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Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us

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  • Kateřina Šmídková
  • Aleš Bulíř

Abstract

Computed fundamental real exchange rates in four new EU members point to difficulties in jointly entering the ERM II soon after the EU entry. Three currencies out of the four were overvalued prior to EU entry. Computations suggest that it is unlikely that the Czech, Hungarian and Polish economies will maintain low inflation during 2004 - 2010 and at the same time keep their currencies within the ERM II easily. Moreover, the experience of Greece, Portugal and Spain - viewed through fundamental real exchange rate goggles - indicates more stable real exchange rate paths and smaller currency misalignments prior to euro adoption than can be expected from the newcomers in the forthcoming years. If the newcomers sail too fast towards the euro, their sailing may not be as smooth as that of the front runners.

Suggested Citation

  • Kateřina Šmídková & Aleš Bulíř, 2005. "Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us," Prague Economic Papers, Prague University of Economics and Business, vol. 2005(4), pages 291-316.
    • Handle: RePEc:prg:jnlpep:v:2005:y:2005:i:4:id:267:p:291-316
    DOI: 10.18267/j.pep.267
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    2. Ian Babetskii & Ales Bulir & Fabrizio Coricelli & Jan Filacek & Michal Franta & Roman Horvath & Branislav Saxa & Katerina Smidkova, 2008. "CNB Economic Research Bulletin: Ten Years of Inflation Targeting," Occasional Publications - Edited Volumes, Czech National Bank, edition 1, volume 6, number rb06/1 edited by Ian Babetskii & Katerina Smidkova, January.
    3. Alena Bicakova & Kamil Dybczak & Ales Krejdl & Jiri Slacalek & Michal Slavik, 2007. "CNB Economic Research Bulletin: Fiscal Policy and its Sustainability," Occasional Publications - Edited Volumes, Czech National Bank, edition 2, volume 5, number rb05/2 edited by Ian Babetskii & Vladimir Bezdek, January.

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    More about this item

    Keywords

    foreign direct investment; fundamental real exchange rates; euro; acceding economies;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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