Equilibrium Exchange Rates in New EU Members: External Imbalances versus Real Convergence
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. Copyright © 2008 The Authors. Journal compilation © 2008 Blackwell Publishing Ltd.
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Volume (Year): 12 (2008)
Issue (Month): 3 (08)
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