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Equilibrium Exchange Rates in New EU Members: External Imbalances versus Real Convergence

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  • Enrique Alberola
  • Daniel Navia

Abstract

In new EU members, the accumulation of net foreign liabilities has gone hand‐in‐hand with real exchange rate appreciations, contrary to intuition. This may be due to the induced effect that capital inflows on productivity and competitiveness (Balassa‐Samuelson effect). An extended empirical model comprising relative productivity and net foreign assets is well‐suited to capture this indirect, opposite effect of liabilities accumulation on the equilibrium exchange rates for the three largest economies: Poland, Hungary and Czech Republic. The model makes it possible to estimate equilibrium exchange rates and misalignments. Going forward, sustaining high productivity growth will be essential to ensure a smooth transition towards euro membership.

Suggested Citation

  • Enrique Alberola & Daniel Navia, 2008. "Equilibrium Exchange Rates in New EU Members: External Imbalances versus Real Convergence," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 605-619, August.
    • Handle: RePEc:bla:rdevec:v:12:y:2008:i:3:p:605-619
    DOI: 10.1111/j.1467-9361.2008.00475.x
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    References listed on IDEAS

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    8. Enrique Alberola & Daniel Navia, 2007. "Equilibrium exchange rates in the new EU members: external imbalances vs. real convergence," Working Papers 0708, Banco de España.
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    Cited by:

    1. Przystupa, Jan, 2009. "Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone," MPRA Paper 19549, University Library of Munich, Germany.
    2. Lopcu, Kenan & Dülger, Fikret & Burgaç, Almıla, 2013. "Relative productivity increases and the appreciation of the Turkish lira," Economic Modelling, Elsevier, vol. 35(C), pages 614-621.
    3. Fakhri J. Hasanov & Noha Razek, 2023. "Oil and Non-Oil Determinants of Saudi Arabia’s International Competitiveness: Historical Analysis and Policy Simulations," Sustainability, MDPI, vol. 15(11), pages 1-39, June.

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