THE EFFECT OF EXCHANGE RATE CHANGE ON THE TRADE BALANCE OF THE REPUBLIC OF CROATIA: AN ECONOMETRIC ANALYSIS

The motive for research whose results are presented in this article was structural deficit of the trade balance of the Republic of Croatia in the circumstances of its relatively high and increasing external debt. The purpose of research was to show econometrically the long run interdependence between effective exchange rate and the trade balance of the Republic of Croatia. Applying Johansen method of testing for the existence of cointegration to the economic model in which it is assumed that imports and domestic goods are imperfect substitutes, it was showed that increase of the real effective exchange rate by 1 % will, on the average, decrease real deficit of the trade balance of the Republic of Croatia by approximately
2 % in the long run. In spite of results of an econometric analysis, considering relatively high external indebtedness of the Republic of Croatia, currency clauses in credit contracts, and high import
dependence of Croatia’s economy it would not need to be concluded that problem of deficit of the trade balance could be solved solely by using exchange rate policy. Namely, a larger depreciation of the kuna would probably result in the financial crisis in the country
already in the short run, and later in international illiquidity.