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Monetary or Exchange Rate Based Stabilization Programme

The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague. Monetary or Exchange Rate Based Stabilization Programme. Jaromír Šindel ECES.

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Monetary or Exchange Rate Based Stabilization Programme

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  1. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Monetary or Exchange Rate Based Stabilization Programme Jaromír Šindel ECES

  2. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Topics • Exchange rate and transition • Devaulation, appreaciation trends, ... • Nominal and Real Exchange Rate • Inflation differentials, exchange rate arrangements • Exchange rate and Interest Groups • Competitiveness, …

  3. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange rate regime classification • Floating rate regimes • Floating rate with inflation targeting • Managed exchange rates without explicit targets (“dirty float”) • Pure floating rates: No CB intervention • Fixed-rate regimes • Soft pegs: Explicit targets without full monetary adjustment • Exchange rate bands and target zones • Crawling pegs, corridors, and tabilias • Use of sterilized intervention • Hard pegs: Full use of automatic monetary adjustment • Currency unions • “Dollarization” • Currency boards

  4. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange rate regime classification Source: Holub, T.: Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience. ČNB (2004).

  5. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange rate and transition The theoretical paths of the real exchange rate in transitional economies Source: Frait, Komárek (1998)

  6. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Why RER appreciation? a)Improvement in the terms of trade • Exporters and domestic producers improve the quality of their products. b)Wages in the non-tradable good sectors rise relative to wages in the traded good sector are lower than those ones in the traditional industry-based tradable good sector. c)Initially wages far exceed productivity in the traded good sector • therefore the subsequent correction of these imbalances leads to a real appreciation as prices in nontradable goods absorb the rise in costs. d)The Ballasa and Samuelson effect.

  7. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Different Currencies

  8. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange rate and transition Monetary Regimes in the C&EE till 1997 Source: Kočenda (1998)

  9. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Different Currencies

  10. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Nominal and Real ER of C&EE Currencies against Germany Mark Nominal Czech republic Real Source: Kočenda (1998)

  11. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Nominal and Real ER of C&EE Currencies against Germany Mark Nominal Hungary Real Source: Kočenda (1998)

  12. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Nominal and Real ER of C&EE Currencies against Germany Mark Nominal Slovakia Real Source: Kočenda (1998)

  13. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Nominal and Real ER of C&EE Currencies against Germany Mark Nominal Poland Real Source: Kočenda (1998)

  14. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange rate and transition Alternative exchange rate scenarios Source: Frait, Komárek (1998)

  15. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Inflation differentials, nominal and real ER of the CEE countries Czech Republic Slovakia Source: Frait, Komárek (1998)

  16. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Inflation differentials, nominal and real ER of the CEE countries Hungary Poland Source: Frait, Komárek (1998)

  17. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Inflation differentials, nominal and real ER of the CEE countries Estonia Slovenia Source: Frait, Komárek (1998)

  18. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Following Generalisations about ER Path in Transition a) Significant nominal exchange rate depreciation - the exchange rate flexibility at the beginning of the 1990s - Slovenia, Hungary, Poland. b) fixed exchange rate - lower inflation (The Czech Republic, Slovakia, Estonia). c) A trend towards real appreciation can be found in all accession countries, even though with profound differences. The strongest one is confirmed in Estonia and significantly applies also to the Czech Republic, Poland and Slovakia. On the other hand, Hungary and Slovenia experienced only mild real appreciation. • Real appreciation in Czech R. (Inflation differential) x Poland (inflation caused by devaluation) d) convergence process - slow e) Since 1999 - switch from nominal exchange rate depreciation to nominal exchange rate stability or even appreciation Source: Frait, Komárek (1998)

  19. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Interest Groups and Exchange Rate Development • Consumers– imported goods (appreciation) x wages(competitiveness - depreciation); foreign assets (depreciation) x foreign debt (depreciation) • Government– foreign debt + foreign bonds (appreciation) x privatisation (not appreciation) • Exporters - competitiveness (depreciation) x ? Share of imported goods; Dual Economy? • Importers– appreciation • Domestic Firms– not appreciation (competitiveness against importers) • Foreign Investors– privatisation (depreciation) x assets (appreciation) • Multinational Corporation– stable ER, appreciation (if Czech firms are suppliers)

  20. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Competitiveness and ER appreciation – how to cope with it? • Improve image and export at a higher price • Increase labour productivity at constant wages • Pay lower wages at unchanged productivity • Shift from domestic production to more import • Shift production to another country • Exert political pressure against appreciation

  21. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Exchange Rate in CR? Who is Winner and who is Looser Development of the Czech Crown Source: Holub, T.: Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience. ČNB (2004).

  22. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Impossible Trinity • Fixed ER + Free Foreign Capital + Inflation (Interest Rates) • … IRtr - IReu = appreciation of tr´ currency • ? floating + inflation targeting – you can not allowed depreciation for increase the competitiveness

  23. The Puzzles of Central and Eastern EuropeTransformation and Integration ECES, Prague Lessons for future. • Design exchange rate arrangements for Cuba and China. • Goals, solutions, reasons, impact on interest groups.

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