Prague Economic Papers 2003, 12(4):291-315 | DOI: 10.18267/j.pep.223

Estimates of fundamental real exchange rates for the five eu pre-accession countries

Kateřina ©mídková1, Ray Barrell2, Dawn Holland2
1 Czech National Bank, Na Příkopě 28, CZ - 115 03 Prague 1 (e-mail: katerina.smidkova@cnb.cz).
2 National Institute of Economic and Social Research, 2 Dean Trench Street, London Smith Square, SW 1 P3 HE, UK (e-mail: ray.barrell@niesr.ac.uk; dawn.holland@niesr.ac.uk).

Are there indications of real exchange rate misalignment in the case of the five pre-accession countries? Will stable real exchange rates, required by two of the Maastricht criteria, be in line with economic fundamentals in the pre-EMU period? In order to address these questions, we employ the concept of the fundamental real exchange rate (FRER). The FRER model approximates the integration gain with the impact of foreign direct investment on trade and allows for larger current account deficits if external debt is below a safety limit. According to the FRERs, there were signs of overvaluation for all the pre-accession economies, with the exception of Slovenia, at the end of 2001. The second main finding is that stability of real exchange rates will not automatically be in line with economic fundamentals in the forthcoming period. This suggests that some flexibility of exchange rates will be needed in the pre-EMU period.

Keywords: EU accession, fundamental real exchange rates, EMU entry, modelling
JEL classification: F41, F47

Published: January 1, 2003  Show citation

ACS AIP APA ASA Harvard Chicago IEEE ISO690 MLA NLM Turabian Vancouver
©mídková, K., Barrell, R., & Holland, D. (2003). Estimates of fundamental real exchange rates for the five eu pre-accession countries. Prague Economic Papers, 12(4), 291-315. doi: 10.18267/j.pep.223
Download citation
  • BibTeX (.bib)
  • Bookends (.ris)
  • EasyBib (.ris)
  • EndNote (.enw)
  • EndNote 8 (.xml)
  • ISI WoS (.isi)
  • Medlars (.medlars)
  • Mendeley (.ris)
  • MODS (.xml)
  • Papers (.ris)
  • RefWorks (.txt)
  • RefManager (.ris)
  • RIS (.ris)
  • MS Word (.xml)
  • Zotero (.ris)
    • Open full article

