Towards the Estimation of Equilibrium Exchange Rates for CEE Acceding Countries: Methodological Issues and a Panel Cointegration Perspective

49 Pages Posted: 15 Oct 2004

See all articles by Francisco Maeso Fernández

Francisco Maeso Fernández

University of Murcia - Department of Applied Economics

Chiara Osbat

European Central Bank (ECB)

Bernd Schnatz

European Central Bank (ECB)

Date Written: April 2004

Abstract

This paper provides a discussion of methodological issues relating to the estimation of the long-run relationship between exchange rates and fundamentals for Central and Eastern European acceding countries, focusing on the so-called behavioural equilibrium exchange rate (BEER) approach. Given the limited availability and reliability of data as well as the rapid structural change acceding countries have been undergoing in the transition phase, this paper identifies several pitfalls in following the most straightforward and standard econometric procedures. As an alternative, it looks at the merits of a two-step strategy that consists of estimating the relationship between exchange rates and economic fundamentals in a panel cointegration setting - using a sample which excludes acceding countries - and then extrapolating the estimated relationships to the latter. While focusing on the first step of such a strategy, the paper also delves into discussing technical aspects underlying the extrapolation stage. As a result, the paper endows the reader with the methodological and empirical ingredients for computing equilibrium exchange rates for acceding countries, providing estimates for the long-run coefficients between real exchange rates and economic fundamentals and a discussion of how to apply these results to acceding countries data.

Keywords: Equilibrium exchange rates, Acceding Countries, Panel Cointegration, BEER

JEL Classification: C23, F31

Suggested Citation

Maeso Fernández, Francisco and Osbat, Chiara and Schnatz, Bernd, Towards the Estimation of Equilibrium Exchange Rates for CEE Acceding Countries: Methodological Issues and a Panel Cointegration Perspective (April 2004). ECB Working Paper No. 353. Available at SSRN: https://ssrn.com/abstract=533022

Francisco Maeso Fernández (Contact Author)

University of Murcia - Department of Applied Economics ( email )

3010 Murcia
Spain
+34 968363718 (Phone)

Chiara Osbat

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6821 (Phone)
+49 69 1344 6000 (Fax)

Bernd Schnatz

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
069-1344-6517 (Phone)

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