Real Exchange Rates in Central and Eastern Europe: What Scope for the Underlying Fundamentals?

Posted: 4 May 2005

See all articles by Gilles Dufrénot

Gilles Dufrénot

GREQAM and Aix-Marseille School of Economics

Balázs Égert

Organization for Economic Co-Operation and Development (OECD); CESifo (Center for Economic Studies and Ifo Institute); Université Paris X Nanterre - Department of Economics; William Davidson Institute

Abstract

In this article we study the fundamental macroeconomic determinants of both the inflation-based (i.e., CPI) and the tradable price-based (i.e., PPI) real effective exchange rate in five acceding countries from Central and Eastern Europe, that is, the Czech Republic, Hungary, Poland, Slovakia, and Slovenia. The article is based on the combination of two approaches widely used for transition economies, namely, the behavioral equilibrium exchange rate and the structural vector autoregression. Indeed, a cointegration approach is adopted and an estimated vector error correction model attempts to connect in a structural way the real effective exchange rate to labor productivity, the relative price of nontradable goods, public deficit, and the current account position. Impulse-response functions are subsequently employed to investigate how shocks in the underlying fundamentals impact on the effective real exchange rates.

Keywords: Balassa-Samuelson effect, cointegration analysis, real exchange rates, transition

JEL Classification: F31, O11, P17

Suggested Citation

Dufrénot, Gilles and Egert, Balazs, Real Exchange Rates in Central and Eastern Europe: What Scope for the Underlying Fundamentals?. Available at SSRN: https://ssrn.com/abstract=713262

Gilles Dufrénot

GREQAM and Aix-Marseille School of Economics ( email )

Centre de la vieille Charité
2 rue de la Charité
13002 Marseille, 13236
France

Balazs Egert (Contact Author)

Organization for Economic Co-Operation and Development (OECD) ( email )

2 rue Andre Pascal
Paris Cedex 16, 75775
France

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Université Paris X Nanterre - Department of Economics

Nanterre Cedex, 92001
France

William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

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