IDEAS home Printed from https://ideas.repec.org/a/prg/jnlpep/v2005y2005i4id267p291-316.html
   My bibliography  Save this article

Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us

Author

Listed:
  • Kateřina Šmídková
  • Aleš Bulíř

Abstract

Computed fundamental real exchange rates in four new EU members point to difficulties in jointly entering the ERM II soon after the EU entry. Three currencies out of the four were overvalued prior to EU entry. Computations suggest that it is unlikely that the Czech, Hungarian and Polish economies will maintain low inflation during 2004 - 2010 and at the same time keep their currencies within the ERM II easily. Moreover, the experience of Greece, Portugal and Spain - viewed through fundamental real exchange rate goggles - indicates more stable real exchange rate paths and smaller currency misalignments prior to euro adoption than can be expected from the newcomers in the forthcoming years. If the newcomers sail too fast towards the euro, their sailing may not be as smooth as that of the front runners.

Suggested Citation

  • Kateřina Šmídková & Aleš Bulíř, 2005. "Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us," Prague Economic Papers, Prague University of Economics and Business, vol. 2005(4), pages 291-316.
  • Handle: RePEc:prg:jnlpep:v:2005:y:2005:i:4:id:267:p:291-316
    DOI: 10.18267/j.pep.267
    as

    Download full text from publisher

    File URL: http://pep.vse.cz/doi/10.18267/j.pep.267.html
    Download Restriction: free of charge

