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Real Convergence of the Czech Economy. Major Issues for Euro Adoption. Tomáš Holub. Conference „Deset let eura – inspirace pro ČR “ Prague , 25 November 2008. Outline. How far have we progressed with convergence; Real appreciation trend; Exchange rate or inflation channel;
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Real Convergence of the Czech Economy Major Issues for Euro Adoption Tomáš Holub Conference „Deset let eura – inspirace pro ČR “ Prague, 25 November 2008
Outline • How far have we progressed with convergence; • Real appreciation trend; • Exchange rate or inflation channel; • Experience of the eurozone members; • Real exchange rate appreciation and euro adoption; • Summary and conclusion.
Real convergence so far much stronger in terms of the relative price level than the GDP level; Czech Republic gradually losing its outlier status (2008 price level around 70 % of EU-13). Real Convergence Since 1995
Real appreciation by far exceeding the GDP growth differential in CZ, HU, SK, and to some extent in PL; Only SI is different. Real Convergence – Regional Comparison
Real Exchange Ratevis-à-vis the Eurozone • The CZK‘s real appreciation since 1993 the second strongest in the region, after SKK.
Exchange rate channel starts to dominatewith a floating exchange rate once the disinflation is achieved; HU: inflation channel clearly dominant. Exchange Rate or Inflation Channel? HU CZ PL SK Source: Komárek, Koprnická, 2008
Inflation channel dominant under fixed exchange rate regime (if fixed against EUR –see LT a LV). Exchange Rate or Inflation Channel? LT EE LV SI Source: Komárek, Koprnická, 2008
Experience of Current Eurozone Members (1980-2007) • Some convergence in 6 countries out of EU-12.
Experience of Current Eurozone Members (1980-2007) • Before euro adoption, price convergence went more than fully through the inflation channel with depreciating ERs; • Except of AT, euro adoption thus improved price stability.
Experience of Eurozone (1999-2007) • Inflation differentials after the euro adoption: 55-60 % of these can be explained by price convergence.
Real Appreciation and Inflation Differential After Euro Adoption • The room for price level convergence is still significant; • Estimates around 1.5 – 3.0 a year for most countries. (PCt= 31.95 + 0.71 GDPPPP,t + 0.92 AR(1)t )
Summary and Conclusions • Most countries in the region have experienced faster catch-up in terms of the price level than the GDP; • The Czech Republic is unique in having exploited the ER channel more than the inflation differential; • None of the current eurozone members followed this route; • But this does not mean they escaped from the price-convergence logic after the euro adoption; • The estimated future real equilibrium appreciation for the countries in our region ≈ 1.5 – 3.0 a year; • How serious is this problem (inflation differential, low or even negative real interest rates, etc.)?