catching-up of new member countries and the real exchange rate appreciation lászló halpern iehas,...
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![Page 1: Catching-up of new member countries and the real exchange rate appreciation László Halpern IEHAS, CEU, CEPR, WDI Ten Years of the Euro – Inspirations for](https://reader036.vdocuments.mx/reader036/viewer/2022081811/56649e9e5503460f94b9f9df/html5/thumbnails/1.jpg)
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
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601996 1998 2000 2002 2004 2006 2008
EA12 MaltaEstonia LatviaLithuania RomániaBulgária
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751996 1998 2000 2002 2004 2006 2008
EA12 AustriaFinland IrelandSpain PortugalGreece
CPI based real effective exchange rate (1995 = 100)
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601996 1998 2000 2002 2004 2006
EA12 Czech Rep.Hungary PolandSlovakia SloveniaCyprus
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160
120
80
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1996 1998 2000 2002 2004 2006
EA12 MaltaEstonia LatviaLithuania RomániaBulgária
130
120
110
100
90
80
70
130
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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)