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Emergent Markets and Their Dilemmas: The Exchange Rate vs. Its Equilibrium – To Be or Not To Be? Case Study on the EUR/RON Currency (Romania)

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  • Dana-Mihaela Haulica

    (The Academy of Economic Studies, Romania)

Abstract

We all aim the equilibrium; in our own, very personal understanding, of course. Whether it`s about family, money, health and so on the equilibrium is a state in which we all dream to be at a certain point in time. It`s well understood that a born rich person will have a higher target for this state as well as a healthy young man will have a different understanding regarding the health equilibrium than a 80 years old person. This principle is valid also for larger entities starting with small groups of similar people and arriving to count in this discussion countries, international organizations etc. A country aims to have enough resources to raise, educate and assist its citizens. In order to obtain this, its representants use multiple sets of complex instruments. This article is about the Exchange Rate – a variable that reflects the power of a country, the maturity of its markets, a variable that it is being used as an important instrument for adjusting the trade balance, the GDP etc. If you are running an emergent market its very likely to be key necessary to adjust some of the macroeconomic variables, to bring them to sustainable values on a medium – long term. As mentioned before, one of the most important instruments to do that is the Exchange Rate and its related monetary policy actions. So the dilemma comes from the following: the Equilibrium Exchange Rate on a short term is given by the current values of the macroeconomic variables that you have chosen to take in count (there are several very popular models also for calculating the Equilibrium Exchange Rate as BEER and FEER). But, if your goal is to adjust those macroeconomic values, you have to take action in the present to be able to change something in the future so practically you would need to break the present equilibrium to obtain a sustainable economy on a medium – long term. How this affects present economy and how such a decision is being made – this is what this article aims to present.

Suggested Citation

  • Dana-Mihaela Haulica, 2015. "Emergent Markets and Their Dilemmas: The Exchange Rate vs. Its Equilibrium – To Be or Not To Be? Case Study on the EUR/RON Currency (Romania)," MIC 2015: Managing Sustainable Growth; Proceedings of the Joint International Conference, Portorož, Slovenia, 28–30 May 2015, University of Primorska, Faculty of Management Koper.
  • Handle: RePEc:mgt:micp15:231-239
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    References listed on IDEAS

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    1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
    2. Ronald MacDonald & Ian W. Marsh, 1997. "On Fundamentals And Exchange Rates: A Casselian Perspective," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 655-664, November.
    3. Ronald MacDonald & Cezary WÛjcik, 2004. "Catching up: The role of demand, supply and regulated price effects on the real exchange rates of four accession countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(1), pages 153-179, March.
    4. MacDonald, Ronald, 1996. "Panel unit root tests and real exchange rates," Economics Letters, Elsevier, vol. 50(1), pages 7-11, January.
    5. Meese, Richard A & Rogoff, Kenneth, 1988. " Was It Real? The Exchange Rate-Interest Differential Relation over the Modern Floating-Rate Period," Journal of Finance, American Finance Association, vol. 43(4), pages 933-948, September.
    6. Ronald Macdonald & Mark P. Taylor, 1993. "The Monetary Approach to the Exchange Rate: Rational Expectations, Long-Run Equilibrium, and Forecasting," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 89-107, March.
    7. Macdonald, Ronald & Marsh, Ian W., 1996. "Currency forecasters are heterogeneous: confirmation and consequences," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 665-685, October.
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