Working Paper: CEPR ID: DP4809
Authors: Balzs Gert; Lszl Halpern; Ronald MacDonald
Abstract: In this Paper we present an overview of a number of issues relating to the equilibrium exchange rates of the new EU member states from Central and Eastern Europe. In particular, we present a critical overview of the various methods available for calculating equilibrium exchange rates and discuss how useful they are likely to be for the new member states. We then consider some methodological issues, relating to the implementation of an equilibrium exchange rate model for new member states, such as the speed with which equilibrium exchange rates change and issues of implementation. Finally, we present an overview of the various extant measures of equilibrium that have been calculated for the new member states.
Keywords: Balassa-Samuelson effect; Equilibrium exchange rate; Purchasing power parity; Tradable prices; Transition economies
JEL Codes: C15; E31; F31; O11; P17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Productivity differentials (O49) | Relative price of nontradables (F16) |
| Relative price of nontradables (F16) | Equilibrium exchange rates (F31) |
| Productivity differentials (O49) | Real appreciation of currency (F31) |
| Wages equalized across sectors (J39) | Relative price of nontradables (F16) |
| Higher productivity growth in tradable sector (O49) | Higher nontradable prices (P22) |
| Higher nontradable prices (P22) | Real appreciation of currency (F31) |
| Initial undervaluations of currencies (F31) | Adjustments towards equilibrium exchange rates (F31) |