You are on page 1of 27

Estimating the Equilibrium Exchange Rate of the Central and Eastern European Acceding Countries: The Challenge of Euro

Adoption Author(s): Balázs Égert and Amina Lahrèche-Révil Source: Review of World Economics / Weltwirtschaftliches Archiv, Vol. 139, No. 4 (2003), pp. 683-708 Published by: Springer Stable URL: http://www.jstor.org/stable/40440982 . Accessed: 10/06/2013 06:55
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp

.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

.

Springer is collaborating with JSTOR to digitize, preserve and extend access to Review of World Economics / Weltwirtschaftliches Archiv.

http://www.jstor.org

This content downloaded from 203.135.62.20 on Mon, 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions

the EquilibriumExchangeRate Estimating of the Centraland EasternEuropean AccedingCountries: The Challengeof Euro Adoption
BalázsÉgert andAmina Lahrèche-Révil
Oesterreichische et Vienna; Centred'ÉtudesProspectives Nationalbanky Paris Internationales^ d'Informations

Thisstudy estimates theequilibrium realandnominal rates Abstract: exchange A and Eastern new forfiveCentral countries. is (CEE) European approach rate(FEER) which combines thefundamental equilibrium exchange adopted, In rate (BEER) methodology. with the behavioural equilibrium exchange we estimate structural a VAR-based equations 3-equation system, cointegration to therealexchange rate. The and external balances and linkthem for internal nominal rates. is usedto derive estimated equilibrium exchange misalignment rate is investigated on ex ofan ERM-II-type Thesustainability exchange regime thecurrencies ofCEE countries offixing problem postdata,and thecredibility no. E31,F31,Oll, P17 is analysed. thesingle vis-à-vis JEL European currency rate;transition; ERM-II; rate;realexchange Equilibrium exchange Keywords: euroadoption

1 Introduction rates hasbeena common ofrealexchange The systematic appreciation Nevertheand EastEuropean(CEE) countries. forall Central feature ratehas been of theappreciation oftherealexchange less,theextent theCzechReForinstance, across thecountries. rather heterogeneous realappreciation of an average haveexperienced publicand Slovakia 1991and 2001.This can be explained 4-5 per centperyearbetween accompanied byposilongunchanged pegofthecurrencies bythefor
referee forhis useful comwouldliketo thank theanonymous The authors Remark: theofficial in thearticle do not necessarily The opinions ments. represent expressed to Balázs Pleaseaddress Nationalbank. viewsof the Oesterreichische correspondence Research Oesterreichische Division, 3, Nationalbank, Otto-Wagner-Platz Foreign Égert, e-mail: A-1090Vienna; balazs.egert@oenb.co.at

This content downloaded from 203.135.62.20 on Mon, 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions

2002. against theconjunction ofexchange and capital moverateflexibility Poland.e. Bycontrast. misalignments Hungary.5-2percentin Slovenia. 139 (4) tiveinflation in differentials thereference countries. Thispaperprovides estimates for realexchange theequilibrium rate theconcepts of fundamental and behavioural combining equilibrium rate(FEER and BEER) so as to derivereal exchange rate exchange for the Czech Slovakia and Poland. 2003.competitiveness While is eroded. and developed countries. recently Kovács2002. The annualaverage from to 4 in and to 2. 1 It is remarkable rate depreciated that. exchange given price thecountries In this under consideration. appreciation ifat all.theB-S effect turns out to be a relatively in CEE weakyardstick forequilibrium realexchange rates andthis callsfor a more connected tothe structural countries. candidate Theeuroentry shouldindeed be as closeas possible to theequilibrium nominal parity the levels and the macroeconomic balances of rate. theequilibrium rate realexchange for CEE countries also Assessing bearsgreat in thelight oftheEU enlargement and importance process. onlydepreciated by20-30 percentin nominal This content downloaded from 203. equilibrium exchange exchange wheninternal and external attained are equilibria simultaneously.135. Asrealexchange rates tothesetofmacroeconomic competibelong trend tiveness a invites thequestion as towhat indicators.Égertet al. rates can be market used to direct equilibrium exchange expectations and ensure a smooth introduction oftheeuro. extent. Republic.Vol.62.Mihaljek and Klau 2003).while the nominalexchange by almost 300 per centin Hungary and Polandduring theperiodunderstudy. price gapsbetween emerging theBalassa-Samuelson is assumed to provide a refer(B-S) hypothesis encefor realequilibrium rates. theSlovakand Czechcurrencies terms. tries withactiveexchange real ratemanagement. parpower purchasing usedas a first for it differences. theperspective ofeuroadoption for countries. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .684 ofWorld Review Economics 2003. measuring exchange (see Égert2002a.20 on Mon. estimates ofnominal respect. approach fundamental rates i. Fleket al.1 Likewise. as shown However. ment ina strong liberalization resulted realappreciation of5-6 percent realappreciation hasbeenrelatively lowin counperyear. real rates (FEER).2002b. ity(PPP) is widely approximation price cannot as far as transition of competitiveness ground analysis developing countries are concerned becauseproductivity gapscreate equilibrium In thelongrun.5 appreciation percent Hungary amounts ranges 1.

This a two-sector smallopen economy framework describes composedof In thetradable tradable and non-tradable goodssectors. nominal economy. acceding types estimationsas regards thetheoretical The and mostsimple first background. aresetin linewith goods(open) secproductivity gainsin thetradable In the event ensures tor.2 productivity leading sectors. however. optimal entering 2 Measuring Real ExchangeRates Equilibrium Whenit comesto estimating the equilibrium real exchange ratefor one can distinguish between three of countries. a range ofequilibrium nominal Drawing is determined.becauselabourmobility wage equalization.internominal the rate is determined sector. 2 The financial and restrucis an exception becauseit has been consolidated sector It is. on theseestimates. 4 offers Section an assessment strategy ofrealexchange ratemisalignments and addresses thequestion ofthe central rate for ERM-II. theoretically being on thegrounds thatmostof the economies wellsuitedfortransition in the sector. This that occurred open implies proprivatizations early havebeenfaster there thanin theclosed ductivity gainscouldpossibly thetwo to a positive differential between sector. wages by goods(closed)sector. candidate modelis theBalassa-Samuelson model(B-S hereafter).135. Section 3 the esticoncept equilibrium exchange presents mation andtheempirical results. ofnon-tradable goodsmeanhigher theinflation in thehomecountry exceeds that then differential abroad. This content downloaded from 203. rates exchange The remainder ofthepaperis as follows: 2 overviews Section the of real rate.20 on Mon.Higher Iftheproductivity overall inflation.As a consean increase produces thereby aretranslated into productivity gainsin theopensector quence. neither in the in all countries underinvestigation. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .62. in withthat in faster the sector that rises open compared productivity increase in whole the which theclosedsector.theEquilibrium Rate Égert/Lahrèche-Révil: Estimating Exchange 685 Slovenia. higher in therelative of non-tradable an increase prices price goods. competitive nationally exchange In the law of one the non-tradable price. wages in theclosedsector's costs.Section 5 concludes. not included tured offices northeharmonized statistical consumer priceindexpublished bythenational consumer priceindexof theEurostat. goods. and leadsto a realappreciation is expected to be positive of differential all things The B-S model is theexchange rate. equal.

