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Towards the EMU: A Need For Exchange Rate Flexibility?

Author

Listed:
  • Cincibuch, Martin

    (Czech National Bank)

  • Vávra, David

    (CERGE-EI)

Abstract

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.

Suggested Citation

  • Cincibuch, Martin & Vávra, David, 2000. "Towards the EMU: A Need For Exchange Rate Flexibility?," Transition Economics Series 17, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihstep:17
    as

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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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    References listed on IDEAS

    as
    1. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
    2. Andrew Weiss & Georgiy Nikitin, 1998. "Performance of Czech Companies by Ownership Structure," William Davidson Institute Working Papers Series 186, William Davidson Institute at the University of Michigan.
    3. Kornélia Krajnyák & Jeromin Zettelmeyer, 1998. "Competitiveness in Transition Economies: What Scope for Real Appreciation?," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 309-362, June.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2003. "Price Dynamics in Central and Eastern European EU Accession Countries," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 39(3), pages 42-78, May.
    2. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2003. "Price Dynamics in Central and Eastern European EU Accession Countries," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 39(3), pages 42-78, May.
    3. Fidrmuc, Jarko, 2001. "The endogeneity of optimum currency area criteria, intraindustry trade and EMU enlargement," BOFIT Discussion Papers 8/2001, Bank of Finland, Institute for Economies in Transition.
    4. Peter Backé & Jarko Fidrmuc & Thomas Reininger & Franz Schardax, 2002. "Price Dynamics in Central and Eastern European EU Accession," Working Papers 61, Oesterreichische Nationalbank (Austrian Central Bank).
    5. Weimann, Marco, 2002. "OCA theory and EMU eastern enlargement: An empirical application," Dresden Discussion Paper Series in Economics 07/02, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
    6. García-Solanes, José & Sancho-Portero, F. Israel & Torrejón-Flores, Fernando, 2008. "Beyond the Balassa-Samuelson effect in some new member states of the European Union," Economic Systems, Elsevier, vol. 32(1), pages 17-32, March.
    7. Martin Cincibuch & Jiří Podpiera, 2006. "Beyond Balassa-Samuelson: Real appreciation in tradables in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 14(3), pages 547-573, July.
    8. Jarko Fidrmuc, 2004. "The Endogeneity of the Optimum Currency Area Criteria, Intra-industry Trade, and EMU Enlargement," Contemporary Economic Policy, Western Economic Association International, vol. 22(1), pages 1-12, January.
    9. Vit Barta, 2005. "Fulfilment of the Maastricht Inflation Criterion by the Czech Republic: Potential Costs and Policy Options," Research and Policy Notes 2005/04, Czech National Bank, Research Department.

    More about this item

    Keywords

    Czech Republic; Eurisation; Optimum currency areas; Real exchange rate; Competitiveness;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • P22 - Economic Systems - - Socialist Systems and Transition Economies - - - Prices
    • P29 - Economic Systems - - Socialist Systems and Transition Economies - - - Other

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