Politická ekonomie
Politická ekonomie
Prague Economic Papers
University of Economics, Prague

Prague Economic Papers Vol. 12 No. 4

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

DOI: https://doi.org/10.18267/j.pep.223

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Kateřina Šmídková, Ray Barrell, Dawn Holland

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: EMU entry, EU accession, fundamental real exchange rates, modelling

JEL Classification: F41, F47