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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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  1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2007. "Capital flows to central and Eastern Europe," Emerging Markets Review, Elsevier, vol. 8(2), pages 106-123, May.
  2. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals: A Methodological Comparison of Beers and Feers," IMF Working Papers 98/67, International Monetary Fund.
  3. Bussière, Matthieu & Fratzscher, Marcel & Müller, Gernot J., 2004. "Current accounts dynamics in OECD and EU acceding countries - an intertemporal approach," Working Paper Series 0311, European Central Bank.
  4. Virginie Coudert & Cécile Couharde, 2002. "Exchange Rate Regimes and Sustainable Parities for CEECs in the Run-up to EMU Membership," Working Papers 2002-15, CEPII research center.
  5. James G. MacKinnon, 1995. "Numerical Distribution Functions for Unit Root and Cointegration Tests," Working Papers 918, Queen's University, Department of Economics.
  6. Gian Maria Milesi-Ferrett & Assaf Razin, 1996. "Sustainability of Persistent Current Account Deficits," NBER Working Papers 5467, National Bureau of Economic Research, Inc.
  7. Peter Isard & Hamid Faruqee, 1998. "Exchange Rate Assessment: Extension of the Macroeconomic Balance Approach," IMF Occasional Papers 167, International Monetary Fund.
  8. Joseph E. Gagnon, 2003. "Productive capacity, product varieties, and the elasticities approach to the trade balance," International Finance Discussion Papers 781, Board of Governors of the Federal Reserve System (U.S.).
  9. Paolo Zanghieri, 2004. "Current Accounts Dynamics in new EU members: Sustainability and Policy Issues," Working Papers 2004-07, CEPII research center.
  10. 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.
  11. Serena Ng & Pierre Perron, 1997. "Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power," Boston College Working Papers in Economics 369, Boston College Department of Economics, revised 01 Sep 2000.
  12. Jiri Popiera & Jan Bruha, 2007. "Inquiries on Dynamics of Transition Economy Convergence in a Two-Country Model," 2007 Meeting Papers 587, Society for Economic Dynamics.
  13. Katerina Smídková & Ales Bulir, 2005. "Exchange Rates in the New EU Accession Countries: What Have We Learned from the Forerunners?," IMF Working Papers 05/27, International Monetary Fund.
  14. Menzie David Chinn & Eswar Prasad, 2000. "Medium-Term Determinants of Current Accounts in Industrial and Developing Countries: An Empirical Exploration," IMF Working Papers 00/46, International Monetary Fund.
  15. Krugman, Paul, 1989. "Differences in income elasticities and trends in real exchange rates," European Economic Review, Elsevier, vol. 33(5), pages 1031-1046, May.
  16. Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
  17. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
  18. Marc Klau & San Sau Fung, 2006. "The new BIS effective exchange rate indices," BIS Quarterly Review, Bank for International Settlements, March.
  19. Maeso-Fernandez, Francisco & Osbat, Chiara & Schnatz, Bernd, 2005. "Pitfalls in estimating equilibrium exchange rates for transition economies," Economic Systems, Elsevier, vol. 29(2), pages 130-143, June.
  20. repec:imf:imfwpa:96/58 is not listed on IDEAS
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