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Towards the EMU: A Need For Exchange Rate Flexibility?

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Author Info

  • Cincibuch, Martin

    (Czech National Bank)

  • Vávra, David

    (CERGE-EI)

Abstract

We address the question of exchange rate regime for the Czech Republic before it enters the EU and the EMU. We classify macroeconomic impacts of a single currency regime according to the traditional OCA theory. Using quantitative measures, we find the degree of macroeconomic convergence between the Czech and German (EU) economies high enough not to form a major obstacle to a common currency regime. In addition, we look at transitional specificities of the Czech economy. We analyse the real appreciation of the Czech currency and its relationship to competitiveness and find that development of cost factors exercise depreciationary pressures on the exchange rate. Conversely, a fixed regime may alleviate problems of the foreign capital influx and ensuing nominal appreciation - another idiosyncrasy of the Czech economy. However, once labour market rigidities are removed, a fixed regime may become a source of a sustainable competitive advantage, growth, and convergence.

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File URL: http://www.ihs.ac.at/publications/tec/te-17.pdf
File Function: First version, 2000
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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Transition Economics Series with number 17.

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Length: 28 pages
Date of creation: Jul 2000
Date of revision:
Handle: RePEc:ihs:ihstep:17

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Related research

Keywords: Czech Republic; Eurisation; Optimum currency areas; Real exchange rate; Competitiveness;

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References

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  1. Kornélia Krajnyák & Jeromin Zettelmeyer, 1997. "Competitiveness in Transition Economies - What Scope for Real Appreciation?," IMF Working Papers 97/149, International Monetary Fund.
  2. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  3. Andrew Weiss & Georgiy Nikitin, 1998. "Performance of Czech Companies by Ownership Structure," William Davidson Institute Working Papers Series 186, William Davidson Institute at the University of Michigan.
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Cited by:
  1. García-Solanes, José & Sancho-Portero, F. Israel & Torrejón-Flores, Fernando, 2008. "Beyond the Balassa-Samuelson effect in some new member states of the European Union," Economic Systems, Elsevier, vol. 32(1), pages 17-32, March.
  2. Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, 07.
  3. Fidrmuc, Jarko, 2001. "The Endogeneity of optimum currency area criteria, intraindustry trade and EMU enlargement," BOFIT Discussion Papers 8/2001, Bank of Finland, Institute for Economies in Transition.
  4. Weimann, Marco, 2002. "OCA theory and EMU eastern enlargement: An empirical application," Dresden Discussion Paper Series in Economics 07/02, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  5. Vit Barta, 2005. "Fulfilment of the Maastricht Inflation Criterion by the Czech Republic: Potential Costs and Policy Options," Research and Policy Notes 2005/04, Czech National Bank, Research Department.
  6. Fidrmuc, Jarko & Reininger, Thomas & Backé, Peter & Schardax, Franz, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank).

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