pacethan higher as thenon-tradable from proportionately price pass-through productivtowards overall inflation remains weak. theobserved realappreciation oftheexchange rate cannot be completely ascribed to relative differentials. is often Furthermore. 2003) Égert al. Themost obvious oneisthat (2003). sometransition countries suchas theCzechRepublic. why to explore andemploy morecomplex inorder models toassess whether or nottheappreciation oftherealexchange ratecan be considered as sustainable.686 Review ofWorld Economics 2003.derived stock-flow relies on a similar definition of theFEER. ifappropriate datais notavailable. dynamic itsambition is less normative thanpositive.As shown in Égert in et and (2002a.Kovács and 2002. in CEE countries observed can be onlya partoftherealappreciation Thisisactually itseems tobe important explained bytheB-S effect.Vol.Mihaljek (Flek strong Klau 2003). inspired by mental rate as therealexchange (FEER)isdefined equilibrium exchange rate that allows for thesimultaneous attainment ofinternal andexternal i. theshare ofnon-tradable priceindex(CPI).135.there increases in productivity havenotbeenlarge if in not enough. becauseit is intended to detect fundamental determinants thatinfluence thebehaviour of the real exchange reduced-form and time-series rate. As a matter goods in the consumer index is about 30 cent on average. output account isfinanced flows. plays theappreciation oftherealexchange ratein transition countries is not that as thought before etal.2002b.2002. demographic recent research shows in that theroletheB-S effect However. Asa consequence. models Williamson the funda(1994).when isset toitspotential level andwhen thecurrent balances.62. Conprice per evenifproductivity in theopen sector at a much increases sequently. ity relatively Generally speaking. aretwomainreasons for this.e. productivity GDP that not but is proxied per capita by onlycaptures productivity also a proxy fordemand sideeffect and is connected to education and factors. The secondreason liesin productivity thestructure ofconsumption andsubsequently inthat oftheconsumer offact. inthesheltered overall inflation will notincrease sector.20 on Mon. negative. model. 139 (4) Itis common to test theextended version oftheB-S model practice demand side variables such asprivate andpublic including consumption. While theNATREX through long-term capital modelconstructed from a specific theoretical byStein(1994). This content downloaded from 203. theestimation oflarge macroeconometric models should be Second. In these mentioned.through equations analysis. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .

relyon a morestatistical rate. (1999) and Hinkle (1999). A fourth models.135. upon single-equation the is to estimate thefirst theFEERapproach. and to therealeffective ( Y*) income exchange foreign 3 See also Elbadawi and Montiel et al. to allows series However. (ex(1994) economy Among In the real this and model. time panel techniques employed.Thisis thecase ofthebehavioural equilibequilibrium exchange and Clark MacDonald rium rate ( 1998).theEquilibrium Rate Estimating Exchange Égert/Lahrèche-Révil: 687 definition of the otherestimates Third.4 and external usually and levels and oftrade. pendssimultaneously and ofthe inaccordance and on that with cleared demand.3 ports. identify country-specific techniques basisrequired or monthly thelackofdataon a quarterly bytheshort toswitch toannual force oftransition) 10years time may span(roughly efficient.20 on Mon. noted that similar be in It should the introduced analysis. specific productivity. are derived variables countries. (1994).e.i. or the model macroeconometric tural approach. stepoftheanalysis Using and to domestic with account current of the (Y) (CA) respect elasticity rate(REER). strand ofpapersis basedon general equilibrium models a three-sector Edwards others.62. frequently modelrecently stock-flow in the intertemporal. equilibrium imports non-tradables).e. The use of time and series i. through that affect theinternal to thefundamentals is related rate realexchange refundamentals The macroeconomic balances. be more to datawhere prove paneltechniques ofa strucon theestimation either one can rely Usingtimeseries. (BEER) developed by exchange determinants oftherealexchange rate arequanwhere thefundamental estimation with an extended version ofthe tified econometric through as thetheoretical interest rate uncovered parity background. productivity inis setthrough thenation's where theequilibrium markets tradable the real rate The of behaviour constraint. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . as therelative ratedefined priceof non-tradable goods deexchange of the non-tradable on thebehaviour market. (1999) for developing developed byMontiel it usedas a background. factors.Baffes 4 This oftrade volume series thelimited allowsto overcome availability methodology the use of theWilliamson whichconstrains and transition in developing economies. This content downloaded from 203. methodology. models theoretical from thedifferent Apart theeconometric studies between todistinguish isalsopossible regarding data. exchange tertemporal budget where the econometric reduced-form assessed is then models. aretheterms tained consumption private public arealso orad hocvariables other labour However.

from is the equilibrium residual of thisestimate.g.Alternatively. components transitory Beveridge-Nelson (e. thelong-run Thus. The alternative and moreoften theequiemployed wayto estimate librium realexchange is the rate(ERER) to approach single-equation thebehavioural rate(BEER) (see Clark andMacequilibrium exchange Donald 1998).However.688 Review ofWorld Economics 2003.Forthisreason. Estimating relationship between therealeffective rateand thefundamentals enables exchange us to obtainsomekindof"average" coefficients fora setofcountries. long-term damentals.135.after estimating there is no needto evaluate valuesfor thefunrelationship. estimated would the real ratefor equation yield equilibrium exchange This content downloaded from 203. Putsimply. The philosophy behindtheuse of panel data is somewhat differentcompared with thetimeseries the analysis.62. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .and is used to derive thedeparture of theactual rate from itslong-run value. theREERis derived which wouldmovethecurrent account modified for internal balance to itstarget value. 139 (4) CA = CA(Y. rate.Thus.Vol. computed usinglong-term tained in either the series into and bydecomposing question permanent filter. Y and 7* converge towards their equilibrium values. The BEER approachconsists the relationestimating between the real rate and a number of fundamentals ship exchange and transitory The actualdeviation factors. Finally.Subsequently. 1999). it is supposedin practice that internal balance is achieved oftheREER.thetotal deviexchange equilibrium ationdepends on theshort-term factors and the of transitory departure thefundamentals from their value. Clarkand long-term MacDonald(2000) showthat itis alsopossible to obtain thetotal deviationdecomposing thecointegration vector itself intoa permanent and a transitory rate component equilibrium (permanent exchange (PEER)) via theGonzalo-Granger method. The idea is thatthese"average" coefficients obtained from thepanel the describe behaviour of the individual countries' correctly long-term realexchange in thelongrun.20 on Mon. The long-run rateis equilibrium exchange values of the which are obfundamentals. r' REER). a valuefor theREERshould be determined so thatCA. thiswouldimply thattheREER shouldaffect three variables at thesametime. therealexchange rate is to react to changes in fundamentals in eachcounsupposed similarly The substitution oftheobserved fundamental timeseries intothe try.Hodrick-Prescott or by evaluating thelong-run value (see decomposition) subjectively Baffes et al.So thecurindependently rent withinternal accountcompatible balanceis determined.

