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Economic convergence and the fundamental equilibrium exchange rate in Poland

The paper presents an extended version of the fundamental equilibrium exchange rate model (FFER). By introducing potential output into the specification of the foreign trade equations of the partial equilibrium FEER model we show that, under some plausible assumptions, the calculated level of the equilibrium exchange rate is consistent with the estimates of the behavioral equilibrium exchange (BEER). Moreover, we indicate that including the terms of trade as an explanatory variable in a reduced-form BEER equation for the real exchange rate might lead to the indeterminacy of the parameter estimates. The proposed model is applied to analyze fluctuations of the Polish zloty. We show that the real appreciation of the zloty is largely an equilibrium phenomenon.

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File URL: http://www.bankikredyt.nbp.pl/content/2009/01/bik_01_2009_01.pdf
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Article provided by National Bank of Poland, Economic Institute in its journal Bank i Kredyt.

Volume (Year): 40 (2009)
Issue (Month): 1 ()
Pages: 7-22

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Handle: RePEc:nbp:nbpbik:v:40:y:2009:i:1:p:7-22
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  16. Hamid Faruqee & Guy Debelle, 1996. "What Determines the Current Account? a Cross-Sectional and Panel Approach," IMF Working Papers 96/58, International Monetary Fund.
  17. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
  18. Virginie Coudert & Cécile Couharde, 2003. "Exchange Rate Regimes and Sustainable Parities for ceecs in the Run-up to emu Membership," Revue économique, Presses de Sciences-Po, vol. 54(5), pages 983-1012.
  19. Aleksander Aristovnik, 2006. "Current Account Sustainability In Selected Transition Countries," William Davidson Institute Working Papers Series wp844, William Davidson Institute at the University of Michigan.
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