    File URL: http://pep.vse.cz/doi/10.18267/j.pep.267.pdf
    Download Restriction: free of charge
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Vladislav Flek & Lenka Marková & Jiøí Podpiera, 2003. "Sectoral Productivity and Real Exchange Rate Appreciation: Much Ado about Nothing?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(3-4), pages 130-153, March.
    2. Angeloni, Ignazio & Dedola, Luca, 1999. "From the ERM to the euro: new evidence on economic and policy convergence among EU countries," Working Paper Series 4, European Central Bank.
    3. 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.
    4. Yuko Kinoshita & Nauro F. Campos, 2003. "Why Does Fdi Go Where it Goes? New Evidence From the Transition Economies," IMF Working Papers 2003/228, International Monetary Fund.
    5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External wealth, the trade balance, and the real exchange rate," European Economic Review, Elsevier, vol. 46(6), pages 1049-1071, June.
    6. Bulir, Ales & Smidkova, Katerina, 2005. "Exchange rates in the new EU accession countries: What have we learned from the forerunners?," Economic Systems, Elsevier, vol. 29(2), pages 163-186, June.
    7. Joannes Mongardini, 1998. "Estimating Egypt’s Equilibrium Real Exchange Rate," IMF Working Papers 1998/005, International Monetary Fund.
    8. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, November.
    9. William Ellery Channing, 1994. "Change," American Journal of Economics and Sociology, Wiley Blackwell, vol. 53(1), pages 15-15, January.
    10. Melanie Lansbury & Nigel Pain & Katerina Smidkova, 1996. "Foreign Direct Investment in Central Europe Since 1990: An Econometric Study," National Institute Economic Review, National Institute of Economic and Social Research, vol. 156(1), pages 104-114, May.
    11. De Broeck, Mark & Sloek, Torsten, 2001. "Interpreting real exchange rate movements in transition countries," BOFIT Discussion Papers 7/2001, Bank of Finland, Institute for Economies in Transition.
    12. Leslie Lipschitz & Alex Mourmouras & Timothy D. Lane, 2002. "Capital Flows to Transition Economies; Master or Servant?," IMF Working Papers 2002/011, International Monetary Fund.
    13. Detken, Carsten & Henry, Jérôme & Smets, Frank & Dieppe, Alistair & Marin, Carmen, 2002. "Model uncertainty and the equilibrium value of the real effective euro exchange rate," Working Paper Series 160, European Central Bank.
    14. 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.
    15. Gian M Milesi-Ferretti & Philip R. Lane, 2000. "The Transfer Problem Revisited; Net Foreign Assets and Real Exchange Rates," IMF Working Papers 2000/123, International Monetary Fund.
    16. John Williamson, 1994. "Estimating Equilibrium Exchange Rates," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 17, May.
    17. MacDonald, Ronald, 1998. "What determines real exchange rates?: The long and the short of it," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 8(2), pages 117-153, June.
    18. Francisco Maeso–Fernandez & Chiara Osbat & Bernd Schnatz, 2002. "Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach," Australian Economic Papers, Wiley Blackwell, vol. 41(4), pages 437-461, December.
    19. Elbadawi, Ibrahim A & Soto, Raimundo, 1997. "Real Exchange Rates and Macroeconomic Adjustment in Sub-Saharan Africa and Other Developing Countries," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 6(3), pages 74-120, Supplemen.
    20. Frait , Jan & Komárek, Luboš, 2001. "REAL Exchange rate trends in transitional countries," The Warwick Economics Research Paper Series (TWERPS) 596, University of Warwick, Department of Economics.
    21. International Monetary Fund, 2001. "Interpreting Real Exchange Rate Movements in Transition Countries," IMF Working Papers 2001/056, International Monetary Fund.
    22. John F. Henry, 1984. "On Equilibrium," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 6(2), pages 214-229, January.
    23. Barrell, Ray & Wren-Lewis, Simon, 1989. "Fundamental Equilibrium Exchange Rates for the G7," CEPR Discussion Papers 323, C.E.P.R. Discussion Papers.
    24. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    25. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
    26. Mark P. Taylor & Michael J. Artis, 1993. "Deer Hunting; Misalignment, Debt Accumulation, and Desired Equilibrium Exchange Rates," IMF Working Papers 1993/048, International Monetary Fund.
    27. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
    28. repec:imf:imfops:209 is not listed on IDEAS
    29. Tarhan Feyzioglu, 1997. "Estimating the Equilibrium Real Exchange Rate; An Application to Finland," IMF Working Papers 1997/109, International Monetary Fund.
    30. 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.
    31. 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.
    32. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate of the Effect of Common Currencies on Trade and Income," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 437-466.
    33. Egert, Balazs, 2002. "Estimating the impact of the Balassa-Samuelson effect on inflation and the real exchange rate during the transition," Economic Systems, Elsevier, vol. 26(1), pages 1-16, April.
    34. Angeloni Ignazio & Ehrmann Michael, 2007. "Euro Area Inflation Differentials," The B.E. Journal of Macroeconomics, De Gruyter, vol. 7(1), pages 1-36, August.
    35. Rahn, Jörg, 2003. "Bilateral equilibrium exchange rates of EU accession countries against the euro," BOFIT Discussion Papers 11/2003, Bank of Finland, Institute for Economies in Transition.
    36. Fratzscher, Marcel & Müller, Gernot J. & Bussière, Matthieu, 2004. "Current accounts dynamics in OECD and EU acceding countries - an intertemporal approach," Working Paper Series 311, European Central Bank.
    37. Louis Kuijs & Alain Borghijs, 2004. "Exchange Rates in Central Europe; A Blessing or a Curse?," IMF Working Papers 2004/002, International Monetary Fund.
    38. Stein, Jerome L. & Allen, Polly Reynolds, 1998. "Fundamental Determinants of Exchange Rates," OUP Catalogue, Oxford University Press, number 9780198293064.