As inthetime case. developed by approach exchange such balanceequations. Égert failure of PPP fortheopen sector.62. However. rate withthebehavioural (FEER) methodology equilibrium exchange internal and external to estimate we seek (BEER) approach. the nominal of thebehaviour exchange for models tosingle-equation Thealternative equilibrium estimating which relies the is rates Williamson. sector theshareofthenon-tradable and with prices). prices expressed about from allows to abstract which questionable hypothesis currency. Actually. and external internal on structural However.theEquilibrium Rate Exchange Estimating Égert/Lahrèche-Révil: 689 series from eachcountry. in thesame to domestic i.thedeviation equilibrium oftheobserved REERand the as thedifferential can then be computed realexchange rate. (2003) forempirical (2002a. librium realexchange on smallopen economy theoretical often models. estimated equilibrium and Data 3 Methodology whenestimating modelsare usually equiemployed Single-equation ratesfordeveloping and transition economies. gration 5 It is thatPPP holdsfortradable assumed goods. And and pricedevelopments rate5 exchange forCEE countries characthisis whythesemodelsare inappropriate Forthis movements.and on otherfactors in theeconomy. 7 The real ratedecomposition by MacDonald(1997) showsthattheinterexchange butthey should oftherelative are indeeda component nal relative priceindex. and models macroeconometric on based are require large equations for CEE countries.e. methodology empirical rate fundamental combines the which this exchange equilibrium paper. rely they relative rateis defined internal where therealexchange prices through thenominal do notinclude 1999). sustainability cointeofa VAR-based outin theframework and is carried 3-equation and the for relative values Estimated prices long-term system. implicitly 6 See evidence on the et al.6 rates and free terized capital byfloating exchange definition oftherealexchange we shalluse themacroeconomic reason.7 rate. theratioof foreign rate. to obtain dataon NAIRU.135. prices withthe relative be considered goods (whichdependon pricesof tradable together in oil suchas variability of tradable the substitutability goods.20 on Mon. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .Thesemodels (seeMontiel explicitly in theforeign countries. ofnon-tradable interms oftherelative defined balances price goodsand account of current the thelong-run respectively. uneasy in is developed a newalternative Therefore.g. This content downloaded from 203. position.2002b)and Égert e.

(3) exchange REL is the relative PROD standsforrelative priceof non-tradables. odology Republic. REERis theCPI-based realeffective rate. andPoland andfrom 2001:Q2for 1993:Q1 Hungary to 2001:Q2for Slovakia and Slovenia. All variables are transformed in natural logarithms. (1994). prices They aredetermined (PROD) anddemand (COATS). the Ina small internal balance. (CA) prices rate(REER).Vol.respectively: exchange Internal balance REL + ßuPROD + ßnCONS (1) External balance CA + ßlxTOT + ßn OPEN (2) Realeffective rate REER+ ß5YREL + ß^CA. Hence.20 on Mon. internal balance isreached when relative the of non-tradables (REL) price clears themarket. The following vectors are estimated and normalized cointegration to relative the current account and the effective real (REL). In CEE countries.An increase in an increase result in relative if it falls on non-tradable prices. oftrade. being proxy Weights basket are derived from tradewiththeUnitedStates and theEU (see Table4 for moreprecision). tivity This content downloaded from 203. labourproductivity of the basket CONS represents countries.2001). private 8 Thesevariables are also usedin Halpern and Wyplosz et (1997. The periodunderstudy runsfrom 1992:Q1to theCzechRepublic. ( 1) describes Equation openeconomy. The realexchange rateis defined ineffective terms a basket thedollar andtheeurowith against including theGerman mark a the euro in the for until 1999. and OPEN is theopenness ratio ofthecountry defined as total tradeoverGDP. 139 (4) in thesimultaneously current accountare thensubstituted estimated the realeffective ratewithrelative relationships connecting exchange andthecurrent account. Hungary. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . against realprivate CA is thecurrent TOT is theterms account. consumption.62.135.8 byrelative productivity An increase in productivity9 shouldlead to an increase in therelative in consumption shouldalso priceofnon-tradable goods. relative reflect the internal balance. Moredetails on data exchange definition and sources areavailable intheAppendix. mostly demandwas seriously constrained goods.690 Review ofWorld Economics 2003. prices Theestimations arecarried outusing the VAR-based methJohansen 5 for the CEE countries the Czech Poland. Slovakia and Slovenia.De Gregorio al.De Gregorio and Wolf(1994) and Coricelli and Jazbec (2001). Or in percapitaGDP measured in purchasing standards (PPS) whenproducparity couldnotbe used.

balancescontribute to the deand external bothinternal Finally. in private increase whichwas an led to an important consumption. of economic retheconsequence This is probably therelative priceof non-tradables. used as a for trade liberalratio is (OPEN) traditionally proxy openness in openness.it increases the current acand fora giventradevolume. in salaries and therefore are reflected of civilservants now mainly consist penditures of households. In other thesevariables shouldbear negative words. to imports.thiscouldpossibly analysis Howon thesize of thecountry. equilibrium withtheterms oftrade{TOT) beingthe factors. shipto productivity 12 If the lead to spuriweremadeon cross-country data. particularly thetradeprotecpends policy on tradeprotection are usually so the tionlevel.+]. (positive) and private consumption. signsin the vector. a +(. On theone hand. productivity.20 on Mon. This content downloaded from 203. thethird rate.ifit is translated The it can also havea volumeeffect. competitiveness. proxy using fortradeliberalization. ing of export in value can deaccount and thecurrent shrinks volumeof exports vector[curteriorate.theEquilibrium Rate Estimating Exchange Égert/Lahrèche-Révil: 691 before the transition and the liberalization of the economy process.Thisis thereason oftherealexchange termination why 10 In alternative on failed to haveanysignificant impact publicdemand specifications. improves intoa worsencountin value. in terms of tradecan havean ambiguin imports.: of are terms rentaccount. protection. The relative expected price-normalized cointegration signsfor relative vector aretherefore the[relative demand] prices. inasmuch as it stemsfrom trade An increase ization. ratioalso depends becausetheopenness ous results ratiocan be viewed as an appropriate time-series data. on economic on variables.It is reached whenthe Equation(2) describes Current account decurrent account(CA) is sustainable. becauseit generates an increase the current shouldworsen account. [1.12 cuts in tariff and non-tariff and therefore liberalization. Í1--1 u theexternal balance.relative prices relationship.e. openness. and of inflation current account deficits.) signmeans signsshouldbe interpreted beara positive relationshould a negative Hence. pendson structural The current accountalso demain one in a small open economy. An improvement relative thevalueof exports ous effect.theopenness ever.On the otherhand. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . Publicexin a significant reduction which resulted structuring.theexpected signsof thecointegrating i. trade] partially ambiguous.135. in publicexpenditure.10 source important imports.?.Timeseries missing.62. Hence.Thatis. consumption private 11 The theother wayround.

