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Exchange Rate Regimes and Sustainable Parities for CEECs in the Run-up to EMU Membership

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  • Virginie Coudert
  • Cécile Couharde

Abstract

The real exchange rates of ceecs have been appreciating for the last decade, especially when measured by consumer prices. We argue that the size of this appreciation is linked to the exchange rate regime, the pegged currencies being more prone to this phenomenon in the long run. We also show that this appreciation is not necessarily linked to overvaluation. First, it is largely reduced when using a proxy of tradable prices as deflator, according to the ¿Balassa-Samuelson effect¿. Second, we use a large sample of emerging countries to calculate ¿normal¿ levels of real exchange rates taking into account the ¿Balassa effect¿ and show that ceecs do not suffer from systematic overvaluation according to this norm. We then calculate Fundamental Equilibrium Exchange Rates, using a model of the foreign trade of five ceecs (Czech Republic, Hungary, Poland, Slovenia and Estonia) and their main partners based on nigem. We show that these ceec currencies only have very small misalignment. This is due to the fact that the response of their foreign trade to small changes in the exchange rate is especially high, because of the high degree of openness and large export price elasticities.

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Bibliographic Info

Paper provided by CEPII research center in its series Working Papers with number 2002-15.

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Date of creation: Dec 2002
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Handle: RePEc:cii:cepidt:2002-15

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Keywords: Exchange rate; Exchange rate policy; Transition; International integration; Enlargement of the euro area; European monetary integration; CEECs;

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  1. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  2. Francisco Maeso-Fernandez & Chiara Osbat & Bernd Schnatz, 2002. "Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 437-461, December.
  3. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals," IMF Working Papers 98/67, International Monetary Fund.
  4. Simon Wren-Lewis & Rebecca Driver, 1998. "Real Exchange Rates for the Year 2000," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa54.
  5. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  6. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
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