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Towards the EMU: A Need For Exchange Rate Flexibility?

  • Cincibuch, Martin

    (Czech National Bank)

  • Vávra, David

    (CERGE-EI)

We address the question of exchange rate regime for the Czech Republic before it enters the EU and the EMU. We classify macroeconomic impacts of a single currency regime according to the traditional OCA theory. Using quantitative measures, we find the degree of macroeconomic convergence between the Czech and German (EU) economies high enough not to form a major obstacle to a common currency regime. In addition, we look at transitional specificities of the Czech economy. We analyse the real appreciation of the Czech currency and its relationship to competitiveness and find that development of cost factors exercise depreciationary pressures on the exchange rate. Conversely, a fixed regime may alleviate problems of the foreign capital influx and ensuing nominal appreciation - another idiosyncrasy of the Czech economy. However, once labour market rigidities are removed, a fixed regime may become a source of a sustainable competitive advantage, growth, and convergence.

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File URL: http://www.ihs.ac.at/publications/tec/te-17.pdf
File Function: First version, 2000
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Paper provided by Institute for Advanced Studies in its series Transition Economics Series with number 17.

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Length: 28 pages
Date of creation: Jul 2000
Date of revision:
Handle: RePEc:ihs:ihstep:17
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Order Information: Postal: Institute for Advanced Studies - Library, Stumpergasse 56, A-1060 Vienna, Austria

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  1. Andrew Weiss & Georgiy Nikitin, 1998. "Performance of Czech Companies by Ownership Structure," Boston University - Institute for Economic Development 85, Boston University, Institute for Economic Development.
  2. Kornélia Krajnyák & Jeromin Zettelmeyer, 1997. "Competitiveness in Transition Economies; What Scope for Real Appreciation?," IMF Working Papers 97/149, International Monetary Fund.
  3. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
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