Working Paper: CEPR ID: DP1145
Authors: Laszlo Halpern; Charles Wyplosz
Abstract: This paper tests two central assumptions regarding transforming economies: that the initial exchange rates were strongly undervalued and that the subsequent evolution of the real exchange rate was both a response to the initial undervaluation and an equilibrium real appreciation. The econometric results support both assumptions. The degree of initial overvaluation varies from country to country, ranging from very little in the case of Hungary to more than 100% in most other countries. It is estimated using a sample of 49 high-and middle-income countries, with five observations per country (1970, 1975, 1980, 1985, 1990). The subsequent process of equilibrium appreciation is estimated with pooled data for six countries (Croatia, the Czech Republic, Hungary, Poland, Slovakia and Slovenia) covering the period after inflation stabilization.
Keywords: exchange rate; transition; overvaluation; central and eastern europe
JEL Codes: E63; F31; P41; P52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| initial exchange rate undervaluation (F31) | subsequent real exchange rate adjustments (F31) |
| initial exchange rate undervaluation (F31) | real appreciation (D46) |
| real appreciation (D46) | correction of initial undervaluation (D46) |
| real appreciation (D46) | changes in equilibrium real exchange rate (F31) |
| nominal exchange rate changes (F31) | real exchange rates (F31) |
| structural adjustments and productivity improvements (O49) | real appreciation (D46) |
| increases in real producer wages (J39) | real appreciation (D46) |