Equilibrium Real Exchange Rates in Central Europe's Transition Economies: Knocking on Heaven's Door
AbstractThe purpose of this paper is to study the equilibrium real exchange rate (ERER) in 5 CEE transition economies, namely the Czech Republic, Hungary, Poland, Slovakia and Slovenia. In so doing, we combine the fundamental equilibrium exchange rate (FEER) approach developed by Williamson (1994) with the behavioural equilibrium exchange rate (BEER) approach advocated by Clark and MacDonald (1998). Our analysis is based on the theoretical model proposed by Montiel (1999) which defines internal balance in terms of the relative price of nontradables and determines external balance in terms of net foreign assets. The empirical part of the paper consists in estimating a VAR-based 3-equation cointegration system. Long-term equilibrium values for relative prices are determined by using relative productivity and private consumption, while the current account, representing external balance, is linked to terms of trade and openness ([X+M]/GDP). In order to derive the ERER and then to compute total misalignment, we finally substitute the long-run values for external and internal balances in the simultaneously estimated cointegration relationship connecting the RER with relative prices and the current account. Results show that the gap between observed real exchange rate developments and the path of the equilibrium real exchange rate differs substantially among the 5 transition countries.
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Bibliographic InfoPaper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 480.
Length: 32 pages
Date of creation: 01 Jul 2002
Date of revision:
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Transition; Central and Eastern Europe; Real Exchange Rate; Cointegration;
Find related papers by JEL classification:
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F31 - International Economics - - International Finance - - - Foreign Exchange
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- P17 - Economic Systems - - Capitalist Systems - - - Performance and Prospects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-09-28 (All new papers)
- NEP-CBA-2002-09-28 (Central Banking)
- NEP-EEC-2002-09-28 (European Economics)
- NEP-IFN-2002-09-28 (International Finance)
- NEP-RMG-2002-09-28 (Risk Management)
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