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Equilibrium Exchange Rates in New EU Members: External Imbalances versus Real Convergence

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  • Enrique Alberola
  • Daniel Navia

Abstract

In new EU members, the accumulation of net foreign liabilities has gone hand‐in‐hand with real exchange rate appreciations, contrary to intuition. This may be due to the induced effect that capital inflows on productivity and competitiveness (Balassa‐Samuelson effect). An extended empirical model comprising relative productivity and net foreign assets is well‐suited to capture this indirect, opposite effect of liabilities accumulation on the equilibrium exchange rates for the three largest economies: Poland, Hungary and Czech Republic. The model makes it possible to estimate equilibrium exchange rates and misalignments. Going forward, sustaining high productivity growth will be essential to ensure a smooth transition towards euro membership.

Suggested Citation

  • Enrique Alberola & Daniel Navia, 2008. "Equilibrium Exchange Rates in New EU Members: External Imbalances versus Real Convergence," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 605-619, August.
    • Handle: RePEc:bla:rdevec:v:12:y:2008:i:3:p:605-619
    DOI: 10.1111/j.1467-9361.2008.00475.x
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    References listed on IDEAS

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    1. Enrique Alberola & Daniel Navia, 2007. "Equilibrium exchange rates in the new EU members: external imbalances vs. real convergence," Working Papers 0708, Banco de España.
    2. Kateřina Šmídková & Ray Barrell & Dawn Holland, 2003. "Estimates of fundamental real exchange rates for the five eu pre-accession countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2003(4), pages 291-315.
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    4. Jörg Rahn, 2003. "Bilateral Equilibrium Exchange Rates of the EU Accession Countries against the Euro," Quantitative Macroeconomics Working Papers 20306, Hamburg University, Department of Economics.
    5. Sebastian Edwards, 1988. "The Determination of Equilibrium Real Exchange Rate," UCLA Economics Working Papers 508, UCLA Department of Economics.
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    8. repec:zbw:bofitp:2002_015 is not listed on IDEAS
    9. Ron Alquist & Menzie D. Chinn, 2002. "Productivity and the Euro-Dollar Exchange Rate Puzzle," NBER Working Papers 8824, National Bureau of Economic Research, Inc.
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    2. Przystupa, Jan, 2009. "Approaching a problem of the long-run real equilibrium exchange rate of Polish zloty while entering the ERM-2 and Euro zone," MPRA Paper 19549, University Library of Munich, Germany.
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