    39. Ewe-Ghee Lim, 2001. "Determinants of, and the Relation Between, Foreign Direct Investment and Growth; A Summary of the Recent Literature," IMF Working Papers 2001/175, International Monetary Fund.
    40. Ronald MacDonald & Luca A Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers 2003/044, International Monetary Fund.
    41. Vladimir Benacek & Ladislav Prokop & Jan A. Visek, 2003. "Determining Factors of the Czech Foreign Trade Balance: Structural Issues in Trade Creation," Working Papers 2003/03, Czech National Bank.
    42. Philip Stevens, 2002. "The Role of Efficiency as an Explanation of International Income Differences," National Institute of Economic and Social Research (NIESR) Discussion Papers 205, National Institute of Economic and Social Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ian Babetskii & Ales Bulir & Fabrizio Coricelli & Jan Filacek & Michal Franta & Roman Horvath & Branislav Saxa & Katerina Smidkova, 2008. "CNB Economic Research Bulletin: Ten Years of Inflation Targeting," Occasional Publications - Edited Volumes, Czech National Bank, edition 1, volume 6, number rb06/1 edited by Ian Babetskii & Katerina Smidkova, March.
    2. Alena Bicakova & Kamil Dybczak & Ales Krejdl & Jiri Slacalek & Michal Slavik, 2007. "CNB Economic Research Bulletin: Fiscal Policy and its Sustainability," Occasional Publications - Edited Volumes, Czech National Bank, edition 2, volume 5, number rb05/2 edited by Ian Babetskii & Vladimir Bezdek, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Katerina Smidkova & Ales Bulir, 2004. "Would Fast Sailing Towards the Euro Be Smooth?: What Fundamental Real Exchange Rates Tell Us About Acceding Economies," Macroeconomics 0408002, University Library of Munich, Germany.
    2. Bulir, Ales & Smidkova, Katerina, 2005. "Exchange rates in the new EU accession countries: What have we learned from the forerunners?," Economic Systems, Elsevier, vol. 29(2), pages 163-186, June.
    3. Balázs Égert & László Halpern & Ronald MacDonald, 2006. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," Journal of Economic Surveys, Wiley Blackwell, vol. 20(2), pages 257-324, April.
    4. Kateřina Šmídková & Ray Barrell & Dawn Holland, 2003. "Estimates of fundamental real exchange rates for the five eu pre-accession countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(4), pages 291-315.
    5. Frait, Jan & Komarek, Lubos & Melecky, Martin, 2006. "The Real Exchange Rate Misalignment in the Five Central European Countries," Economic Research Papers 269632, University of Warwick - Department of Economics.
    6. Roman Horváth, 2005. "Real Equilibrium Exchange Rate Estimates: To What Extent Are They Applicable for Setting the Central Parity?," Working Papers IES 75, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005.
    7. Roman Hotvath, 2005. "Real Equilibrium Exchange Rate Estimates: To What Extent Applicable for Setting the Central Parity?," International Finance 0509006, University Library of Munich, Germany.
    8. Égert, Balázs, 2004. "Assessing equilibrium exchange rates in CEE acceding countries : can we have DEER with BEER without FEER? : A critical survey of the literature," BOFIT Discussion Papers 1/2004, Bank of Finland, Institute for Economies in Transition.
    9. Ondrej Schneider & Jan Zapal, 2006. "Fiscal Policy in New EU Member States: Go East, Prudent Man!," Post-Communist Economies, Taylor & Francis Journals, vol. 18(2), pages 139-166.
    10. Jan Babecky & Ales Bulir & Katerina Smidkova, 2012. "Sustainable Real Exchange Rates in the New EU Member States: What Did the Great Recession Change?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 62(3), pages 226-251, July.
    11. Ian Babetskii & Balázs Égert, 2005. "Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER?," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(5-6), pages 232-252, May.
    12. International Monetary Fund, 2003. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country; The Case of Russia," IMF Working Papers 2003/093, International Monetary Fund.
    13. Egert, Balazs & Halpern, Laszlo, 2006. "Equilibrium exchange rates in Central and Eastern Europe: A meta-regression analysis," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1359-1374, May.
    14. Chernookiy Valery, 2005. "Adjustment to the Asymmetric Shocks and Currency Unions: the Case of Belarus and Russia," EERC Working Paper Series 05-07e, EERC Research Network, Russia and CIS.
    15. Kemme, David M. & Roy, Saktinil, 2006. "Real exchange rate misalignment: Prelude to crisis?," Economic Systems, Elsevier, vol. 30(3), pages 207-230, October.
    16. Joanna Beza-Bojanowska & Ronald MacDonald, 2009. "The Behavioural Zloty/Euro Equilibrium Exchange Rate," CESifo Working Paper Series 2568, CESifo.
    17. García Solanes José, 2008. "Real Exchange Rate Appreciation in Central and Eastern European Countries. Why the Balassa-Samuelson Effect Does Not Explain the Whole Story," Working Papers 2010100, Fundacion BBVA / BBVA Foundation.
    18. Egert, Balazs, 2005. "Equilibrium exchange rates in South Eastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) diseased?," Economic Systems, Elsevier, vol. 29(2), pages 205-241, June.
    19. Reza Siregar, 2011. "The Concepts of Equilibrium Exchange Rate: A Survey of Literature," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp81.
    20. Lommatzsch, Kirsten & Tober, Silke, 2004. "What is behind the real appreciation of the accession countries' currencies?: An investigation of the PPI-based real exchange rate," Economic Systems, Elsevier, vol. 28(4), pages 383-403, December.

    More about this item

    Keywords

    foreign direct investment; fundamental real exchange rates; euro; acceding economies;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:prg:jnlpep:v:2005:y:2005:i:4:id:267:p:291-316. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Stanislav Vojir). General contact details of provider: https://edirc.repec.org/data/uevsecz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.