Equilibrium Exchange Rates in the Transition: The Tradable Price-Based Real Appreciation and Estimation Uncertainty

This paper sets out to estimate equilibrium real exchange rates for the Czech Republic, Hungary, Poland, Slovakia and Slovenia. A theoretical model is developed that provides an explanation for the appreciation of the real exchange rate based on tradable prices in the acceding countries. Our model can be considered as a competing but also completing framework to the traditional Balassa-Samuelson model. With this as a background, alternative cointegration methods are applied to time series (Engle-Granger, DOLS, ARDL and Johansen) and to three small-size panels (pooled and fixed effect OLS, DOLS, PMGE and MGE), which leaves us with around 5,000 estimated regressions. This enables us to examine the uncertainty surrounding estimates of equilibrium real exchange rates and the size of the underlying real misalignments.http://deepblue.lib.umich.edu/bitstream/2027.42/40062/3/wp676.pd

Monetary policy aspects of the enlargement of the Euro area

There is some evidence that interdependencies among European banks have increased over the past 15 years and that the potential of systemic risks in banking has shifted from a national level to a European level. / Whereas wholesale financial markets are considered to be highly integrated within the European Union, integration in retail financial markets is less advanced, as a study on measuring financial market integration including an analysis of obstacles to financial market integration shows. --

Productivity Growth and the Real Appreciation of the Accession Countries' Currencies

In the process of catch-up growth the Czech Republic, Hungary and Poland have experienced a transition to the production of higher-quality goods. We incorporate this effect in a theoretical model of exchange rates and econometrically estimate its impact on equilibrium real exchange rates. We find support for our hypothesis that productivity increases in industry can be regarded as one source of the observed PPI-based real appreciation of the accession countries’ currencies. The productivity gains experienced during economic catch-up occur as higher-quality goods are produced and imply an increased export capacity as well as import substitution. To some extent real appreciation can therefore be viewed as an equilibrium phenomenon.relative productivity growth, catch-up growth, real exchange rates, transition economies

The Inflation Target of the ECB: Does the Balassa-Samuelson Effect Matter?

This paper argues that the Balassa-Samuelson effect is not of importance for the inflation target of the ECB. First, econometric tests of the Balassa-Samuelson effect suggest that its econometric significance is weak at best. Second, countries in the process of catching up require a real devaluation in the sector of tradable goods to maintain balance-of-payments equilibrium which counters the real appreciation resulting from a relative increase in service prices. It follows that whereas the Balassa-Samuelson effect could, at least in theory, be used to justify an inflation target well above zero, thedifference in productivity growth and thus the difference in the size of the Balassa-Samuelson effect between countries as such cannot.European Central Bank; EMU; international trade

Equilibrium exchange rates in the transition: The tradable price-based real appreciation and estimation uncertainty

This paper sets out to estimate equilibrium real exchange rates for the Czech Republic, Hungary, Poland, Slovakia and Slovenia. A theoretical model is developed that provides an explanation for the appreciation of the real exchange rate based on tradable prices in the acceding countries. Our model can be considered as a competing but also completing framework to the traditional Balassa-Samuelson model. With this as a background, alternative cointegration methods are applied to time series (Engle-Granger, DOLS, ARDL and Johansen) and to three small-size panels (pooled and fixed effect OLS, DOLS, PMGE and MGE), which leaves us with around 5,000 estimated regressions. This enables us to examine the uncertainty surrounding estimates of equilibrium real exchange rates and the size of the underlying real misalignments.real exchange rate; equilibrium exchange rate; tradable prices; transition; cointegration

Bond Yield Compression in the Countries Converging to the Euro

We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.http://deepblue.lib.umich.edu/bitstream/2027.42/40185/3/wp799.pd

Equilibrium Exchange Rates in the Transition: The Tradable Price-Based Real Appreciation and Estimation Uncertainty

This paper sets out to estimate equilibrium real exchange rates for the Czech Republic, Hungary, Poland, Slovakia and Slovenia. A theoretical model is developed that provides an explanation for the appreciation of the real exchange rate based on tradable prices in the acceding countries. Our model can be considered as a competing but also completing framework to the traditional Balassa-Samuelson model. With this as a background, alternative cointegration methods are applied to time series (Engle-Granger, DOLS, ARDL and Johansen) and to three small-size panels (pooled and fixed effect OLS, DOLS, PMGE and MGE), which leaves us with around 5,000 estimated regressions. This enables us to examine the uncertainty surrounding estimates of equilibrium real exchange rates and the size of the underlying real misalignments.Real Exchange Rate, Equilibrium Exchange Rate, Tradable Prices, Transition, Cointegration

Bond Yield Compression in the Countries Converging to the Euro

We demonstrate that bond yield compression is under way in the countries converging to the euro and that German yields are significant drivers of local currency yields. Based on the evidence from Poland, Hungary and the Czech Republic, we conclude that these new Member States of the European Union are ready to adopt the euro without risking a disruptive shock to their financial stability. This message transpires from investigating the daily volatility dynamics of local bond yields as a function of German yields, conditional on changes in local term spreads, exchange rates and adjustments to central bank reference rates. Similar results of high sensitivity of local currency bond yields to changes in German yields are obtained from testing monthly series of macroeconomic fundamentals. These findings provide evidence of the potential usefulness of term spreads as indicators of monetary convergence.term spread, term premium, yield compression, monetary convergence, new Member States, EMU, conditional volatility, asymmetric GARCH models

Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges?

We find that productivity gains in tradables cause an appreciation of the real exchange rate via both tradable and nontradable prices in the CEE-5 and have no affect in the Baltic countries, while they lead to a depreciation of the real exchange rate of tradables in OECD economies that overcompensates the appreciation due to nontradable prices. Rising net foreign liabilities lead to a real appreciation in the Baltic countries instead of the expected depreciation found in OECD and CEE-5 countries. These differences are due to the different impact of the fundamentals on the real exchange rate depending on the time horizon studied.http://deepblue.lib.umich.edu/bitstream/2027.42/57239/1/wp859 .pd

Real Exchange Rates in Small Open OECD and Transition Economies: Comparing Apples with Oranges?

We find that productivity gains in tradables cause an appreciation of the real exchange rate via both tradable and nontradable prices in the CEE-5 and have no affect in the Baltic countries, while they lead to a depreciation of the real exchange rate of tradables in OECD economies that overcompensates the appreciation due to nontradable prices. Rising net foreign liabilities lead to a real appreciation in the Baltic countries instead of the expected depreciation found in OECD and CEE-5 countries. These differences are due to the different impact of the fundamentals on the real exchange rate depending on the time horizon studied.real exchange rate, equilibrium exchange rate, productivity, tradables, Balassa-Samuelson effect