The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies

CEPII Paper No. 2004-15

Posted: 3 May 2005

See all articles by Balázs Égert

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

Amina Lahreche-Revil

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris; University of Amiens; Université Paris I Panthéon-Sorbonne - TEAM

Kirsten Lommatzsch

German Institute for Economic Research (DIW Berlin)

Date Written: November 2004

Abstract

This paper investigates the determinants of equilibrium real exchange rates for the new EU member states and candidate countries, relying on an asset model inspired by Aglietta et al. (1998) and Alberola et al. (1999, 2002). The impact of productivity gains on both the Balassa-Samuelson effect and the behaviour of the tradable real exchange rate is especially assessed. Subdividing the panel into sub-panels, we show that the B-S effect is a common feature to all economies, but that the tradable price-based real appreciation is a distinct feature of transition and emerging economies. We also show that in transition countries, a decrease in net foreign assets leads to an appreciation of the real exchange rate, instead of the depreciation predicted by theory. Comparing in-sample and out-of-sample estimates (in terms of the country coverage) of equilibrium exchange rates shows that these measures can yield different results, and could therefore be considered as complementary tools in judging misalignments

Keywords: Real equilibrium exchange rate, EU enlargement, Balassa-Samuelson effect, productivity, net foreign assets, out-of sample panel

JEL Classification: C15, E31, F31, O11, P17

Suggested Citation

Egert, Balazs and Lahreche-Revil, Amina and Lahreche-Revil, Amina and Lommatzsch, Kirsten, The Stock-Flow Approach to the Real Exchange Rate of CEE Transition Economies (November 2004). CEPII Paper No. 2004-15, Available at SSRN: https://ssrn.com/abstract=712584

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

Amina Lahreche-Revil

CEPII, Centre d'Etudes Prospectives et d'Info. Internationales, Paris ( email )

9 Rue Georges Pitard
Paris Cedex 15, F-75015
France
+33 1 53 68 55 61 (Phone)
+33 1 53 68 55 03 (Fax)

University of Amiens

Chemin du Thil
80025 Amiens Cedex 1
France

Université Paris I Panthéon-Sorbonne - TEAM

106-112 boulevard de l'hôpital
Cedex 13 Paris, P75647
France

Kirsten Lommatzsch

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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