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From PPP to Natrex - the Case of Czech Crown

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  • Jiří Škop
  • Jan Vejmělek
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    Abstract

    The exchange rate cannot significantly diverge from a (real) long-term equilibrium level consistent with the macroeconomic picture of an economy for a long period of time; otherwise, the economy suffers from macroeconomic imbalances such as below-potential growth and below natural employment, or on the other hand faces overheating of the economy with rising inflation. The paper focuses on different methods of how to measure the long-term equilibrium exchange rate. After a brief discussion of different approaches, the NATREX one was theoretically developed for the case of an open economy and empirically validated for the Czech economy. The NATREX concept represents a macroeconomic model based on stock-flow interaction. After the estimation of the NATREX model for the CZK, we have been able to answer such questions as: What are the pace and main determinants of the current long-term equilibrium appreciation? What is the current value of the equilibrium exchange rate and the misalignment of the current exchange rate? And, how fast is the exchange rate likely to revert to its equilibrium value?

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 2009 (2009)
    Issue (Month): 3 ()
    Pages: 323-343

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    Handle: RePEc:prg:jnlpol:v:2009:y:2009:i:3:id:687:p:323-343

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    Related research

    Keywords: Equilibrium exchange rate; exchange rate misalignments; purchasing power parity (PPP); natural real exchange rate (NATREX); half-life convergence; Granger-Engle cointegration analysis and Johansen method;

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