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Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?

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  • Ian Babetskii

    ()

  • Balázs Égert

    ()

Abstract

This paper investigates the equilibrium exchange rate of the Czech koruna using the reduced form equation of the stock-ow approach advocated, for instance, by Faruqee (1995) and Alberola and others (1999). We investigate whether or not the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the Behavioural Equilibrium Exchange Rate (BEER) popularised by MacDonald (1997) and Clark and MacDonald (1998) in that the Czech real exchange rate vis-à-vis the euro is regressed on the dual productivity differential and the net foreign assets position, based on which actual and total misalignment gures are derived in a time series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial undervaluation on the estimated equilibrium exchange rate. Employing monthly time series from 1993:M1 to 2004:M9 and applying several alternative cointegration techniques, we identify a period of an overvaluation in 1997 and in 1999, an increasing overvaluation till 2002, an undervaluation in 2003 and a correction towards equilibrium in the second half of 2004

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File URL: http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp781.pdf
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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number wp781.

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Length: pages
Date of creation: 01 Jul 2005
Date of revision:
Handle: RePEc:wdi:papers:2005-781

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Keywords: Equilibrium exchange rate; real exchange rate; behavioral equilibrium exchange rate; Czech koruna; transition economies; stock-ow approach; productivity.;

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References

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Citations

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Cited by:
  1. Jan Bruha & Jiri Podpiera & Stanislav Polak, 2007. "The Convergence of a Transition Economy: The Case of the Czech Republic," Working Papers 2007/3, Czech National Bank, Research Department.
  2. repec:ebl:ecbull:v:6:y:2007:i:29:p:1-8 is not listed on IDEAS
  3. Bruha, Jan & Podpiera, Jirí & Polák, Stanislav, 2010. "The convergence dynamics of a transition economy: The case of the Czech Republic," Economic Modelling, Elsevier, vol. 27(1), pages 116-124, January.
  4. Brixiova, Zuzana & Égert, Balázs & Hadj Amor Essid, Thouraya, 2013. "The Real Exchange Rate and External Competitiveness in Egypt, Morocco and Tunisia," IZA Discussion Papers 7822, Institute for the Study of Labor (IZA).
  5. Zuzana Brixiova & Balázs Égert & Thouraya Hadj Amor Essid, 2013. "Working Paper 187 - The Real Exchange Rate and External Competitiveness in Egypt, Morocco and Tunisia," Working Paper Series 991, African Development Bank.
  6. Roman Horváth, 2005. "Real Equilibrium Exchange Rate Estimates: To What Extent Are They Applicable for Setting the Central Parity?," Working Papers IES 75, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
  7. Ondrej Schneider & Jan Zapal, 2006. "Fiscal Policy in New EU Member States: Go East, Prudent Man!," Post-Communist Economies, Taylor & Francis Journals, vol. 18(2), pages 139-166.
  8. Roman Horvath, 2007. "Modelling Central Bank Intervention Activity under Inflation Targeting," Economics Bulletin, AccessEcon, vol. 6(29), pages 1-8.
  9. Roman Hotvath, 2005. "Real Equilibrium Exchange Rate Estimates: To What Extent Applicable for Setting the Central Parity?," International Finance 0509006, EconWPA.
  10. Horvath, Roman & Komarek, Lubos, 2006. "Equilibrium Exchange Rates in EU New Members: Applicable for Setting the ERM II Central Parity?," MPRA Paper 1180, University Library of Munich, Germany.
  11. Aurel Iancu, 2008. "Nominal Convergence," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 2, pages 53-73, November.
  12. Prasert Chaitip & Chukiat Chaiboonsri, 2009. "Thailand’s International Tourism Demand: The ARDL Approach to Cointegration," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, vol. 9(3), pages 163-184.
  13. Alper, Ahmet Murat & Civcir, İrfan, 2012. "Can overvaluation prelude to crisis and harm growth in Turkey," Journal of Policy Modeling, Elsevier, vol. 34(1), pages 112-131.

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