:
- 2026-04-06
- OpenAlex record:
- View
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