    References

    1. Ades, A., Kaune, F. (1997), "GS-SCAD A New Measure of Current Account Sustainability for Developing Countries." Economic Research, Goldman Sachs.
    2. Artis, M., Taylor, M. (1993), "DEER Hunting: Misalignment, Debt Accumulation and Desired Equilibrium Exchange Rates." Washington, International Monetary Fund, IMF Working Paper No. 48. Go to original source...
    3. Barrell, R., Christodolakis, N., Currie, D., Garrett, A., Ireland, J., Kemball-Cook, D., Westaway, P., Levine, P. (1993), "Policy Analysis and Model Reduction Techniques Using GEM," in Bryant, R., Hooper, P., Mann, C., eds., Evaluating Policy Regimes. Washington DC: Brookings Institution.
    4. Barrell, R., Dury, K., Hurst, I. (2001), "International Monetary Policy Coordination: An Evaluation Using a Large Econometric Model." London, National Institute of Economic and Social Research, Discussion Paper No. 160.
    5. Barrell, R., Holland, D., Jakab, Z., Kovacs, M., ©mídková, K., Sepp, U., Cufer, U. (2002), "An Econometric Macro-model of Transition: Policy Choices in the Pre-Accession Period, in Proceedings of AMFET'2001 Conference - Modelling Economies in Transition. Krag (Poland), Absolwent, Lodz.
    6. Barrell, R., Holland, D., ©mídková, K. (2002), "An Empirical Analysis of Monetary Policy Choices in the Pre-EMU Period." London, National Institute of Economic and Social Research, NIESR Discussion Paper No. 204.
    7. Barrell, R., Pain, N. (1997), "Foreign Direct Investment, Technological Change and Economic Growth within Europe." The Economic Journal, 107, pp. 1770-1786. Go to original source...
    8. Barrell, R., Sefton, J. (1997), "Fiscal Policy, Real Exchange Rates and Monetary Union." London, National Institute of Economic and Social Research, mimeo.
    9. Barrell, R., te Velde, D. W. (2000), "A Note on Multinationals and Irish Trade." London, NIESR, mimeo.
    10. Barrell, R., Wren-Lewis, S. (1989), "Fundamental Equilibrium Exchange Rates for the G-7." London, CEPR Discussion Paper No. 323, June.
    11. Barry, F. (1996), Peripherality in Economic Geography and Modern Growth Theory: Evidence from Ireland. London: Blackwell Publishers Ltd. Go to original source...
    12. Bayoumi, T., Clark, P., Symansky, S., Taylor, M. (1994), "Robustness of Equilibrium Exchange Rate Calculations to Alternative Assumptions and Methodologies." Washington, International Monetary Fund, IMF Working Paper No. 17. Go to original source...
    13. Begg, D., Halpern, L., Wyplosz, Ch. (1999), "Monetary and Exchange Rate Policies, EMU and Central and Eastern Europe." London, CEPR, Economic Policy Initiative Forum Report 5. Go to original source...
    14. BOP Statistics Yearbook (2001), Washington: IMF.
    15. Clark, P., Bartolini, L., Bayoumi, T., Symansky, S. (1994) "Exchange Rates and Economic Fundamentals: A Framework for Analysis." Washington, International Monetary Fund, IMF Occasional Paper No. 115.
    16. Dees, S. (1997), "Estimation of Long Term Equilibrium Exchange Rate for China." University of Bordeaux, mimeo.
    17. De Broeck, M., Sløk, T. (2001), "Interpreting Real Exchange Rate Movements in Transition Countries." BOFIT Discussion Papers, 7/2001. Go to original source...
    18. Detken, C., Dieppe, A., Henry, J., Marin, C., Smets, F. (2003), "Determinants of the Effective Real
    19. Exchange Rate of the Synthetic Euro: Alternative Methodological Approaches." Australian Economic Papers, Special Issue.
    20. Edwards, S. (1989), Real Exchange Rates, Devaluation, and Adjustment: Exchange Rate Policy in Developing Countries. Cambridge, MA. and London: MIT Press.
    21. ECB (2000), Convergence Report. London, European Central Bank.
    22. Frait, J., Komárek, L. (2001), "On the Way to European Union: Nominal and Real Convergence in Transition Countries" (in Czech). Finance a úvěr, 51(6), pp. 314-329.
    23. Grossman, G., Helpman, E. (1991), Innovation and Growth in the Global Economy. Cambridge, MA: MIT Press.
    24. Halpern, L., Wyplosz, Ch. (1996), "Equilibrium Exchange Rates in Transition Economies." Washington, International Monetary Fund, IMF Working Paper No. 125. Go to original source...
    25. Havlik, P. (1996), "Exchange Rates, Competitiveness and Labour Costs in Central and Eastern Europe." Vienna, WIIW Research Report No. 231.
    26. Holland, D., Pain, N. (2000), "On the Road to the Market: The Prospects for Growth in Central Europe." Conference on Liberalization & Growth in Developing & Transition Economies. University of Wales, April.
    27. Kovacs, M. (2001), "The Equilibrium Exchange Rate in Hungary." Budapest, National Bank of Hungary.
    28. Lansbury, M., Pain, N., ©mídková, K. (1996), "Foreign Direct Investment in Central Europe Since 1990: An Econometric Study." National Institute Economic Review (156), May, pp. 104-114. Go to original source...
    29. National Institute Economic Reviews (2002), London, National Institute of Economic and Social Research, various issues.
    30. Milesi-Ferretti, G., Razin, A. (1996), "Current-Account Sustainability." Princeton Studies in International Finance (81).
    31. Pain, N., Wakelin, K. (1998), "Export Performance and the Role of Foreign Direct Investment." The Manchester School.
    32. Stavrev, E. (2000), "Monetary and Fiscal Policies' Efficiency and the Determination of a Nominal Equilibrium Exchange Rate" (in Czech). Finance a úvěr 50(9), pp. 464-477.
    33. Stein, J. L., Allen, P. R. (1995), Fundamental Determinants of Exchange Rates. New York and Oxford: Oxford University Press, Clarendon Press.
    34. Stern, N. (1998), "The Future of Economic Transition." London, EBRD, Working Paper No. 30.
    35. ©mídková, K. et al. (1998), "Koruna Exchange Rate Turbulence in May." Prague, Czech National Bank, Working Paper No. 2.
    36. ©mídková, K. (2001), "The Link between FEER and Fiscal Policy in a Transitional Period: the Case of the Czech Economy," in Dickinson, D. G., Mullineux, A. W., eds., Financial and Monetary Integration in the New Europe. London: Edward Elgar, pp. 59-78.
    37. Williamson, J. (1994), "Estimating Equilibrium Exchange Rates." Washington DC, Institute for International Economics.
    38. World Economic Outlook (2000), Focus on Transition Economies. Washington: IMF, October.

    This is an open access article distributed under the terms of the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License (CC BY NC ND 4.0), which permits non-comercial use, distribution, and reproduction in any medium, provided the original publication is properly cited. No use, distribution or reproduction is permitted which does not comply with these terms.


    Return to the content