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Estimates of Fundamental Real Exchange Rates for the Five EU Pre-Accession Countries

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Author Info
Katerina Smidkova
Ray Barrell
Dawn Holland

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Abstract

Are there indications of real exchange rate misalignment in the case of the five pre-accession countries? Will stable real exchange rates, required by two of the Maastricht criteria, be in line with economic fundamentals in the pre-EMU period in these countries? In order to address these questions, we employ the concept of the fundamental real exchange rate (FRER), taking into account the specific features of countries in the advanced stage of transition. The FRER model approximates the integration gain with the impact of foreign direct investment on trade and allows for larger current account deficits if external debt is below a safety limit. The model coefficients are calibrated according to our previous econometric work. Sensitivity tests are used to deal with uncertainty about the baseline assumptions. According to the FRERs, there were signs of overvaluation for all the pre-accession economies, with the exception of Slovenia, at the end of 2001. The second main finding relates to the feasibility of stable real exchange rates in the pre-EMU period. Stability of real exchange rates will not automatically be in line with economic fundamentals in the forthcoming period and, moreover, the FRERs do not move in one direction in all the pre-accession countries. This finding suggests that some flexibility of exchange rates will be needed in the forthcoming period.

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Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2002/03.

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Date of creation: Dec 2002
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Handle: RePEc:cnb:wpaper:2002/03

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Related research
Keywords: Fundamental Real Exchange Rates EU Accession EMU Entry Modelling

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Find related papers by JEL classification:
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

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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. Broeck, Mark De & Sløk, Torsten, 2001. "Interpreting real exchange rate movements in transition countries," BOFIT Discussion Papers 7/2001, Bank of Finland, Institute for Economies in Transition. [Downloadable!]
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  2. Mark P. Taylor & Michael J. Artis, 1993. "DEER Hunting - Misalignment, Debt Accumulation, and Desired Equilibrium Exchange Rates," IMF Working Papers 93/48, International Monetary Fund.
  3. Carsten Detken & Alistair Dieppe & Jérôme Henry & Frank Smets & Carmen Marin, 2002. "Determinants of the Effective Real Exchange Rate of the Synthetic Euro: Alternative Methodological Approaches," Australian Economic Papers, Blackwell Publishing, vol. 41(4), pages 404-436, December. [Downloadable!] (restricted)
  4. Tamim Bayoumi & Peter B. Clark & Steven A. Symansky & Leonardo Bartolini, 1994. "Exchange Rates and Economic Fundamentals: A Framework for Analysis," IMF Occasional Papers 115, International Monetary Fund.
  5. Milesi-Ferretti, G-M & Razin, A, 1996. "Current-Account Sustainability," Princeton Studies in International Economics 81, International Economics Section, Departement of Economics Princeton University,.
  6. Tamim Bayoumi & Peter B. Clark & Steven A. Symansky & Mark P. Taylor, 1994. "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," IMF Working Papers 94/17, International Monetary Fund.
  7. Pain, Nigel & Wakelin, Katharine, 1998. "Export Performance and the Role of Foreign Direct Investment," The Manchester School of Economic & Social Studies, Blackwell Publishing, vol. 66(0), pages 62-88, Supplemen.
  8. Katerina Smidkova, 2003. "Koruna Exchange Rate Turbulence in May 1997," Macroeconomics 0303020, EconWPA. [Downloadable!]
  9. Ray Barrell & Dawn Holland & Kateøina Šmídková, 2002. "An Empirical Analysis of Monetary Policy Choices in the Pre-EMU Period," NIESR Discussion Papers 204, National Institute of Economic and Social Research. [Downloadable!]
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  10. Barrell, Ray & Wren-Lewis, Simon, 1989. "Fundamental Equilibrium Exchange Rates for the G7," CEPR Discussion Papers 323, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
  12. Barrell, Ray & Pain, Nigel, 1997. "Foreign Direct Investment, Technological Change, and Economic Growth within Europe," Economic Journal, Royal Economic Society, vol. 107(445), pages 1770-86, November. [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. Jan Strasky, 2005. "Optimal Forward-Looking Policy Rules in the Quarterly Projection Model of the Czech National Bank," Research and Policy Notes 2005/05, Czech National Bank, Research Department. [Downloadable!]
  2. Égert, Balázs & Halpern, László, 2005. "Equilibrium Exchange Rates in Central and Eastern Europe: A Meta-Regression Analysis," CEPR Discussion Papers 4869, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Dimitar Chobanov & Piritta Sorsa, 2004. "Competitiveness in Bulgaria: An Assessment of the Real Effective Exchange Rate," IMF Working Papers 04/37, International Monetary Fund. [Downloadable!]
  4. Katerina Smidkova, 2004. "The Euro – When and how: three perspectives," Macroeconomics 0403005, EconWPA. [Downloadable!]
  5. Ian Babetskii & Balázs Égert, 2005. "Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?," William Davidson Institute Working Papers Series wp781, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
    Other versions:
  6. Yu Hsing, 2007. "Analysis of exchange rate fluctuations in Estonia: test of the interest parity condition and the open economy model," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 51-54, January. [Downloadable!] (restricted)
  7. 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:
  8. Horvath, Roman & Komarek, Lubos, 2006. "Equilibrium Exchange Rates in EU New Members: Applicable for Setting the ERM II Central Parity?," MPRA Paper 1180, University Library of Munich, Germany. [Downloadable!]
  9. Ray Barrell & Dawn Holland & Katerina Smidkova, 2003. "An Empirical Analysis of Monetary Policy Choices in the Pre-EMU Period," Macroeconomics 0303017, EconWPA. [Downloadable!]
    Other versions:
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