The Monetary Approach to Exchange Rates in the Ceecs

Fidrmuc, Jarko; Cuaresma, Jesús Crespo; MacDonald, Ronald

doi:10.2139/ssrn.494762

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The Monetary Approach to Exchange Rates in the Ceecs

William Davidson Institute Working Paper No. 642

BOFIT Discussion Paper No. 14/2003

27 Pages Posted: 6 Feb 2004

See all articles by Jarko Fidrmuc

Jesús Crespo Cuaresma

University of Innsbruck - Department of Economic Theory, Economic Policy and Economic History

Ronald MacDonald

University of Strathclyde in Glasgow - Department of Economics; Government of New Zealand - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 2004

Abstract

A panel data set for six Central and Eastern European countries (the Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia) is used to estimate the monetary exchange rate model with panel cointegration methods, including the Pooled Mean Group estimator, the Fully Modified Least Square estimator and the Dynamic Least Square estimator. The monetary model is able to convincingly explain the long-run dynamics of exchange rates in CEECs, particularly when this is supplemented by a Balassa-Samuelson effect. We then use our long-run monetary estimates to compute equilibrium exchange rates. Finally, we discuss the implications for the accession of selected countries to the European Economic and Monetary Union.

Keywords: Exchange rates, monetary model, panel unit root tests, panel cointegration, EMU

JEL Classification: C33, F31, F36

Suggested Citation: Suggested Citation

Fidrmuc, Jarko and Crespo Cuaresma, Jesús and MacDonald, Ronald R., The Monetary Approach to Exchange Rates in the Ceecs (January 2004). William Davidson Institute Working Paper No. 642, BOFIT Discussion Paper No. 14/2003, Available at SSRN: https://ssrn.com/abstract=494762 or http://dx.doi.org/10.2139/ssrn.494762