Equilibrium Real Exchange Rates in Central Europe's Transition Economies: Knocking on Heaven's Door

The purpose of this paper is to study the equilibrium real exchange rate (ERER) in 5 CEE transition economies, namely the Czech Republic, Hungary, Poland, Slovakia and Slovenia. In so doing, we combine the fundamental equilibrium exchange rate (FEER) approach developed by Williamson (1994) with the behavioural equilibrium exchange rate (BEER) approach advocated by Clark and MacDonald (1998). Our analysis is based on the theoretical model proposed by Montiel (1999) which defines internal balance in terms of the relative price of nontradables and determines external balance in terms of net foreign assets. The empirical part of the paper consists in estimating a VAR-based 3-equation cointegration system. Long-term equilibrium values for relative prices are determined by using relative productivity and private consumption, while the current account, representing external balance, is linked to terms of trade and openness ([X+M]/GDP). In order to derive the ERER and then to compute total misalignment, we finally substitute the long-run values for external and internal balances in the simultaneously estimated cointegration relationship connecting the RER with relative prices and the current account. Results show that the gap between observed real exchange rate developments and the path of the equilibrium real exchange rate differs substantially among the 5 transition countries.http://deepblue.lib.umich.edu/bitstream/2027.42/39865/3/wp480.pd

Equilibrium Exchange Rates in Southeastern Europe, Russia, Ukraine and Turkey: Healthy or (Dutch) Diseased?

This paper investigates the equilibrium exchange rates of three Southeastern European countries (Bulgaria, Croatia and Romania), of two CIS economies (Russia and Ukraine) and of Turkey. A systematic approach in terms of different time horizons at which the equilibrium exchange rate is assessed is conducted, combined with a careful analysis of country-specific factors. For Russia, a first look is taken at the Dutch Disease phenomenon as a possible driving force behind equilibrium exchange rates. A unified framework including productivity and net foreign assets completed with a set control variables such as openness, public debt and public expenditures is used to compute total real misalignment bands.http://deepblue.lib.umich.edu/bitstream/2027.42/40156/3/wp770.pd

Nominal and Real Convergence in Estonia: The Balassa-Samuelson (dis)connection

The objective of the paper is to analyse the nominal and real convergence process in Estonia drawing on the Balassa-Samuelson (B-S) framework. A 15-sectoral breakdown for GDP and a 5-digit level CPI data disaggregation with over 260 items is used for the period 1993:Q1 to 2002:Q1 to show that the productivity differential is related to the GDP-deflator relative price of non-tradable goods in the long-run. Furthermore, the role of regulated prices in the CPI basket is also investigated: we show that excluding regulated prices makes it possible to detect a robust relationship between productivity and the relative price of market services in CPI. The B-S effect could have possibly contributed to CPI by a yearly average of 2% to 3% over the sample period, with 1% to 4% at the beginning of the period and 0,5% to 1% in 2000 and 2001. The potential long-run impact of the B-S effect in Estonia is estimated to amount to 1%-2% . The analysis of the influence of the B-S effect on the inflation differential and the real appreciation of the exchange rate against Finland, Sweden, Germany and the UK shows that whereas the inflation differential attributable to the B-S effect seems to be higher in the early 1990s, it explains better the real appreciation, which has occurred in recent years.http://deepblue.lib.umich.edu/bitstream/2027.42/39941/3/wp556.pd

Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?

This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector's productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern EuropeBalassa-Samuelson effect, productivity, inflation, real exchange rate, transition, South Eastern Europe, CIS, Turkey

Balassa-Samuelson Meets South Eastern Europe, the CIS and Turkey: A Close Encounter of the Third Kind?

This paper investigates the importance of the Balassa-Samuelson effect for two acceding countries (Bulgaria and Romania), two accession countries (Croatia and Turkey) and two CIS countries (Russia and Ukraine). The paper first studies the basic assumptions of the Balassa-Samuelson effect using yearly data, and then undertakes an econometric analysis of the assumptions on the basis of monthly data. The results suggest that for most of the countries, there is either amplification or attenuation, implying that any increase in the open sector’s productivity feeds onto changes in the relative price of non-tradables either imperfectly or in an over-proportionate manner. With these results as a background, the size of the Balassa-Samuelson effect is derived. For this purpose, a number of different sectoral classification schemes are used to group sectors into open and closed sectors, which makes a difference for some of the countries. The Balassa-Samuelson effect is found to play only a limited role for inflation and real exchange rate determination, and it seems to be roughly in line with earlier findings for the eight new EU member states of Central and Eastern Europe.http://deepblue.lib.umich.edu/bitstream/2027.42/40182/3/wp796.pd

Assessing Equilibrium Exchange Rates in CEE Acceding Countries: Can We Have DEER with BEER without FEER?

