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Estimates of Fundamental Real Echange Rates for the Five EU Pre- Accession Countries

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Author Info

  • Ray Barrell

    (NIESR)

  • Dawn Holland

    (NIESR)

  • Katerina Smidkova

    (Czech National Bank)

Abstract

Are there indications of the real exchange rate misalignment in the case of five pre-accession countries? Will in these countries stable real exchange rates, required by the two of Maastrich criteria, be in line with economic fundamentals in the pre-EMU period? In order to analyse these questions, we employ the concept of fundamental real exchange rate (FRER) that reflects well specific features of countries in the advanced stage of transition. The FRER model approximates the integration gain by the impact of foreign direct investment on trade and it allows for larger current account deficits if external debt is below safety limit. Model coefficients are calibrated according to our previous econometric work. Sensitivity tests are used to deal with uncertainty about baseline assumptions. According to the FRERs, there were signs of overvaluation for all pre-accession economies, with the exception of Slovenia, in the end of 2001. The second main finding relates to the feasibility of stable real exchange rates in the pre-EMU period. The stability of the real exchange rates will not be automatically in line with economic fundamentals in the forthcoming period and, moreover, FRERs do not move in one direction in all pre-accession countries. This finding suggests that certain flexibility of exchange rates will be needed in the forthcoming period.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0303016.

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Length: 34 pages
Date of creation: 21 Mar 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0303016

Note: Type of Document - ; pages: 34 . CNB WP No 3
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Web page: http://128.118.178.162

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Keywords: Fundamental Real Exchange Rates; EU Accession; Modelling;

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  1. Katerina Smidkova & Jiri Behounek & Tibor Hledik & Josef Jilek & Miroslav Kostel & Ivana Matalikova & Dana Rottova & Jana Stankova, 1998. "Koruna Exchange Rate Turbulence in May 1997," Archive of Monetary Policy Division Working Papers 1998/02, Czech National Bank.
  2. Peter B. Clark & Steven A. Symansky & Tamim Bayoumi & Mark P. Taylor, 1994. "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies," IMF Working Papers 94/17, International Monetary Fund.
  3. International Monetary Fund, 2001. "Interpreting Real Exchange Rate Movements in Transition Countries," IMF Working Papers 01/56, International Monetary Fund.
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  8. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17.
  9. Barrell, Ray & Dawn Holland & Nigel Pain, 2002. "An Econometric Macro-model of Transition: Policy Choices in the Pre-Accession Period," Royal Economic Society Annual Conference 2002 15, Royal Economic Society.
  10. Mark P. Taylor & Michael J. Artis, 1993. "Deer Hunting," IMF Working Papers 93/48, International Monetary Fund.
  11. Emil Stavrev, 2000. "Monetary and Fiscal Policies' Efficiency and the Determination of a Nominal Equilibrium Exchange Rate," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 50(9), pages 452-463, September.
  12. Pain, Nigel & Wakelin, Katharine, 1998. "Export Performance and the Role of Foreign Direct Investment," The Manchester School of Economic & Social Studies, University of Manchester, vol. 66(0), pages 62-88, Supplemen.
  13. Dr Martin Weale, 1998. "UK Consumption in the long run: the determinants of consumer spending 19251995," NIESR Discussion Papers 204, National Institute of Economic and Social Research.
  14. Steven A. Symansky & Peter B. Clark & Leonardo Bartolini & Tamim Bayoumi, 1994. "Exchange Rates and Economic Fundamentals," IMF Occasional Papers 115, International Monetary Fund.
  15. Carsten Detken & Alistair Dieppe & Jér�me Henry & Frank Smets & Carmen Marin, 2002. "Determinants of the Effective Real Exchange Rate of the Synthetic Euro: Alternative Methodological Approaches," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 404-436, December.
  16. Barrell, Ray & Wren-Lewis, Simon, 1989. "Fundamental Equilibrium Exchange Rates for the G7," CEPR Discussion Papers 323, C.E.P.R. Discussion Papers.
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