Estimation of equilibrium exchange rate in CEECs: a rolling window approach

The literature on equilibrium exchange rates for the Central and Eastern European Countries has blossomed in the recent years. The multitude of studies is justified by the fact that, in order to join the Eurozone, these countries have to participate to the ERM II. Therefore, the CEECs are forced to identify a sustainable central parity of their currency to the euro. Accordingly, different approaches and methods have been developed and different variables applied, providing information on the equilibrium exchange rate. However, the empirical researches reached heterogeneous and sometimes contradictory results. We consider that the outcomes of different studies are influenced by the fact that the periods when the currencies were overvalued or undervalued alternated. Therefore, the level of the constructed equilibrium exchange rate might be biased by the choice of the base period. To demonstrate this, we have calculated the real exchange rate based on the PPP theory and we have applied a rolling window approach. Afterwards, we have used a behavioral equilibrium exchange rate (BEER) for a panel of data corresponding to the eight CEECs, candidates to EMU. Our results show that in Latvia and Romania, the nominal exchange rate seems undervalued in comparison with the equilibrium exchange rate, while for the Czech Republic the exchange rate appears as overvalued.