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Equilibrium Exchange Rates in New EU Members: External Imbalances versus Real Convergence

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  • Enrique Alberola
  • Daniel Navia

Abstract

In new EU members, the accumulation of net foreign liabilities has gone hand-in-hand with real exchange rate appreciations, contrary to intuition. This may be due to the induced effect that capital inflows on productivity and competitiveness (Balassa-Samuelson effect). An extended empirical model comprising relative productivity and net foreign assets is well-suited to capture this indirect, opposite effect of liabilities accumulation on the equilibrium exchange rates for the three largest economies: Poland, Hungary and Czech Republic. The model makes it possible to estimate equilibrium exchange rates and misalignments. Going forward, sustaining high productivity growth will be essential to ensure a smooth transition towards euro membership. Copyright � 2008 The Authors. Journal compilation � 2008 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 12 (2008)
Issue (Month): 3 (08)
Pages: 605-619

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Handle: RePEc:bla:rdevec:v:12:y:2008:i:3:p:605-619

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=1363-6669

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Cited by:
  1. Przystupa, Jan, 2009. "Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone," MPRA Paper 19549, University Library of Munich, Germany.

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