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Sustainable real exchange rates in the new EU Member States: Is FDI a mixed blessing?

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Listed:
  • Jan Babecký
  • Aleš Bulíř
  • Kateřina šmídková

Abstract

This study analyses the various macroeconomic opportunities and challenges created by the foreign direct investment (FDI) inflows in the new member states. This essay focuses on the various macroeconomic opportunities and challenges created by the foreign direct investment (FDI) inflows in the new member states (NMS). We question whether the macroeconomic performance of the NMS is furthered through the FDI's overall positive impact on the trade balance or whether it can actually worsen the performance. Our findings suggest that in some NMS the integration gain, foreseen by the financial markets, may be reflected in a sustainable appreciation of the real exchange rate. Such real appreciation is in most cases moderate enough to allow for smooth nominal convergence required for to the euro adoption. In some cases, however, this appreciation is very fast, especially in the NMS with a low net external debt and massive FDI inflows, making it challenging to fulfill the Maastricht criteria. The Maastricht criteria may be difficult to meet also in those NMS where FDI has been channeled predominantly into services, housing construction, or nontradable sectors in general. In these countries we observe increasing net external debt without a corresponding improvement in the trade balance and these economies might be required to depreciate their currencies in real terms to sustain the external balance.

Suggested Citation

  • Jan Babecký & Aleš Bulíř & Kateřina šmídková, 2009. "Sustainable real exchange rates in the new EU Member States: Is FDI a mixed blessing?," European Economy - Economic Papers 2008 - 2015 368, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0368
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign direct investment; new EU member states; euro adoption; Sustainable Real Exchange Rates in the New EU Member States: Is FDI a Mixed Blessing?; Economic Papers;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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