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

Inflation persistence: Is it similar in the new EU member states and the euro area members?

Inflation persistence has been put forward as one of the potential reasons of divergence among euro area members. It has also been proposed that the new EU Member States (NMS) may struggle with even higher persistence due to convergence factors. We argue that persistence may not be as different between the two country groups as one might expect. However, this empirical result can only be obtained if the adequate estimation methods, reflecting the scope of the convergence process the NMS went through, are applied. We emphasize that a time-varying mean models suggest similar or lower inflation persistence for the NMS compared to euro area countries while more traditional parametric statistical measures assuming a constant mean deliver substantially higher persistence estimates for the NMS than for the euro area countries. This difference is due to frequent breaks in inflation time series in the NMS. Structural persistence measures show that backward-looking behavior may be a more important component in explaining inflation dynamics in the NMS than in the euro area countries

Central banks' voting records, and future policy

We assess whether the voting records of central bank boards are informative about future monetary policy using data on five inflation targeting countries (the Czech Republic, Hungary, Poland, Sweden and the United Kingdom). We find that in all countries the voting records, namely the difference between the average voted-for and actually implemented policy rate, signal future monetary policy, making a case for publishing the records. This result holds even if we control for the financial market expectations; include the voting records from the period covering the current global financial crisis and examine the differences in timing and style of the voting record announcements

Leading indicators of crisis incidence: evidence from developed countries

We search for early warning indicators that could indicate important risks in developed economies. We therefore examine which indicators are most useful in explaining costly macroeconomic developments following the occurrence of economic crises in EU and OECD countries between 1970 and 2010. To define our dependent variable, we bring together a (continuous) measure of crisis incidence, which combines the output and employment loss and the fiscal deficit into an index of real costs, with a (discrete) database of crisis occurrence. In contrast to recent studies, we explicitly take into account model uncertainty in two steps. First, for each potential leading indicator, we select the relevant prediction horizon by using panel vector autoregression. Second, we identify the most useful leading indicators with Bayesian model averaging. Our results suggest that domestic housing prices, share prices, and credit growth, and some global variables, such as private credit, are risk factors worth monitoring in developed economies

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