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Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective

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Abstract

This paper discusses methodological issues relating to the estimation of the long-run relationship between exchange rates and fundamentals for Central and Eastern European acceding countries. Given limited data availability and reliability and the rapid structural change acceding countries have been undergoing, we identify several pitfalls of standard econometric procedures. We analyse the merits of a two-step strategy that consists of estimating the relationship between exchange rates and fundamentals in a panel cointegration setting excluding acceding countries from the sample - and then “extrapolating” the estimated relationships. While focusing on the first step of such a strategy, the paper also discusses technical aspects underlying the “extrapolation” stage. As a result, the paper endows the reader with the methodological and empirical ingredients for computing equilibrium exchange rates for acceding countries, providing estimates for the long-run coefficients and a discussion of how to apply these results to acceding countries data.

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Bibliographic Info

Paper provided by European Central Bank in its series Working Paper Series with number 353.

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Length: 47 pages
Date of creation: Apr 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040353

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Keywords: Equilibrium exchange rates; Acceding Countries; Panel Cointegration; BEER.;

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