This content downloaded from 203.Vol. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . worsening The expected contrary.Despitethe capitalaccountliberalization. an increasein relative pricesand an improvement current account positionshould lead to the appreciation of the real exchange rate. by the absenceof any significant dummy.62. setto0 between 1992:1 and 1995:1. equation following way: Internalbalance REL + ßnCAPITA. non-significant balance is altered the CzechRepublic. producea realdepreciation.20 on Mon. cointegration in in the mid-1990s of capitalflows occurred The liberalization it has all countries Slovenia treatment because except special requires in monetary and exchange ratepolicies. dummies did not turnout to be significant forPoland and Slovakia.+l·13 where CAPITAis the(log of) percapitaGDP expressed in PPS terms. senting a real aprelative of non-tradables be associated with should price whilst a current account of the should. andto 1 between 1995:2 FortheCzechRepublic.14 It should be notedthat theestimated coefficient oftheproductivity in in (1) is found andthe differential Slovenia Slovakia. dummy Hungary and2001:2. e. missing for external balance Slovakia: CA +ß2lOPEN. especially Hungary is introduced to account for The for policy changes. of a stabilization In the Czech Republic. tionmargins and the float.+.In Slovenia.g. the widening of the fluctuaspring1997.2002b) showsthattherelationship Égert productivity therelative and therealexchange in these rateis weaker differential. the korunacrisisburstin programme. respectively. considerable breaks produced in dummies are and the Czech Therefore.to the preciation. itis0 between 1992:1 and 1997:1 and 1between 1997:2 and 2001:2. 139 (4) rate(REER) links therealeffective relationship cointegration exchange and the current to therelative accountreprepriceof non-tradables A risein the the internal and external balance.135. account] exchange prices. (1') [1. no major exchange rate policychangetook place duralso confirmed time ing the periodunderstudy. terms of force us to trade data estimate thefollowing Finally. pricedifferential countries thanin other CEE countries.692 Review ofWorld Economics 2003. signsof the [real relative vector are current rate.15 theinternal Therefore. {!') 13 Put of the differently. 14 In the exchange rate policychangeoccurred in March 1995 as part Hungary. 15 between therelative (2002a. Republic.

+.345 (15.03 X3 1992:1-2001:2 Poland. expected signs[1.253 (12. m4.135.539 (-11. accepts hypothesis cointegration Table 1: Johansen Tests Cointegration XI = [REL.TOT.04** X2 R= 4 17. under t-statistics areshown dent's is significant at the thatthenormalized variable i.443) -0.r = 3 R=l 166. (Ho) is rejected respectively. cointegrating thatin Polandand in theCzechRepublic.e.84 R= 6 0.109) 0.837) 0.a' = [1.-. m5).theEquilibrium Rate Égert/Lahrèche-Révil: Estimating Exchange 693 4 EmpiricalResults 4. the number are presented underthe nameof thecountry.699 (13.67 X2 R= 4 17.165) 1992:1-2001:2 Hungary. be noted.978) 0. It is possible to find VARs in terms well-specified ofserial and normality forall countries.+] k Ho 1 Coefficient 2 Àtraœ Vector 1 Coefficient 1* 1* 1* -0. Note:Atrace *.r = 3 R=l 128. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .33*** R = 2 87.βηΐ expected signs[1.706) -0. expected signs[1.558) -0.11*** R = 3 42.113) 2.16 X3 1* 1* 1* thatthe null hypothesis is the Johansen statistic.βη.572 (12.ß22].1 The Determination Real Exchange Rate of theEquilibrium The estimated and thediagnostic tests are relationships cointegrating setoutin Tables1-3.62.183) 0.046) 1.39*** R = 2 71.84 R= 5 3.ß3l.899) 0.ßlx.286 (-5. R = 0 219.25** R = 3 39.20 on Mon.β' = [1. ** and *** indicate 5 percentand 1 per centlevels.420) 0. R = 0 309.81 7.ß02].278 (1.CONS]. 5 percent levelin another This content downloaded from 203.603 (-13. normalization. PROD. thetracetestalso however. REL.512 (-7.?. The at the 10 percent. m3.CA]. Sturank(r) used in the estimations * abovethe in parentheses theestimated coefficients.198 (25. 1 indicates normalized variable. of lags (k) and the cointegration modeltested (ml.15*** XI m3.OPEN].k=l.653 (10.04*** XI ml.k=l.05 R= 5 R= 6 1. thealternative ofat leastfour vectors.-] X2 = [CA.+] X3 = [REER. m2.γ' = [1. correlation The Johansen test thepresence indicates ofthree Itshould vectors.648 (6.

365) 1.CAPITA]. 139 (4) Tests Table 2: Johansen Cointegration X2 = [CA. a! = [1. areall cointegration also showthatnoneof The long-run exclusion tests correctly signed.87*** 107. r = 3 R= R= R= R= R= 0 1 2 3 4 5 131.435) 0. CA].746 (57.246 (5. k = 1.+] k Ho 2 1 Coefficient Xtrace Vector 1 Coefficient 178.077 (-12.659 (6.REL.013) 1.16 thethree-equation is estimated both system and mated turn out to be relationships significant. cointegrating The estifor countries.?.221) -0. However.924 (-76. ßnl expectedsigns [1.69 0. r = 3 R=l R= R= R= 0 2 3 4 123.000) Note: See Table 1.481 (13.270) -0.-. β' = [1.34*** 23.99 8.62.25 2. Vol.675 (45. 1993:1-2001:2 R= mO.97** 9.+] X3 = [REER.135. r = 3 R=l R= 2 R= 3 R= 4 R= 5 Slovenia.471 (16. TOT.63*** 79.βηΐ expected signs[1.the stability testcarried rankrejects the stability vector.βη.528) 0.080) 0.912) 1. 16 The 24-28).035 (-2. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .252) 1. &2]> expectedsigns [1. OPEN].694 Review of World Economics 2003.k = 2. β3' .89*** 65.833) 0.theyare reportedin Égert (2002c: stability This content downloaded from 203. 1992:1-2001:2 R= 0 m3.98*** 75.385) -20.949 (-27. 1993:1-2001:2 R= m3.05 2.752 (30.907 (-18.-] Czech Republic.843 (20.02*** 47.47 XI X2 X3 1* 1* 1* Slovakia.20 on Mon. testsare not shown here.69*** 11.102 (-3.+. k = 2.743) XI = [REL. out on the cointegration At the same time.98*** 31.87 XI X2 X3 1* 1* 1* -0. γ' = [1. of theforth Therefore.125) -0.119 XI X2 X3 1* 1* 1* -0. βιι.13*** 38.