The ambition of this paper is to provide a thorough overview of equilibrium exchange rates in the acceding countries of Central and Eastern Europe. Therefore, theoretical models of equilibrium exchange rates are reviewed first and presented in a structured way. Subsequently, the existing body of the empirical literature aimed at investigating real exchange rate determination and possible misalignments is analyzed in a systematic manner. Finally, an attempt is made to sum up where we stand at the moment and what the major shortcomings of the approaches currently used in the literature are.http://deepblue.lib.umich.edu/bitstream/2027.42/40050/3/wp664.pd

Modelling Stock Returns in the G-7 and in Selected CEE Economies: A Non-linear GARCH Approach

This paper investigates conditional variance patterns in daily return series of stock market indices in the G-7 and 6 selected economies of Central and Eastern Europe. For this purpose, various linear and asymmetric GARCH models are employed. The analysis is conducted for Canada, France, Germany, Italy, Japan, the UK and the US for which the TSX, CAC-40, DAX-100, BCI, Nikkei-225, FTSE-100 and DJ-30 indices are respectively considered over the period 1987 to 2002. Furthermore, the official indices of Czech, Hungarian, Polish, Russian, Slovak and Slovene stock markets are also studied, i.e. the PX-50, BUX, WIGI, RFS, SAX-16 and SBI, respectively, over 1991/1995 to 2002. The estimation results reveal that the selected stock returns for the G-7 can be reasonably well modelled using linear specifications whereas the overwhelming majority of the stock indices from Central and Eastern Europe can be much better characterised using asymmetric models. In other words, stock markets of the transition economies exhibit much more asymmetry because negative shocks hit much harder these markets than positive news. It also turns out that these changes do not occur in a smooth manner but happen pretty brusquely. This corroborates the usual observation that emerging stock markets may collapse much more suddenly and recover more slowly than G-7 stock markets.http://deepblue.lib.umich.edu/bitstream/2027.42/40049/3/wp663.pd

Assessing equilibrium exchange rates in CEE acceding countries: Can we have DEER with BEER without FEER? A critical survey of the literature

The ambition of this paper is to provide a thorough overview of equilibrium exchange rates in the acceding countries of Central and Eastern Europe. Therefore, theoretical models of equilibrium exchange rates are reviewed first and presented in a structured way. Subsequently, the existing body of the empirical literature aimed at investigating real exchange rate determination and possible misalignments is analyzed in a systematic manner. Finally, an attempt is made to sum up where we stand at the moment and what the major shortcomings of the approaches currently used in the literature are.

Dutch disease in former Soviet Union: Witch-hunting?

This study seeks to determine the extent to which countries of the former Soviet Union are “infected” by the Dutch Disease. We take a detailed look at the functioning of the trans-mission mechanism of the Dutch Disease, i.e. the chains that run from commodity prices to real output in manufacturing. We complement this with two econometric exercises. First, we estimate nominal and real exchange rate models to see whether commodity prices are correlated with the exchange rate. Second, we run growth equations to analyse the possible effects of commodity prices and the dependency of economic growth on natural resources.Dutch disease; commodity prices; exchange rate; Commonwealth of Independent States

Equilibrium Real Exchange Rates in Central Europe's Transition Economies: Knocking on Heaven's Door

The purpose of this paper is to study the equilibrium real exchange rate (ERER) in 5 CEE transition economies, namely the Czech Republic, Hungary, Poland, Slovakia and Slovenia. In so doing, we combine the fundamental equilibrium exchange rate (FEER) approach developed by Williamson (1994) with the behavioural equilibrium exchange rate (BEER) approach advocated by Clark and MacDonald (1998). Our analysis is based on the theoretical model proposed by Montiel (1999) which defines internal balance in terms of the relative price of nontradables and determines external balance in terms of net foreign assets. The empirical part of the paper consists in estimating a VAR-based 3-equation cointegration system. Long-term equilibrium values for relative prices are determined by using relative productivity and private consumption, while the current account, representing external balance, is linked to terms of trade and openness ([X+M]/GDP). In order to derive the ERER and then to compute total misalignment, we finally substitute the long-run values for external and internal balances in the simultaneously estimated cointegration relationship connecting the RER with relative prices and the current account. Results show that the gap between observed real exchange rate developments and the path of the equilibrium real exchange rate differs substantially among the 5 transition countries.Transition, Central and Eastern Europe, Real Exchange Rate, Cointegration