Sustainable real exchange rates in the new EU Member States: Is FDI a mixed blessing?

This study analyses the various macroeconomic opportunities and challenges created by the foreign direct investment (FDI) inflows in the new member states. This essay focuses on the various macroeconomic opportunities and challenges created by the foreign direct investment (FDI) inflows in the new member states (NMS). We question whether the macroeconomic performance of the NMS is furthered through the FDI's overall positive impact on the trade balance or whether it can actually worsen the performance. Our findings suggest that in some NMS the integration gain, foreseen by the financial markets, may be reflected in a sustainable appreciation of the real exchange rate. Such real appreciation is in most cases moderate enough to allow for smooth nominal convergence required for to the euro adoption. In some cases, however, this appreciation is very fast, especially in the NMS with a low net external debt and massive FDI inflows, making it challenging to fulfill the Maastricht criteria. The Maastricht criteria may be difficult to meet also in those NMS where FDI has been channeled predominantly into services, housing construction, or nontradable sectors in general. In these countries we observe increasing net external debt without a corresponding improvement in the trade balance and these economies might be required to depreciate their currencies in real terms to sustain the external balance.Foreign direct investment, new EU member states, euro adoption, Sustainable Real Exchange Rates in the New EU Member States: Is FDI a Mixed Blessing?, Economic Papers

Comparison of monetary policy rules using a Czech economy model

Since koruna turbulence in 1997, many statements have been made about suitable strategies for the Czech monetary policy. This work tries to give a model background for such policy debate. Analogously to preceding research on policy rules, the Czech economy is represented with a small model. Three alternative monetary strategies are approximated by policy rules. Several specific features of the Czech economy (such as large openness, corrections of administered prices and nominal convergence) are reflected in the model. Specifically, during model simulations, major shocks come from external prices and price corrections. Similarly, policy rules mirror strategies of monetary policy that are relevant for the Czech experience. For example, standard inflation targeting rule is modified with a concept of imported equilibrium interest rate. Alternative definitions of aggressiveness of the exchange rate rule correspond to changes in width of the band. Model simulations can be used for comparison of efficiency of rules in ensuring convergence to low inflation and their costs in terms of output, interest rate and trade balance volatility. Three alternative policy rules are compared in a model framework. Results of simulations can provide a background for policy debate on properties of alternative strategies of the Czech monetary policy. Specific features of a period of transition have been reflected in the extended set of measures when comparing the rules. The work presents results of simulations including tests of sensitivity to calibration, and summarises conclusions. First, rules that combine several targets are inferior to inflation and exchange-rate rules since they are less efficient in ensuring nominal convergence and more costly in terms of output, interest rate and external balance volatility. Second, exchange-rate rules are less efficient and less costly in terms of output volatility.Institut ekonomických studiíFakulta sociálních vě

Estimating the fundamental equilibrium exchange rate for the czech economy

When currency turbulences hit the CZK in May 1997, the research presented in this paper had been nearly finished. It tried to contribute to the discussion of sustainability of external development of the Czech economy by comparing signals given by a set of indicators to signals implied by the estimates of fundamental equilibrium exchange rate (FEER) for the CZK. Interestingly, the method of indicators did not give an unambiguous answer. Specifically, when applied to the Czech data, debt as well as solvency indicators did not imply a danger of external crisis. Financial indicators with a shorter-time horizon did send some warning signals. Indicators of competitiveness watched by large international investors considered the CZK to be overvalued since 1995. In order to gain more decisive conclusion concerning the danger of external crisis, the structural approach was employed. The model simulations of the FEER indicated that the CZK became overvalued in 1996 with respect to the central parity of the exchange-rate band. This conclusion was quite robust taking into account behavior of both the real economy as well as decisive external financial flows. The Czech experience with currency turbulences provided an unintentional measure on how good the warning indicators were. The FEER methodology was able to conclude that there was a need for a policy shift in the end of 1996 although it did not give the clear warning that the exchange-rate regime itself was not sustainable.fundamental equilibrium exchange rate, external imbalance, Czech economy

Targeting inflation under uncertainty:policy makers's perspective

Reflecting the further progress of the methodological debate inside the CNB, this paper aims to provide suggestions to policy makers as to which methods could be used to assess uncertainty during the monetary policy decision process. Suggestions for each stage of the process are summarised in the final chapter. These take into account the findings of surveys of three very distinct sources – the economic literature on monetary policy under uncertainty, the managerial literature on decision analysis, and the real-life strategies of five central banks

What is the optimal rate of disinflation to be targeted in the czech economy?

What is the optimal rate of disinflation to be targeted during transition? This question has attracted more attention under the inflation-targeting regime than under other monetary strategies, because explicit inflation targets are used to anchor expectations. These targets signal what rate of disinflation is targeted by policymakers. Deciding what level of disinflation is least costly in terms of the volatility of important economic variables is not straightforward, since costs depend on monetary transmission in a given economy. In this paper, a small, aggregate, forward-looking model of Czech monetary transmission is used to compare the consequences of different disinflation strategies that are approximated with alternative policy rules. Our results suggest that trajectories with a more linear tendency are superior to trajectories that postpone disinflation or reduce inflation suddenly.Czech economy, transition, optimal disinflation, simulations

Exchange rate in the new EU accession countries:What have we learned from the forerunners?

This study deals with the economic problems associated with the European Union. Estimation and simulation of sustainable real exchange rates in some of the new EU accession countries point to potential difficulties in sustaining the ERM2 regime if entered too soon and with weak policies. According to the estimates, the Czech, Hungarian, and Polish currencies were overvalued in 2003

What is the appropriate rate of disinflation to be targeted in the Czech economy?

This work deals with the inflation of the Czech Republic in comparison with countries and values ​​of the European Union. It discusses the changing targets after 1997 and possible solutions disinflation

The Demand-for-money Function

The stability and credibility of a national currency is one of the key factors for successful national economic development. Knowledge of the long-run demand for money helps the monetary authorities to determine what is the rate of growth of the money stock that would not lead to an excessive money supply and, consequently, would not accelerate inflation. Also, it allows to avoid the costs incurred by the central bank in case it has to curb down an excess demand for money, and in doing so contribute to economic recession. The possible costs of mistakes in targeting the money stock are likely to be much higher for a transitional economy: a trade-off between transitional inflation and recession is much more difficult to discern than in a standard market economy, and credibility once lost is extremely hard to re-gain.

Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us

Computed fundamental real exchange rates in four new EU members point to difficulties in jointly entering the ERM II soon after the EU entry. Three currencies out of the four were overvalued prior to EU entry. Computations suggest that it is unlikely that the Czech, Hungarian and Polish economies will maintain low inflation during 2004 - 2010 and at the same time keep their currencies within the ERM II easily. Moreover, the experience of Greece, Portugal and Spain - viewed through fundamental real exchange rate goggles - indicates more stable real exchange rate paths and smaller currency misalignments prior to euro adoption than can be expected from the newcomers in the forthcoming years. If the newcomers sail too fast towards the euro, their sailing may not be as smooth as that of the front runners.fundamental real exchange rates, foreign direct investment, euro, acceding economies

Sustainable real exchange rates in the new EU member states:what did the great recession change

Writers find that real misalignments in several countries with pegged exchange rates and excessive external liabilities widened relative to earlier estimates. While countries with balanced net trade positions may experience sustainable appreciation during 2010–2014, several currencies are likely to require real depreciation to maintain sustainable net external debt