01 0.00 0.41 0.86 18.14 16.13 15.00 0.53 0.67 8.01 31.42 7.00 0.87 21.00 0.00 This content downloaded from 203.00 0.01 0.00 0.10 12.00 0.37 33.25 14.58 11.79 4.29 0.00 0.15 25.44 0.00 0.00 0.09 0.04 14.00 0.00 0.01 0.57 0.09 23.82 0.53 12.00 0.00 0.70 33.84 48.28 11.23 0.00 0.69 5.89 0.48 0.90 6.18 0.02 0.00 0.91 11.21 0.68 19.12 31.00 0.88 9.12 0.63 11.60 42.00 0.00 0.19 10.59 53.64 28.00 0.00 0.20 13.37 16.00 0.02 0.00 0.46 14.09 44.00 0.00 0.00 0.01 0.22 35.54 35.14 0.58 3.42 5.76 15.83 8.00 0.56 8.48 2.135.00 0.25 25.00 0.07 34.00 0.59 0.11 p-valueWeakexogeneity p-value Exclusion p-value Stationarity Hungary REER REL CA PROD CONPRIV TOT OPEN Poland REER REL CA PROD CONPRIV TOT OPEN CzechRepublic REER REL CA CAPITA TOT OPEN Slovenia REER REL CA CAPITA TOT OPEN Slovakia REER REL CA CAPITA OPEN 24.01 0.01 0.11 0.00 0.62 0.19 0.theEquilibrium Rate Estimating Exchange Égert/Lahrèche-Révil: Table 3: DiagnosticTests Skewness p-value Hungary Poland CzechRepublic Slovenia Slovakia 3.29 0.00 0.81 0.19 5.32 16.77 20.61 3.05 25.06 30.08 48.00 0.00 0.44 18.49 0.32 21.00 0.26 22.08 20.01 0.00 0.21 11.77 24.00 0.18 0.00 0.67 7.73 18.75 7.49 8.01 0.68 90.02 0.00 0.14 9.01 0.62.00 0.00 0.49 13.04 22.00 0.00 0.03 0.00 0.44 11.20 on Mon.62 13.71 6.16 0.79 10.00 0.60 12.25 13.17 0.36 26.00 0.61 28.24 36.74 24.00 0.02 0.08 11.51 11.77 22.62 22.00 0.48 22.38 9.00 0.02 22.00 0.21 695 Jarque-Bera normality Kurtosis p-value p-value Skew&kurt 9.34 25.00 0.79 0.21 0.62 4.01 0.00 0.01 0.43 16.05 17.46 25.00 0. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .51 32.39 60.17 27.01 0.94 15.32 23.13 13.70 15.99 9.00 0.02 0.00 0.00 0.06 23.43 11.00 0.00 0.00 0.88 21.36 13.23 32.68 11.00 0.30 0.00 9.00 0.00 0.79 0.17 29.20 21.045 0.

An 17 et al. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . theestimated coefficient seemsto be too high. stationarity variables. As fortherelationship therealeffective rate connecting exchange = tointernal andexternal balances REL. to theexternal an improvement in theterms of balance. 139 (4) thevariables are excluded from thecointegration space.An exception is thecurrent account variable for Slovakia with thep-value indicating Themultivariate exclusion. Notealso thatthecointegration also turnout vectors at the5 percent level. it has a systematic effect on thecurrent worsening account. given byX3 [REER(CPI). (1998) confirm thatCEE countries are pricetakers.An imin the differential tends to increase therelative provement productivity of non-tradables.imports of high-quality have products ina worsening ofexternal inthe accounts increased.3 for Poland.Vol. ending past10years. The of relative to relative price elasticity prices producare0. the estimated coefficients and are of 0.135. adjustment.CA]. approximately bothcountries. Aglietta This content downloaded from 203.62. thesignsofthecointegration vector are in linewithexpectations. they do notcontribute to theshort-term exogenous.A risein private tivity Hungary leadsto a significant increase in therelative consumption priceofthe non-tradable and the size of coefficient is 0. tests exwithout long-run stationary reject.We However.17 In Slovenia. conditioned on the of the rest of the ception. With thefast liberalization and reorientation of CEE markets to EU ones. exogeneity to be weakly i. statistically significant As regards the modified internal balanceequation. The initial modelperforms wellforHungary and Poland.6 for and roughly 0.e.696 ofWorld Review Economics 2003. stationarity.20 on Mon. Thismaybe explained thatthis bythefact a reveals in an environment improvement competitiveness deteriorating of strong of demand. Astothe weak variables arefound someofthe tests. Thisresult is consistent with theapproach oftrade as openness a proxy for trade reforms. an appreciation in priceelasticity theterms of tradeis associated withan improvement of thecurrent account.75 for Slovenia. notethat for all coefficients arestatistically except Hungary. significant at the5 percent level.9 for the Czech and appearsignificant Republic Slovakia and somewhat 0. As to openness. Turning tradehas a systematic accountwith impacton the current negative theexception of Slovenia. lower. which callsfora depreciation oftherealexchange rateto raiseexport revenues that couldbring thecurrent account backto equilibrium.5 in goods.

becausein these the account was sustainand Slovenia. compare period ratewiththeestimated oftherealexchange appreciation equilibrium the estimated realexchange rate. equilibrium exchange provides rate. in 1992 areusedas indexes normalized that realexchange rates Given and in for and the Czech 1993 Slovenia for Poland Republic. 4. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . (1998) and Filipozzi The realexchange rate is viewed tobe at itsequilibrium valuewhenthe and current account are close to their relative prices longunderlying on theexternal values. Hungary.e.2 Exchange Rate Misalignments in CEE Countries Wewouldliketo figure outhere whether therealexchange rateexperiencedan excessive and whether it was overvalued over the appreciation under For this we the observed investigation. long-run and the current account.theEquilibrium Rate Égert/Lahrèche-Révil: Exchange Estimating 697 inrelative increase ofnon-tradable (decrease) prices goodsis associated of the realexchange withan appreciation whilst rate. purpose.i. (1994). (depreciation) ina depreciaa worsening ofthecurrent account results (improvement) tion(appreciation) ofthereal rate. years current financed thecurrent accountdeficit able in thesensethatFDI largely 1). these relative Subsequently. Twoexceptions areSlovenia exchange andSlovakia because therealexchange rate when thecurrent depreciates account theelasticities.Slovakia 1993fortheCzechRepublic.In orderto derive real equilibrium the series are first substituted into the internal rate. low. (Figure This content downloaded from 203. equilibrium inlevels a reference ourresults abletointerpret byselecting year during ratecan be regarded as beingin which theequilibrium realexchange Edwards Elbadawi This is what (1994). Hungary. only we are ratescan be assessed.Instead.closeto zero. in levto assessoveror undervaluation itis notpossible and Slovakia. and we also makeuse ofthismethod. realexchange Nevertheless. significant arevery atthe5 percent level. (2000) do. improves.135. long-term prices intothethird estimated vector that valuesaresubstituted cointegrating rate to relative and the current aclinks therealeffective prices exchange with the estimated real andthis us count.Mongardini equilibrium. The reference chosenare 1997for years and 1994forPoland. of the observed and estimated the relative evolution els.We put a specialemphasis term sustainability whenchoosing thebase year. original exchange Thishelps us obtain values for andexternal balances equation.62.20 on Mon. eventhough Nonetheless.

therealexchange rate turns outto converge to andto stabilize arounditsestimated value./ Poland 7^ I § I ο 2000 . signs thecasesoftheCzechRepublic. This content downloaded from 203.20 on Mon.135.theextent ofa possible overor undervaluation rates. aresetoutin Figure 2.While andSloveratedoes not seemto be overvalued overthe nia. 139 (4) 1: Current Account Balance PlusFDI. possible say period... alwe can observe an of 10 in undervaluation to cent the first though up per half ofthe1990s. ' 1 CzechRepublic ^-t^ 4000 / ' . In Hungary. explicitly lution ofthefundamentals when itcametodetermining therate ofcrawl.Once again. ratewasvery closeto itsequilibrium value. The caseofSlovenia is very similar to what we can observe in HunIt is to that over the whole the Slovenian real gary.62. International Financial Statistics. '·' ^■••■/ ΙΦΜ 7 -- '99'9~~ 2000 "-Κ/ -4000 -6000 -1 'w^ ~' V . This is because ofthe equilibrium which considered the evopre-announced crawling pegsystem.it is exchange due to theexchange ratepolicyconsisting in managing the probably nominal rate so that the real rate never exchange exchange appreciated too much. Source:IMF. ·-■·1994 / γ / ' ^ ' / ^ ·χ ' ' >V'' 1995 ■^•bs>-^. Wecandistinguish inHungary between twocases.■ SIovenif / : °- 1993 / ::'f 'U-u:. therealexchange under there are of substantial real in overvaluation period study. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . Polandand Slovakia.4- / / Noie:Current account balance+ FDI. 1993-2000 Figure 6000 -ι y' .698 Review ofWorld Economics 2003.Vol.e. The difference between theobserved andtheestimated equilibrium realexchange i./ 1996 Ϊ997^- HTgary / -f- Slovakia^ .

