Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues*

Abstract

In this paper we present an overview of a number of issues relating to the equilibrium exchange rates of transition economies of the former soviet bloc. 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 transition economies. Amongst our findings is the result that the trend appreciation usually observed for the exchange rates of these economies is affected by factors other than the usual Balassa-Samuelson effect, such as the behaviour of the real exchange rate of the open sector and regulated prices. We then consider three main sources of uncertainty relating to the implementation of an equilibrium exchange rate model, namely: differences in the theoretical underpinnings; differences in the econometric estimation techniques; and differences relating to the time series and cross-sectional dimensions of the data. The ensuing three-dimensional space of real misalignments is probably a useful tool in determining the direction of a possible misalignment rather than its precise size.JEL: C15, E31, F31, O11, P17.

The Contribution of Sectoral Productivity Differentials to Inflation in Greece

“…In Greece, the figures are similar at 12.3 and 4.5%, respectively. This compares with around 15-25% in most transition economies (Egert et al 2006 , Table A1). restaurants, along with transport, in the tradeables sector, even though parts of these sectors are clearly nontradeable.…”

“…As noted above, this approach differs from the predominant methodologies used in the literature (Sinn and Reutter 2001, are an exception although they use only labour productivity differentials). In a first approach, ad hoc relations are estimated to explain either relative prices (or inflation rates) between the two sectors as a function of, among other variables, some measure of relative productivities (Flek et al 2002;Mihaljek and Klau 2003;Katsimi 2004;Egert et al 2006). 9 A second approach estimates the real exchange rate as a function of relative productivities between the two sectors (Faria and Leon-Ledesma 2000;De Broek and Slok 2001;Fischer 2002) or simply the level of economic development Rault 2003, 2005).…”

“…Other goods and services are also subject to regulation and there is evidence that prices in these sectors behave differentially from other services (Lunnemann and Matha 2005;Egert et al 2006). In the euro area, administered prices (for both goods and services and whether they are "fully" or "mainly" administered) account for around 13.8% of the Harmonised Index of Consumer Prices (HICP).…”

“…For countries that are planning on joining a monetary union or some form of exchange rate system (such as ERM II), some measure of the extent of the BS effect may be helpful in setting the exchange rate at which entry will take place. Many papers deal with the extent of the BS effect in new EU Member States (De Broeck and Slok 2001;Arratibel et al 2002;Flek et al 2002;Fischer 2002;Mihaljek and Klau 2003;Crespo-Cuaresma et al 2005;Egert et al 2006). See Doyle et al (2001) for a review of earlier studies.…”

Exchange rate misalignment and inflation rate persistence: Evidence from Latin American countries

“…Thus, the long-term persistence in the real exchange rate is mirrored in the interest rate differential. 5 Perfect capital mobility is assumed and the starting point is the UIP condition (Égert, Halpern, & MacDonald, 2006), which indicates that if the expected returns on domestic and foreign equivalent securities are different, then the economic agents will borrow at the low rate and invest the proceeds at the high rate. This procedure will stop when both rates are equalised plus the expected rate of change in the exchange rate.…”