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Catching-up of new member countries and the real exchange rate appreciation

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 the Czech Republic Prague, 25 November 2008. CPI based real effective exchange rate (1995 = 100).

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Catching-up of new member countries and the real exchange rate appreciation

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  1. Catching-up of new member countries and thereal exchange rate appreciation László Halpern IEHAS, CEU, CEPR, WDI Ten Years of the Euro – Inspirations for the Czech Republic Prague, 25 November 2008

  2. CPI based real effective exchange rate (1995 = 100)

  3. Total economy unit labor costs based real effective exchange rate (1995 = 100)

  4. Facts • Significant relative real appreciation of most NMS - Cyprus, Malta, Slovenia excepted- price- labour cost • No difference according to the growth rate

  5. Interpretation • Initial undervaluation vs convergence • Explanatory factorsa) BSb) PPP

  6. BS • DefinitionsA) positive link bw income and price levelB) low nontradable productivityC) higher growth of tradable productivity • Classificationunchanged traded and nontraded sectors or activities • Endogenous tradabilitytrade/transportation costs • Measurement

  7. PPP • Sectors – composition effect • Products – aggregation level • Bar code data bw US and Canadalarge differences vanish fastsmall differences persistzero border-distance equivalent • QualityPrice increase: inflation + quality?

  8. Policy issues • Exchange rate regimeinflation vs nominal appreciation • Maastricht criteriasustainabilityvolatility • Real vs nominal convergence • Early vs late entry

  9. Conclusions • Real appreciation is an equilibrium phenomenon of catching-up • Different explanations: BS, quality, pricing more micro evidence is needed • Real and nominal convergence includes price level convergence • Euro is a must • Maastricht inflation criterion is inappropriate • Countries should minimize the welfare loss of transition from national currency to euro

  10. Balassa-Samuelson Effects Emerge: log Price Level versus log Per Capita Income

  11. Balassa-Samuelson Effects Emerge: log Price Level versus log Per Capita Income

  12. Balassa-Samuelson Effects Emerge: log Price Level versus log Per Capita Income

  13. Regression coefficient of price level and per capita income in the cross section of countries present in 1950 (N=53)

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