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Assessing the Equilibrium Exchange Rate of the Cyprus Pound at the time of Euro Adoption

Author

Listed:
  • George Kyriacou

    (Central Bank of Cyprus)

  • Maria Papageorghiou

    (Central Bank of Cyprus)

Abstract

One of the landmark events in the recent history of Cyprus was the adoption of the euro on 1 January 2008. A crucial element of the preparatory discussions between the Cypriot authorities and the competent European bodies was the search for an agreement on the conversion rate of the Cyprus pound vis-a-vis the euro, which was decided by the Economic and Financial Affairs Council (ECOFIN) on 10 July 2007. This paper describes part of the work undertaken at the Central Bank of Cyprus as background material for these discussions. Using a qualitative and quantitative approach, the paper suggests that the exchange parity rate of the Cyprus pound vis-a-vis the euro which existed for a number of years prior to euro adoption was broadly in line with economic fundamentals. Evidence examined include the stability of the Cyprus pound vis-a-vis the euro within a credible exchange rate policy framework, robust growth, low levels of unemployment, high Foreign Direct Investment (FDI) coverage of the current account deficit as well as low and stable inflation. This conclusion is also supported by a model-based approach using the Fundamental Equilibrium Exchange Rate (FEER) framework.

Suggested Citation

  • George Kyriacou & Maria Papageorghiou, 2010. "Assessing the Equilibrium Exchange Rate of the Cyprus Pound at the time of Euro Adoption," Working Papers 2010-6, Central Bank of Cyprus.
    • Handle: RePEc:cyb:wpaper:2010-6
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    File URL: https://www.centralbank.cy/images/media/pdf/NPWPE_No6_092010.pdf
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    References listed on IDEAS

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    Cited by:

    1. Torój, Andrzej & Bednarek, Elżbieta & Bęza-Bojanowska, Joanna & Osińska, Joanna & Waćko, Katarzyna & Witkowski, Dariusz, 2012. "EMU: the (post-)crisis perspective. Literature survey and implications for the euro-candidates," MF Working Papers 12, Ministry of Finance in Poland, revised 06 Mar 2012.
    2. Lucian Claudiu ANGHEL & Florina PINZARU & Mihaela DINU & Laurentiu-Mihai TREAPAT, 2014. "Fixing the Central Parity and the Evolution of the Currency within the Exchange Rate Mechanism II in the Countries that Joined the Euro Zone," Management Dynamics in the Knowledge Economy, College of Management, National University of Political Studies and Public Administration, vol. 2(4), pages 21-40, April.
    3. Lucian Claudiu ANGHEL & Laurentiu-Mihai TREAPAT, 2015. "Main Economic Policies in order to Manage an Optimum Accession of Romania to the Euro Zone," Management Dynamics in the Knowledge Economy, College of Management, National University of Political Studies and Public Administration, vol. 3(1), pages 151-169, March.

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    More about this item

    Keywords

    Equilibrium exchange rate; euro adoption; FEER;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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