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Catching up: The role of demand, supply and regulated price effects on the real exchange rates of four accession countries

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Author Info
Ronald MacDonald
Cezary WÛjcik

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Abstract

The main aim of this paper is to examine the exchange rate behaviour of a group of four transitional, EU accession countries, with a view to making policy recommendations regarding their full accession to the European Monetary Union. We employ a dynamic OLS panel estimator to investigate the relative importance of demand and supply influences on the exchange rates of these countries. Our analysis shows that both supply- and demand-side effects are important for the accession countries, although their overall effect on inflation differentials and competitiveness seems to be small. An additional focus of the paper is the examination of the role that administrated, or regulated, prices and the productivity of the distribution sector play in the real exchange rate dynamics. Using a unique database we show that administrative prices have been a powerful force behind price and real exchange developments for our group of accession countries. The distribution sector is shown to have an independent effect on the internal price ratio over and above that generated by the Balassa-Samuelson effect. Copyright (c) The European Bank for Reconstruction and Development, 2004.

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Article provided by The European Bank for Reconstruction and Development in its journal The Economics of Transition.

Volume (Year): 12 (2004)
Issue (Month): 1 (03)
Pages: 153-179
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Handle: RePEc:bla:etrans:v:12:y:2004:i:1:p:153-179

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Égert, Balázs, 2002. "Investigating the Balassa-Samuelson hypothesis in transition: Do we understand what we see?," BOFIT Discussion Papers 6/2002, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
  2. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(1), pages 35-50, August. [Downloadable!] (restricted)
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  3. Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession Countries," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank). [Downloadable!]
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  5. MacDonald, Ronald, 1999. "Exchange Rate Behaviour: Are Fundamentals Important?," Economic Journal, Royal Economic Society, vol. 109(459), pages F673-91, November. [Downloadable!] (restricted)
  6. Jose De Gregorio & Holger C. Wolf & Alberto Giovannini, 1994. "International Evidence on Tradables and Nontradables Inflation," IMF Working Papers 94/33, International Monetary Fund.
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  7. Menzie Chinn & Louis Johnston, 1996. "Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries," NBER Working Papers 5709, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Neary, Peter, 1988. "Determinants of the Equilibrium Real Exchange Rate," American Economic Review, American Economic Association, vol. 78(1), pages 210-15, March. [Downloadable!] (restricted)
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  9. Luca Antonio Ricci & Ronald MacDonald, . "PPP and the Balassa Samuelson Effect: The Role of the Distribution Sector," IMF Working Papers 01/38, International Monetary Fund. [Downloadable!]
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  10. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August. [Downloadable!] (restricted)
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  11. Mark, Nelson C. & Sul, Donggyu, 2001. "Nominal exchange rates and monetary fundamentals: Evidence from a small post-Bretton woods panel," Journal of International Economics, Elsevier, vol. 53(1), pages 29-52, February. [Downloadable!] (restricted)
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  12. Peter B. Clark & Ronald MacDonald, 1998. "Exchange Rates and Economic Fundamentals - A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
  13. Peter C.B. Phillips & Hyungsik R. Moon, 1999. "Linear Regression Limit Theory for Nonstationary Panel Data," Cowles Foundation Discussion Papers 1222, Cowles Foundation, Yale University. [Downloadable!]
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  14. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
  15. Rudiger Dornbusch, 1985. "Purchasing Power Parity," NBER Working Papers 1591, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Rogers, J.H. & Jenkins, M.A., 1993. "Haircuts or Hysteresis? Sources of Movements in Real Exchange Rates," Papers 4-93-6, Pennsylvania State - Department of Economics.
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  17. Bergstrand, Jeffrey H, 1991. "Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence," American Economic Review, American Economic Association, vol. 81(1), pages 325-34, March. [Downloadable!] (restricted)
  18. Anthony, Myrvin & MacDonald, Ronald, 1998. "On the mean-reverting properties of target zone exchange rates: Some evidence from the ERM," European Economic Review, Elsevier, vol. 42(8), pages 1493-1523, September. [Downloadable!] (restricted)
  19. Peter B. Clark & Ronald MacDonald, 2000. "Filtering the BEER - A Permanent and Transitory Decomposition," IMF Working Papers 00/144, International Monetary Fund.
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  20. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, vol. 40(3-5), pages 1007-1021, April. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Balázs Égert, 2005. "Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?," William Davidson Institute Working Papers Series wp770, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  2. Jesús Crespo-Cuaresma & Jarko Fidrmuc & Ronald MacDonald, 2003. "The Monetary Approach to Exchange Rates in the CEECs Relations and Output Performance," Vienna Economics Papers 0313, University of Vienna, Department of Economics. [Downloadable!]
  3. Bertrand Candelon & Clemens Kool & Katharina Raabe & Tom van Veen, 2005. "The Feasibility of a Fixed Exchange Rate Regime for New EU-members: Evidence from Real Exchange Rates," Working Papers 05-09, Utrecht School of Economics. [Downloadable!]
    Other versions:
  4. Bask , Mikael & Fidrmuc , Jarko, 2006. "Fundamentals and technical trading: behaviour of exchange rates in the CEECs," Research Discussion Papers 10/2006, Bank of Finland. [Downloadable!]
  5. Balázs Égert, 2005. "Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 2(2), pages 221-243, December. [Downloadable!]
    Other versions:
  6. Marcelo Sánchez, 2006. "Implications of monetary union for catching-up member states," Working Paper Series 630, European Central Bank. [Downloadable!]
  7. Jesús Crespo Cuaresma & Maria Antoinette Silgoner, 2004. "Groth effects of inflation in Europe: How low is too low, how high is too high?," Vienna Economics Papers 0411, University of Vienna, Department of Economics. [Downloadable!]
  8. Kirsten Lommatzsch & Balazs Egert & Amina Lahreche-Revil, 2005. "The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies:," Money Macro and Finance (MMF) Research Group Conference 2005 14, Money Macro and Finance Research Group. [Downloadable!]
    Other versions:
  9. Andrén, Niclas & Oxelheim, Lars, 2006. "Producer Prices in the Transition to a Common Currency," Working Paper Series 668, Research Institute of Industrial Economics. [Downloadable!]
  10. Jesús Crespo-Cuaresma & Jarko Fidrmuc & Ronald McDonald, 2004. "The monetary approach to exchange rates in the CEECs," Macroeconomics 0401013, EconWPA. [Downloadable!]
    Other versions:
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