15 o. years toPoland.Ö5-I ^20-1 02-.25 ^^^/ 1 -030-1 0Λ2-Ι Slovakia(1994) 'jy~t <V ^' 1 0.M ^ - ^ 1 z.62. rate is pretty volatile.it is trueto saythatthe misalignment in theearly1990sand evenabsentin 1994but becomeslarger from 1995onward. major is not too important Poland. themisalignment vis-à-vis theequilibrium Nevertheless. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . As to However.00 ™ -0.Rate theEquilibrium Égert/Lahrèche-Révil: Estimating Exchange 699 theObserved and theEstimeted Real Figure2: The Gap between Equilibrium Rate Exchange 0.20-j 1 0.20 τ (1997) Hungary 1 Slovenia(1994) 0. Turning Figure a substantial in all three overvaluation casesat theend of theperiod under some differences haveto be noted.20 on Mon. Theresponsibility for theincreasing and exchange more volatile in the second half of the studied can misalignment period to the increased and of the nominal go volatility appreciation exchange This content downloaded from 203. study. aïs Poland (1994) 1 αιο-ι Czech Republic(1993) 0Ό5··^ν -0. theCzechRepublic 2 shows andSlovakia.12J ν Note:Reference are in parentheses.'^ ■■■-y>^ '^ -0.135.15 '- 4uJ ' ^ -0.

rate. theweight Applying to the actualnominalexchange nominalmisalignment the obtained vis-à-vis the rate thenominal we can derive rate. ofthenominal exchange depreciation ponding rateoftheacceding nominal Table4 showstheobserved exchange basket of theeffective the euro of the the countries euro.62. the overvaluation programme tends to of the the extent in early wasimplemented 1998. realexchange that. 139 (4) the ofthefluctuation bandandthen rate from theenlargement resulting moveto free floating. dateofthecurrency seems tobe broken overvaluation thetrend the estimated sustainable moves close to real rate crisis: the very exchange and the overvaluation Butsoonafter rate. in 1997. appears misalignment 15 cent from 10 to i. valueduring sustainable to itsestimated Afterwards. computed misalignment and then of the euro to the real misalignment.700 Economics Review ofWorld 2003.3 NominalEquilibrium Exchange the rateallowsus to compute realexchange The estimated equilibrium the countries rate oftheacceding nominal against exchange equilibrium here theeuro.The underlying and against basket effective hypothesis is rate. misalignment in 7-8 percent 2001. real to the close per ranging misalignment. reveals a widening thecase oftheCzechRepublic gap Examining rate. and Slovenia. and attains be smaller Rates and EMU Entry 4.displayed high nominal the intheeffective EU countries basket. floating going ineffective terms ofthecurrency intandem with a nominal appreciation for this. reappears in the of free in 2001. thenominal with canbe corrected that themisalignment exchange a with correscan be eliminated a realovervaluation In other words.135.e. Because row of Table in last the euro.Vol. of themaximum terms andreaches inreal overvalued tobe getting seems stabilization Since the atabout10percent. very and beingcloseto zeroin Polandand Slovakia in theCzechRepublic. exchange equilibrium share of of the 4. Hungary This content downloaded from 203. As case 15percent isaround Poland. couldbe responsible different from thatof the Czech The case of Slovakiais slightly rate turns outtobe close in the real that Poland and exchange Republic it theearly 1990s. andtheestimated real between theobserved equilibrium exchange inreal oftheCzechcurrency overvaluation Wecanobserve an increasing should note that ofthetransition We thebeginning terms from process. weight against for of the size and the previously 2001:Q2. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .20 on Mon.

withinwhich most actual EMU member currencieshad de factocome back afterthe early 1990s crises.49 62 15 4. hypothetical moving ERM-IIin early ourbenchmark exited The Czechkoruna 2002.25 per cent margins.30 80 11 38.19 and Polandappearto have i.54 257.trade with the rest of the world is allocated between the euro and dollar areas in proportionto the share of trade with the EU and the United States. criterion on nominal exto assesstheMaastricht We nowattempt ofa hypothetical ratein theframework ERM-II-type exchange change theeuro.Figure exchange counwithin thelargeband in thefive has been developing acceding tries. 18 To This content downloaded from 203. stronger zloty parity. exchange inside the±15 percentmargins hasbeenmoving rate accompanied by substantial swings.94 Note: The equilibriumeuro-dollarexchangerate is assumed to be equal to the observed exchangeratein the second quarterof 2001. oftheexchange peg system compute the weights.46 83 2 263.12 34. our the framework of within Hungarian imaginary ing on thestrong side bandof10percent ina relatively narrow forint stayed in The exitfrom thecrawling rateregime.20 on Mon. Slovakia Hungary Slovenia Observed nominal exchangerate (X/euro) Weightof the euro in the basket (in percent)18 Nominal overvaluation againstthe euro (in per cent) Equilibriumnominal exchangerate (X/euro) 3. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .butit sideof in a rangeof20-25 percenton thestrong has thenstabilized out of the side the broke As to thecentral Poland. the fluctuation out of their currencies margins.00 74 10 47.44 89 2 217.e. 19 We also plot the ±2. theCzechRepublic Twocountries. for ofthebandin mid-2001 Afterwards. the nominal a while. Slovakia The ERM-II.62.the EquilibriumExchange Rate Égert/Lahrèche-Révil: Estimating 701 Table 4: NominalEquilibrium Rates in 2001:Q2 Exchange Poland Czech Rep. theestimated rateregime equilibagainst ratein 2001:Q2 are used as the central riumnominalexchange parenter the±15 percentfluctuacountries withwhich theacceding ity nominal rate howtheobserved 3 displays tionband. In Hungary. hasbeenevolvtheexchange rate andSlovenia.39 43.135.90 214.Forthispurpose.

