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

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. Copyright � 2008 The Authors. Journal compilation � 2008 Blackwell Publishing Ltd.

Oil and Non-Oil Determinants of Saudi Arabia’s International Competitiveness: Historical Analysis and Policy Simulations

“…For example, Refs. [119,120,136] theoretically showed that an increase in NFA does not necessarily lead to the appreciation of the national currency.…”

“…The authors of [136,137] discussed the failure of traditional theoretical models of the real exchange rates, such as the portfolio balance approach. They developed a theoretical model in which the sign of the NFA coefficient in the real exchange rate equation is not necessarily positive.…”

“…The studies of [136,137] were influential and have served as the theoretical underpinning of many other studies in which researchers have examined the REER in different countries. As we discussed in Appendix B, the authors built a theoretical framework in which the sign of the NFA coefficient in the real exchange rate equation is determined by the difference between the real international interest (r) and real economic growth rate of a domestic economy (g).…”

“…As a second robustness check, we calculated the cumulative sum of the Saudi current account and adjusted it with GDP values, both in current USD and based on WDI [65] data. We included it in the REER estimates as another measure of NFA, in line with the literature (see, e.g., [136]). This measure of NFA is negative and statistically significant in the DOLS, FMOLS, and CCR estimates, but it is negative and insignificant in the ADL estimate (results are available from the authors upon request).…”

Relevance of Exchange Rates on the Trade Imbalance in the Eurozone

“…Southern and peripheral states have run a large number of deficits due to overvalued currency misalignments as shown by Coudert et al (2013), Couharde and Mazier (2001), Alberola and Navia (2008) and others. But estimating an equilibrium exchange rate to avoid divergent rates is complicated by the structural change experience at the transition phase as Maeso-Fernandez et al (2006) claims, and by the larger inflation differentials as Honohan and Lane (1999) argue.…”