The Role of Exchange Rate in Contemporary Czechia’s Foreign Trade

Abstract

Czechia's economic growth is substantially dependent on foreign trade. An independent monetary policy in a managed floating exchange rate regime gives a unique perspective on the effects of the exchange rate on foreign trade. This chapter evaluates the effects of exchange rate development on different sectors of Czechia's foreign trade. Using disaggregated data based on trading partner and product category, the period from 1999 to 2020 is analyzed. Czechia's 10 major trading partners are included in the estimation. The relationship between exchange rates and foreign trade is assessed through a Johansen cointegration approach and modified vector error correction model. The results of the Johansen cointegration test indicate that the majority of the aggregate bilateral trade balances are in a long-term relationship with Czechia's gross domestic product (GDP), foreign GDP and exchange rate movements. The J-curve is proved only in chemicals and related products traded with France, manufactured goods traded with Italy and Slovakia and mineral fuels and lubricants traded with the Netherlands.

Citation

Šimáková, J. (2024), "The Role of Exchange Rate in Contemporary Czechia’s Foreign Trade", Stavárek, D. and Tvrdoň, M. (Ed.) Modeling Economic Growth in Contemporary Czechia (Entrepreneurship and Global Economic Growth), Emerald Publishing Limited, Leeds, pp. 51-69. https://doi.org/10.1108/978-1-83753-840-920241004