The causes and the consequences of the real exchange rates misalignment's of European Union (EU) members were examined in this paper by implementing stationary panel vector autoregression (PVAR) model with fixed effects. PVAR methodology was recognized as the most appropriate in line with data structure and the objectives of the research. For estimation purpose, the generalized method of moments (GMM) in first differences, with a reduced number of instruments, was applied. Primarily objective was to find whether a collapsed matrix of instruments helps in reducing the dynamic panel bias within the two--step estimation of PVAR model when employing the first difference GMM estimator. Even though, the benefits of collapsed instrument matrix have been documented in rare simulation studies, this paper empirically demonstrates it's utility considering balanced panel data. In that context, recommendations to potential users are given and supported by open source codes in the RStudio environment. Besides, auxiliary findings contribute to a better understanding of influential channels through which EU policy makers should reduce a real exchange rates misalignment's.
Croatia is characterised by a foreign direct investment (FDI) inflow, mainly in the service sector, which is partly understandable owing to the country's orientation towards tourism. On the other hand, theoretical and empirical research indicates a weak impact of FDI in the service sector on the economic growth of the recipient country. Following the theoretical framework and critical analysis of previous research, the paper, on the example of Croatia in the period q1/2000 - q3/2020, uses the VAR model to analyse the mutual influence of GDP growth rate and FDI in the service sector. The results show that the impact of the GDP growth rate on the FDI inflow into the service sector is more significant and longer lasting than vice versa. The paper emphasises the importance of the adopted growth model for the type of FDI inflows into the recipient country, which in this case is characterised by the appreciation of the real exchange rate as an indicator of the country's competitiveness, whose impact on FDI inflow into the service sector is positive and long lasting.
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