Equilibrium exchange rates in the new EU members: external imbalances vs. real convergence
New EU members share two very marked features which have conflicting implications for the evolution of their real exchange rates in the long run: accelerated growth and systematic current account imbalances, which would anticipate, respectively an appreciation and a depreciation of their currencies, according to different theories of exchange rate determination. Furthermore, both elements are intertwined, for current account imbalances are the other side of capital inflows which have been central in boosting potential output and productivity convergence in these economies. In this paper, we aim at achieving some insight on the role of persistent and substantial capital inflows and the consequent accumulation of net foreign liabilities in improving competitiveness and in the determination of the exchange rate for the three largest new EU members: Poland, Hungary and the Czech Republic. We adopt a sequential approach that sheds light on the role of capital flows and their interaction with the Balassa-Samuelson hypothesis. We start by noting in a bivariate cointegration analysis that the accumulation of net foreign liabilities, far from depressing the exchange rate in the long-run, has gone hand-in-hand with exchange rate appreciation. We claim that this may be due to the induced effect that capital inflows are expected to have on productivity and competitiveness. After testing that foreign direct investment is cointegrated with productivity trends, we show that a extended empirical model comprising relative productivity and net foreign assets is well-suited in general to capture this indirect, opposite effect of liabilities accumulation on the real exchange rate. Finally, the model makes it possible to estimate for the considered countries equilibrium exchange rates and misalignments and perform some simulations on their expected future path.
|Date of creation:||Apr 2007|
|Date of revision:|
|Contact details of provider:|| Web page: http://www.bde.es/|
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- De Broeck, Mark & Slok, Torsten, 2006.
"Interpreting real exchange rate movements in transition countries,"
Journal of International Economics,
Elsevier, vol. 68(2), pages 368-383, March.
- International Monetary Fund, 2001. "Interpreting Real Exchange Rate Movements in Transition Countries," IMF Working Papers 01/56, International Monetary Fund.
- Enrique Alberola & Susana G. Cervero & Humberto Lopez & Angel Ubide, 2000. "Global Equilibrium Exchange Rates: Euro, Dollar, "Ins," "Outs," and Other Major Currencies in a Panel Cointegration Framework," Econometric Society World Congress 2000 Contributed Papers 0051, Econometric Society.
- LÃ¡szlÃ³ Halpern & Charles Wyplosz, 1997.
"Equilibrium Exchange Rates in Transition Economies,"
IMF Staff Papers,
Palgrave Macmillan, vol. 44(4), pages 430-461, December.
- Lionel Halpern & Charles Wyplosz, 1996. "Equilibrium Exchange Rates in Transition Economies," IMF Working Papers 96/125, International Monetary Fund.
- 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, 04.
- Balázs Égert & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in T ransition Economies: T aking Stock of the Issues," Working Papers 106, Oesterreichische Nationalbank (Austrian Central Bank).
- Égert, Balázs & Halpern, László & MacDonald, Ronald, 2004. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," CEPR Discussion Papers 4809, C.E.P.R. Discussion Papers.
- Balázs Égert, & László Halpern & Ronald MacDonald, 2005. "Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues," William Davidson Institute Working Papers Series wp793, William Davidson Institute at the University of Michigan.
- Kim, Byung-Yeon & Korhonen, Iikka, 2002.
"Equilibrium exchange rates in transition countries : Evidence from dynamic heterogenous panel models,"
BOFIT Discussion Papers
15/2002, Bank of Finland, Institute for Economies in Transition.
- Kim, Byung-Yeon & Korhonen, Iikka, 2005. "Equilibrium exchange rates in transition countries: Evidence from dynamic heterogeneous panel models," Economic Systems, Elsevier, vol. 29(2), pages 144-162, June.
- Byung-Yeon Kim & Iikka Korhonen, 2002. "Equilibrium Exchange Rates in Transition Countries: Evidence from Dynamic Heterogeneous Panel Models," Macroeconomics 0212014, EconWPA.
- Tamim Bayoumi & Ronald MacDonald, 1999.
"Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions,"
IMF Staff Papers,
Palgrave Macmillan, vol. 46(1), pages 5.
- Ronald MacDonald & Tamim Bayoumi, 1998. "Deviations of Exchange Rates from Purchasing Power Parity; A Story Featuring Two Monetary Unions," IMF Working Papers 98/69, International Monetary Fund.
- Bayoumi, Tamim & MacDonald, Ronald, 1998. "Deviations of Exchange Rates from Purchasing Power Parity: A Story Featuring Two Monetary Unions," CEPR Discussion Papers 1932, C.E.P.R. Discussion Papers.
- Kirsten Lommatzsch & Balazs Egert & Amina Lahreche-Revil, 2005.
"The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies:,"
Money Macro and Finance (MMF) Research Group Conference 2005
14, Money Macro and Finance Research Group.
- Balazs Egert & Amina Lahrèche-Révil & Kirsten Lommatzsch, 2004. "The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies," Working Papers 2004-15, CEPII research center.
- 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.
- Susana Garcia Cervero & J. Humberto Lopez & Enrique Alberola Ila & Angel J. Ubide, 1999. "Global Equilibrium Exchange Rates; Euro, Dollar, â€œIns,â€ â€œOuts,â€ and Other Major Currencies in a Panel Cointegration Framework," IMF Working Papers 99/175, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:bde:wpaper:0708. 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: (María Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de España)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.