IMPACT OF REAL EFFECTIVE EXCHANGE RATE MISALIGNMENT ON THE ECONOMIC GROWTH OF EASTERN EUROPEAN COUNTRIES: EVIDENCE FROM HETEROGENEOUS PANEL ESTIMATES

The focus of this research is the evaluation of the impact of the real exchange rate misalignment on the economic growth in the countries of Eastern Europe, using a novel estimation approach. The objective of the research is to estimate how large are variations in responses of the economic growth to a shock of undervaluation across countries, what is the magnitude of the median, interquartile, common and idiosyncratic responses and what country's structural characteristics are associated with the strength of those responses. To address estimation problems such as cross-sectional dependence, heterogeneity, endogeneity and to analyse common and idiosyncratic structural shocks separately, we applied the heterogeneous panel structural VAR methodology. Our findings indicate the considerable cross-country variations in the sign and strength of economic growth responses to undervaluation shock, and that the magnitude of a country's response depends on the degree of export diversification, institutional quality and market failures.