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Catching-up of new member countries and the real
exchange rate appreciation
László HalpernIEHAS, CEU, CEPR, WDI
Ten Years of the Euro – Inspirations for the Czech Republic
Prague, 25 November 2008
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601996 1998 2000 2002 2004 2006 2008
EA12 Czech Rep.Hungary PolandSlovakia SloveniaCyprus
200
180
160
140
120
100
80
60
200
180
160
140
120
100
80
601996 1998 2000 2002 2004 2006 2008
EA12 MaltaEstonia LatviaLithuania RomániaBulgária
120
115
110
105
100
95
90
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80
75
120
115
110
105
100
95
90
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80
751996 1998 2000 2002 2004 2006 2008
EA12 AustriaFinland IrelandSpain PortugalGreece
CPI based real effective exchange rate (1995 = 100)
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100
80
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160
140
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100
80
601996 1998 2000 2002 2004 2006
EA12 Czech Rep.Hungary PolandSlovakia SloveniaCyprus
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200
160
120
80
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200
160
120
80
1996 1998 2000 2002 2004 2006
EA12 MaltaEstonia LatviaLithuania RomániaBulgária
130
120
110
100
90
80
70
130
120
110
100
90
80
701996 1998 2000 2002 2004 2006
EA12 AustriaFinland IrelandSpain PortugalGreece
Total economy unit labor costs based real effective exchange rate (1995 = 100)
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Facts
1) Significant relative real appreciation of most NMS - Cyprus, Malta, Slovenia excepted- price- labour cost
2) No difference according to the growth rate
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Interpretation
1) Initial undervaluation vs convergence
2) Explanatory factorsa) BSb) PPP
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BS
1) DefinitionsA) positive link bw income and price levelB) low nontradable productivityC) higher growth of tradable productivity
2) Classificationunchanged traded and nontraded sectors or activities
3) Endogenous tradabilitytrade/transportation costs
4) Measurement
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PPP
1) Sectors – composition effect
2) Products – aggregation level
3) Bar code data bw US and Canadalarge differences vanish fastsmall differences persistzero border-distance equivalent
4) QualityPrice increase: inflation + quality?
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Policy issues
1) Exchange rate regimeinflation vs nominal appreciation
2) Maastricht criteriasustainabilityvolatility
3) Real vs nominal convergence
4) Early vs late entry
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Conclusions
1) Real appreciation is an equilibrium phenomenon of catching-up
2) Different explanations: BS, quality, pricing more micro evidence is needed
3) Real and nominal convergence includes price level convergence
4) Euro is a must5) Maastricht inflation criterion is inappropriate6) Countries should minimize the welfare loss of
transition from national currency to euro
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Balassa-Samuelson Effects Emerge: log Price Level versus log Per Capita Income
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Balassa-Samuelson Effects Emerge: log Price Level versus log Per Capita Income
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Balassa-Samuelson Effects Emerge: log Price Level versus log Per Capita Income
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Regression coefficient of price level and per capita income in the cross section of countries present in 1950 (N=53)
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