Exchange rate adjustment and output in Greece and Cyprus: evidence from panel data

Abstract

This paper studies the effect of currency depreciation in Greece and Cyprus using panel data from 1969 to 1998. An empirical model, which includes monetary as well as fiscal variables in addition to exchange rates, is developed. Two versions of this model, one with the real exchange rate and another with the nominal exchange rate and foreign-to-domestic price ratio are estimated. Before estimating the model the time series properties of the data are diagnosed using unit root and cointegration tests. The estimated results suggest that the exchange rate depreciation is expansionary in the short run. In the medium and long run it is neutral to the economy.