it turns out to exchange movefrom thestronger sidetowards theweaker limits oftheexchange rate Thisis becausetheactive ofthetolar regime. ■ r- -OIS -0. .1 0. "»'JUS. apparent occursin closeproximity of theupper. ■ ■ . .1 u~-^S^ ~~~~^r^- -0.05 ι 1 0. Vol.10 WV^L ^ ^ ^^ -005 -0.20 on Mon.20 π Polish zloty 1 «o-yv. 139 (4) EMR-II Ratesin theHypothetical Figure3: NominalExchange Czech koruna 0.ι ΓΤ-.05 0. side of the limits bility strong oftheexchange rateregime.15 ^////////vvv 0.20 0.15 0. The case of Slovenia differis somewhat entcompared withthatofHungary in thateventhough and Slovakia thenominal rateremains within thesystem.05 ^_________- Hungarianforint ι 4)05 k/*W>^ -0. rate has been a koruna The Slovak exchange exhibitingstriking stability. ■ ■ .30 -0. .62.10 0.20J 2001produced an episodeofhigh butsince then thenominal volatility.00 . j/' 'I '' |/'a Γ 'f W V _ :ι -0.25-I Λν νννw*^ a f*v ννννν* 0.20 M5 010 0.15 0. pattern stability.135. shows a similar ofnominal this staHowever.20 . ? s s s s s yy « -0.15 0. brought management abouta steady nominal of the tolar aimed atcompensating appreciation This content downloaded from 203.15 οίο A 0. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .15£- Slovak koruna ■ ■ ■ . > .2 -ι 0.702 Review of World Economics 2003.10 0.05 yy y yy y yy y yy y Sloveniantolar 1 0.35-I "°15 Νγν V 1 -010 ■"»■ -0. 0. ■ .

flexibility exchange in CEE countries seemsto be accompanied rateregimes by growing ratestabirate andnotbysteady nominal exchange exchange volatility.20 accept areboundbytheexchange rate these countries Furthermore. longer stay rateinstability in the ERM-II.g. despite the the currencies be fulfilled Nonetheless. implies forthey issue. thata credible central a and credible commitment of thenaparity tionalauthorities in maintaining and theECB maybe very crucial the between the fluctuation band. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . stronger could be easier. to because the currencies tend exit on the limitof However. hereby contributing to curbexchange ratevolatility and to driveexchange rateexpectationstowards an equilibrium level.62.the defence the nominalexchange thedifficulties.as thischoiceconditions central rateas soonas they theadoption thetwoyears rate theexchange stability preceding during be credible for markets to ratemusttherefore oftheeuro. equilibrium why defining exchange commitment of thenational central bankand the Second. and overthe fluctuation bands. forinstance). stability of in theMaastricht The included criterion treaty.Thiscentral it. equilibrium currencies turned out valued. ratestability could all.135. the higher the risksof exchange appear.a credible and to maintain thecurrency within ECB to defend theERM-IIwould market to in mid-2001). conclusions it appears First. are an integral banksector reform partofthecredibility This content downloaded from 203.20 on Mon. Severalinteresting seem to emerge.theEquilibrium Rate Égert/Lahrèche-Révil: Estimating Exchange 703 forthepositive inflation differential between Slovenia and itstrading partners. Announcing a credible cencurrency tralratemight offer an anchorto expectations. the rate exit the band Poland prevent (e. 20 This before EMU entry thatstructural reforms be achieved (privatization.Third. indicate Our results whereas the rencies did not appearto be at their value. and Slovenian fairly Hungarian setthe"good" toenter theeurorapidly should CEE countries willing enter theERM-II. rate This is the reason exchange thenominal rateis a crucial issue. relatively easily. 5 Conclusion:How Should the ExchangeRate Be Managed into the Euro? beforeEntry Czechand Slovenian curthatin 2001 thePolish.

20 on Mon. runprovided in thelightof recent of the Balassa-Samuelson importance findings the in the literature to which most of countries. rate could be metin Maastricht on nominal criterion exchange stability Thisresult is ofutmost themedium there is credibility.62. lessconcern than believed In this isthespeedofentry intoEMU. CEE countries wouldcancelthe entry conversely arguethata fast of rate which is renominal negative consequence exchange volatility. andthus be attherootofa conconfidence On theother overto other countries.135.The another context. tagionphenomenon spreading inconverging fiscal is structurally over 3 percent countries deficit hand. Hence. through entry According a strategy wouldalso constrain realappreciation to thenon-tradable sector inflation differential translated intooverall inflation differentials. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions .704 ofWorld Review Economics 2003. OeNB). coming along overhang resolved In this sector investment and overvaluation. impatient According theECB andmembers oftheESCB (Deutsche Bundesbank.fast Exas not view unsustainable.5 percentrequired by theMaastricht criterion on pricestability. which is already with and coincides an narrow. and financial sector and stability). preciation. totheEuropean most Commission. inparticular and duetofinancing infrastructure investment (seeKopits Székely2002). (banking strength This content downloaded from 203. according acceding has area and the euro structural inflation differential vis-à-vis Germany beenand is expected to continue to be below1. linked tothenominal rate as wellas volatility. 139 (4) rate themarket a notfully credible central couldprevent lization. Setting rate rate totheequilibrium toprogressively exchange exchange converge to EMU acceding. monetary with a in the phenomenon. in for of the real and these counmost sponsible appreciation volatility tries thefree to itsdefenders. such ofcapital. bynon-tradable adhesion should not substitute for structural reforms premature setting.Vol. liquidity economy. itdoesnotdelete exchange and rooted in evenin short-run inflows: appreciation volatility capital in such inflows can indeed end the Dutch disease union. mostly equilibrium apwhile a monetary unioncancels realappreciation However. problem and the is beingmostdebated between institutions European question CEE countries. is desirable because early entry they entry the affect to the nature of could related unsustainable pectations entry market in all EU countries.themuch-heralded seemsto be of between nominal and realconvergence incompatibility earlier. prior showsthatthe our hypothetical ERM-II simulation Nonetheless.

arethoseofthewell-specified tests that thestationarity presented This content downloaded from 203.however. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . cointegration It is.20 on Mon. and US labourproductivity.theVARsystem relations. for themajorpartofCEE countries' countries account from in Tranrate is taken theWIIW database Countries Thenominal exchange of monthly 2001 and is computed as the arithmetic sition average exchange rates. 1993:1 to 2001:2for Slovakia and Slovenia. andweighted EU by tradewiththerestof theworldbeing theUS (exports and imports average. an improvement An increase in theratiodenotes index. thehypothesis in Table3.135. In a secondstep.62. age ofGerman Terms are theratioof theexport price priceindexovertheimport oftrade in theterms oftrade.PP or KPSSare unit-root tests Whenusing analysis. theCzechRepublic and spansfrom is computed the German Theeffective realexchange rate mark (usedas against flows trade with 15and a proxy for theeuro)andtheUSD.21 robustness of thecointegration to ensure thesubsequent in order criAkaike and Schwarz information defined the is theoptimal First. is defined as theratioof exports Openness wereseasonally Tradeseries (4). using lag 21 Notice VARs.2 Estimation suchas ADF. tries as and is obtained is basedon labourproductivity Theproductivity differential in the industrial the number of divided industrial employees by production theweighted averwith is compared ofCEE countries Theproductivity sector. in VAR of series stationarity The tests through systems arity ofstationarity. usually multivariate tests. + imports to GDP in valueterms. to theweight oftheUS and Europe These reallocated proportionally trade. to study thestationthefirst possible stepoftheanalysis. averages through moving adjusted Method 5. Indicator the OECD Main Economic are takenfrom Consumer priceindexes in order to cancel thedisand arecomputed as three-month database averages fluctuations.1 Data Sourceand Definition in natural All times series areseton a quarterly basisand are expressed logais 1992:1 to 2001:2 for rithms. The periodunder Polandand study Hungary. in trade).theEquilibrium Rate Exchange Égert/Lahrèche-Révil: Estimating 705 A Appendix 5. effect ofshort-run ruptive Therelative usingOECD data. and they arepresented reject It mustbe well-specified is estimated.and is goodsis calculated priceofnon-tradable as services in theCPI overtheproducer defined priceindex. from in percent theWIIW CounofGDP is drawn account balance Thecurrent in Transition database.

