The Feasibility of a Fixed Exchange Rate Regime for New EU-members Evidence from Real Exchange Rates
AbstractIn this paper, we estimate fundamental bilateral real exchange rates for a group of eight accession countries using a panel-cointegration approach for the period 1993-2003. We document a significant positive link between productivity levels and the corresponding real exchange rate levels. Future rises in productivity cannot be excluded on the basis of either our own analysis or the literature as a whole. Consequently, inflation pressure and real exchange rate appreciation in the accession countries probably remain a fact of life in the near future. The extent to which this is a problem for a fixed nominal exchange rate regime is hard to determine. Price dynamics in the accession countries are still quite flexible to accommodate substantial real exchange rate movements even when the nominal exchange rate is rather fixed; moreover, that price adjustment is mostly an internal process for the accession countries. Overall we conclude that a fixed exchange rate regime for each of the accession countries would be feasible in itself, despite possible future real exchange rate appreciations due to either the Balassa-Samuelson effect or demand shifts. We find current misalignments to be small, robust and generally in line with the literature. This implies current exchange rate levels provide a reasonable indication of the level at which a parity exchange rate could be set.
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Bibliographic InfoPaper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 20.
Date of creation: 03 Sep 2005
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Other versions of this item:
- Bertrand Candelon & C.J.M. Kool & K. Raabe & T. van Veen, 2005. "The fundamentals behind the real exchange rate developments of the new EU members," Working Papers 05-09, Utrecht School of Economics.
- Candelon,Bertrand & Kool,Clemens & Raabe,Katharina & Veen,Tom,van, 2005. "The feasibility of a fixed exchange rate regime for new EU-members: evidence from real exchange rates," Research Memorandum 010, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
- NEP-ALL-2006-03-05 (All new papers)
- NEP-EEC-2006-03-05 (European Economics)
- NEP-FMK-2006-03-05 (Financial Markets)
- NEP-IFN-2006-03-05 (International Finance)
- NEP-TRA-2006-03-05 (Transition Economics)
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