The Real Exchange Rate Misalignment in the Five Central European Countries

The paper focuses on the developments of real exchange rates and their fundamental determinants in the five new EU Member States (Czech Republic, Hungary, Poland, Slovakia, and Slovenia). First, the approaches that can be used for estimation of equilibrium real exchange rates are briefly discussed. Then, we use well-established determinants of real exchange rates associated with the behavioral equilibrium exchange rate (BEER) approach to assess misalignments of the real exchange rates for the five new EU Member States. The estimates of the equilibrium exchange rates are obtained by means of both purely statistical approaches (HP filter, band-pass filter) and applying several multivariate estimation methods to our reduced-form BEER model. The results obtained indicate that the tendency towards appreciation of real exchange rates in the economies under consideration have been driven primarily by fundamental determinants.Exchange rate misalignments ; equilibrium exchange rates ; ERM II ; Central European Countries

Money Demand in an Open Transition Economy

This article offers an internationalized view of the demand for money as applied to the Czech Republic. The traditional money demand function, consisting purely of domestic variables, is extended to include certain foreign determinants that likely affect the demand for money in a small open transition economy. In this respect, both narrow and broad money are considered. Several estimation techniques, DOLS, DGLS, the Johansen method, and ARDL, are applied to increase robustness of the results acquired. The stability of the estimates obtained is tested to study changes in the estimated relations during the transition period. Finally, estimates of the possible effects of money market disequilibria on prices and output are presented. The results suggest that international variables are significant mainly in the context of broad money demand and that liquidity gaps significantly influence prices and output dynamics.

Currency Substitution in a Transitional Economy with an Application to the Czech Republic

Currency substitution appears to be an important issue affecting the design of monetary policy, especially in transition economies. This article strives to analyze the particular relevance of the currency substitution phenomenon in the Czech Republic. We initially discuss the role of currency substitution in small open economies in transition with some illustrations relating to the Czech Republic. We distinguish and analyze a locally and globally substituting currency from substituted ones and discuss the consequences of euroization. Further, we estimate a modified Branson and Henderson portfolio model for the Czech Republic. This provides a multiperspective approach to currency substitution in the broad sense. We attempt to improve the robustness of our estimations by applying several cointegration techniques, namely, the Johansen procedure, ARDL, DOLS, and ADL. Finally, we discuss the potential implications of currency and asset substitution according to our estimates for the Czech economy.