C. Single Baffes. and Evidence on J. Jazbec (2001). Prospectives I. B.CEPR. Paper144. ingPaper67.. Normality of the tionis checked theJarque-Bera testto theresiduals ex post. S. long-run relationships byimposing vectors. of whichis thenallowsthecointegration therobustness checked testprovided (1998).Washington. IMF.Vol. A. Fiusingthestability byHansenand Johansen the are identified restrictions on the nally. 139 (4) and theabsence ofserial correlaand theportemanteau test. J. F. Economic Review 38: 1225European 1244.706 Economics Review ofWorld 2003. CEPII Working changeen EuropeCentrale. C. Mass.Exchange A Methodological IMF mentals: of BEERs and FEERs. J. Estimating theImpactof theBalassa-Samuelson Effect on Égert. Elbadawi.C. (1994). Baulant.20 on Mon. Coudert(1998)..International Tradable and Nontradable Inflation.. MacDonald(2000). and Transitory IMF Working Decomposition. B. Oxford University P. Aglietta. Giovannini. MacDonald Clark.Productivity. Montiel (eds.C: Institute forInternational Economics. (1998). in Transition RateDynamics Coricelli. Paper 10.Washington. B. (2002a). in the trend of a constant. Cambridge. Filtering the BEER . O'Connell(1999). therootsof theVARallowstationarity of thesystem Finally. and the J. De Gregorio. Wolf (1994). RealExchange Economies. teria. Terms RealExchange Rate. trend thepolynomial (inclusion Subsequently.62..Washington.NBERWorking Bureauof EcoPaper4807.. P. H.National nomicResearch. Real and Monetary Determinants of Real Exchange Edwards. of theEquiand S. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . Inflation and theRealExchange Rateduring theTransition. cointegration References de and V. controlled. Economic Systems 26 (1): 1-16.In L. Compétitivité et régime M. De Gregorio.). and Rates and Economic FundaR.and B.and H. BankResearch Publication. In Rates. and R.A Permanent Clark.. of Trade. WorkComparison D..IMF.). Concepts forDeveloping A World NewYork: Press.135.Williamson (ed.applying of and via correlogrammes forthevector individual of thesystems equations to be residuals. Centre forEconomic Research Discussion Series Policy Papers 2869. Centred'Études et d'Informations Paris. Estimating Equilibrium Exchange D. Wolf(1994). Hinkleand P.Exchange and Measurement RateMisalignments: Countries. Rate Behavior:Theoryand EvidencefromDevelopingCountries. This content downloaded from 203. test individual series is determined. D. Internationales.London. Thetrace thecointegration and/or vectors) rankto be defined. Equation librium Real Exchange Rate.

Working Tallinn.135. International D. or Reality? in Central and Eastern Effect Samuelson Journal Europe: Myth 31 Economics 552-572. Nominaland Real Convergence Égert. and M. I. Countries. International This content downloaded from 203. Klau (2003). 3-5. William Working in Estonia:The BalassaB. (Dis)Connection.Investigating Hypothesis Égert. I. Montiel (1999). Papers (4): Transformation and RealExL. ington. in FiveCentral andEastern fect Paper5. Α. FiscalPolicy Challenges Kopits. and C.62. Connection. on Heaven's Door. Égert. Measurement Developing for Press. IMF Staff Countries.theEquilibrium Rate Exchange Égert/Lahrèche-Révil: Estimating 707 theBalassa-Samuelson in theTranΒ.. NewYork: Oxford University ofEU Accession for C. Prague. Equilibrium Long-Run Rates. Marková.Regulated Prices.20 on Mon. sition: (2): of RealExchange Ratesin Central TranΒ. NaWorking European tionalBankofHungary.Equilibrium Exchange Halpern. Bankof Estonia. L. BankforInternaAnalysis. EfSize of the Balassa-Samuelson Μ. A Disaggregated Paper 143. Monetary Washington. J. Rates? The Longand RealExchange R. and Real and J. Exchange Filipozzi. Vienna. (2002). V. UNO EcoRatesin the2000s:The Balassa-Samuelson change 2001 227-239. (2000). The Balassa-Samuelson Mihaljek. Rault (2003).Estimating Exchange Washington. 44 430-461. Accession Central Paperpresented European November Conference.: Institute ItsDyRateoftheEstonian F. and C.Williamson (ed. Working and Ch. (1997). A PanelStudy.Equilibrium Europe's Égert. Sectoral Productivity Much Ado about Rate Paper4. and Other Tradable Samuelson Goods. in Central Effect D. forInternational D. IMF Working Short Fund. at the East-West Countries.WashMonetary Paper21. Wyplosz (1997). of It.C. and I. (3): ofComparative Real Exchange Rates. nomic (1): ofEurope Survey and RateMisalignments: Hinkle. tionalSettlements. (2002). Lommatzsch. (1998). TheEconomics Transition 10 279-309. 4. Equilibrium Economics. (2003). Estimating Equilibrium Egypt's Mongardini. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . On the Estimated Kovács.. Paper5. Wyplosz (2001).C. Budapest.William Economies: Davidson Institute sition Knocking AnnArbor. Economic Halpern. The BalassaΒ.Equilibrium Kroon.C.. Estonia. Estimating Elbadawi. Bank of Tallinn. A World BankResearch Countries. Drine.WhatDetermines MacDonald. D. of Deviations. K. Paper Culprits.Exchange Concepts Publication. (1994). L. IMF Working Fund.Podpiera Flek. In J. (2002c). and P. in Transition Rates L.). namicsand Its Impacts Paper2. (2002b). DavidsonInstitute. Székely (2002). Working Europe: Basel. Nothing? Working Appreciation: Exchange CzechNational Bank. Paper480. Real Exchange Rate.

Determinants Montiel. J.: Institute Equilibrium Exchange Washington.C. Exchange Washington. Montieland L. 10 Jun 2013 06:55:15 AM All use subject to JSTOR Terms and Conditions . Estimating Equilibrium Rates. Estimating forInternational Rates. sity RealExchange RateoftheUS Dollarand DeStein. The Natural In J. 139 (4) oftheLong-Run RealExchange P. (1994). E.).).L.In J. of FEERs. BankResearch Publication. This content downloaded from 203.).: Institute forInternational Economics.Vol. Equilibrium Rate: An Analytical Model.20 on Mon. J. Economics. In P. Williamson terminants (ed. Hinckle(eds. and Measurement Rate Misalignments: Concepts forDeveloping Exchange UniverA World NewYork: Oxford Countries. ofCapital Flows.(1994).Williamson Williamson. (1999). D. Press.135.708 Review ofWorld Economics 2003.62. Estimates (ed. D. J.C.