European Regional Science Association
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European Regional Science Association
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The abstract for paper number 367:
Petar Filipić, Branko Grčić, Faculty of Economics Split, Split, Croatia
Effects of Changes in the Exchange Rate on Regional Development
In the countries which are trying to accelerate their development, the balance of payments problems frequently come to the foreground. As a rule it is attempted to set such a relation of home and foreign prices that will encourage import and limit export in order to balance the foreign exchange. In that context the exchange rate policy creates to a great extent the macroeconomic setting in which developments are controlled.
The basic idea of this text is to observe to which extent the changes in the home currency exchange rate can contribute to an increase (and decrease) of regional development differences. Namely, economies of some countries (especially less developed and in transition) are not homogenously developed, and thus also their import and export activites are not evenly distributed among their regions. Therefore, before making any decisions related to changes in the exchange rate, this aspect has to be considered too. Otherwise, the existing disproportions in the regional development might be additionally increased.
This paper will analyse the effect of changes in the exchange rate on the national sectors balances reflecting onto development of particular regions.
In the real sector, the change in the exchange rate on the resource side changes the value of foreign liabilities of the enterprise and the liabilities indexed on the foreign currency. With exporters, income related to the sales in foreign markets is increased. At the same time on the usage side the cost of interest on foreign loans is changed, as well as purchasing costs of production materials and foreign equipment. Consequently, financial assets of enterprises expressed in foreign currencies are increased. The data of the real sector have the "regional address" and are an important segment in the analysis of regional differences.
The household sector in the analysed countries is a surplus sector, which means that its assets exceed its liabilities. The change in the exchange rate produces an interesting configuration in the relation of rights and liabilities, which can also be analysed from the regional aspect, as this is the sector whose activity can be territorialy identified.
The value of the assets of the monetary and banking sector (shares and bonds), as well as the revenues from property expressed in foreign currency are reduced/increased by the amount of change in the exchange rate. Also, annuities on loans with a foreign curreny clause would be increased by that amount due to devaluation.
The effect of change in the exchange rate in case of devaluation will be tested on the example of Croatia.
Unfortunately full paper has not been submitted.