Alberola, Enrique, Susana Cervero, Humberto Lopez, and Angel Ubide, 1999, “Global Equilibrium Exchange Rates: Euro, Dollar, “Ins,” “Outs,” and Other Major Currencies in a Panel Cointegration Framework,” IMF Working Paper 99/175 (Washington: International Monetary Fund).
- Search Google Scholar
- Export Citation
)| false Alberola, Enrique, Susana Cervero, Humberto Lopez, and Angel Ubide, 1999, “ Global Equilibrium Exchange Rates: Euro, Dollar, “Ins,” “Outs,” and Other Major Currencies in a Panel Cointegration Framework,” IMF Working Paper 99/175( Washington: International Monetary Fund).
Balassa, Bela, 1964, “The Purchasing Power Parity Doctrine: A Reappraisal,” Journal of Political Economy, Vol. 72, No. 6, pp. 584–596.
Bayoumi, Tamim, Takatoshi Ito, Peter Isard, and Stephen Symansky, 1996, Exchange Rate Movements and Their Impact on Trade and Investment in the APEC Region, IMF Occasional Paper No. 145 (Washington: International Monetary Fund).
Begg, David, László Halpern, and Charles Wyplosz, 1999, Monetary and Exchange Rate Policies, EMU and Central and Eastern Europe, Forum Report of the Economic Policy Initiative No. 5 (London: CEPR).
Calderón, César, 2000, “Equilibrium Real Exchange Rates in the New Open Economy Macroeconomics,” (unpublished manuscript; Rochester: University of Rochester).
Canzoneri, Matthew, Robert Cumby, and Behzad Diba, 1999, “Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries,” Journal of International Economics, Vol. 47, pp. 245–266.
Chinn, Menzie and Louis Johnston, 1997, “Real Exchange Rate Levels, Productivity and the Real Exchange Rate in the Long Run: Evidence for a Panel of OECD Countries,” IMF Working Paper 97/66 (Washington: International Monetary Fund).
Cipriani, Marco, 2000, “The Balassa-Samuelson Effect in Transition Economies,” (unpublished manuscript; Washington: International Monetary Fund).
De Broeck, Mark, and Vincent Koen, 2000, “The Great Contractions in Russia, the Baltics, and Other Countries of the Former Soviet Union: A View from the Supply Side,” in International Monetary Fund, World Economic Outlook Supporting Studies, (Washington), pp. 161–183.
- Search Google Scholar
- Export Citation
)| false De Broeck, Mark, and Vincent Koen, 2000, “ The Great Contractions in Russia, the Baltics, and Other Countries of the Former Soviet Union: A View from the Supply Side,” in International Monetary Fund, World Economic Outlook Supporting Studies, ( Washington), pp. 161– 183.
De Gregorio, Jose and Holger Wolf, 1994, “Terms of Trade, Productivity, and the Real Exchange Rate,” NBER Working Paper No. 4807 (Cambridge, MA: NBER).
Frenkel, Jacob and Michael Mussa, 1985, “Asset Markets, Exchange Rates, and the Balance of Payments,” Chapter 14 in Gene Grossman and Kenneth Rogoff (eds.), Handbook of International Economics, Vol. 2 (Amsterdam: North Holland), pp. 679–747.
Grafe, Clemens, and Charles Wyplosz, 1999, “A Model of the Real Exchange Rate Determination in Transition Economies,” in Mario Bléjer and Marko Škreb, Balance of Payments, Exchange Rates, and Competitiveness in Transition Economies (Boston: Kluwer Academic Publishers), pp. 159–184.
- Search Google Scholar
- Export Citation
)| false Grafe, Clemens, and Charles Wyplosz, 1999, “ A Model of the Real Exchange Rate Determination in Transition Economies,” in Mario Bléjerand Marko Škreb, Balance of Payments, Exchange Rates, and Competitiveness in Transition Economies( Boston: Kluwer Academic Publishers), pp. 159– 184.
Halpern, László, and Charles Wyplosz, 1997, “Equilibrium Exchange Rates in Transition Economies,” IMF Staff Papers, Vol. 44 (December), pp. 430–61.
Jakab, Zoltán, and Mihály András Kovács, 1999, “Determinants of Real-Exchange Rate Fluctuations in Hungary,” NBH Working Paper 1999/6.
Krajnyák, Kornélia, and Jeromin Zettelmeyer, 1998, “Competitiveness in Transition Economies: What Scope for Real Appreciation?” IMF Staff Papers, Vol. 45 (June), pp. 309–62.
MacDonald, Roland, 1998, “What Do We Really Know About Real Exchange Rates?” Oesterreichische Nationalbank Working Paper No. 28.
Maliszewska, Maryla, 1997, “Modelling Real Exchange Rate in Transition: The Case of Poland and Romania,” CASE Foundation, S&A No. 131.
Mussa, Michael, 1984, “The Theory of Exchange Rate Determination,” in John Bilson and Richard Marston (eds.), Exchange Rate Theory and Practice, NBER Conference Report (Chicago: Chicago University Press), pp. 13–58.
Panagiotis Liargovas, 1999, “An Assessment of Real Exchange Rate Movements in the Transition Economies of Central and Eastern Europe,” Post-Communist Economies, Vol. 11, No. 3, pp. 299–318.
Pesaran, Hashem, and Ron Smith, 1995, “Estimating Long-run Relationships from Dynamic Heterogeneous Panels,” Journal of Econometrics, Vol. 68, No. l, pp. 79–113.
Pesaran, Hashem, Yongcheol Shin, and Ron Smith, 1999, “Pooled Mean Group Estimation of Dynamic Heterogeneous Panels,”Journal of the American Statistical Association, Vol. 94, No. 446, pp. 621–634.
Philipp, Rother, 2000, “The Impact of Productivity Differentials on Inflation and the Real Exchange Rate: An Estimation of the Balassa-Samuelson Effect in Slovenia,” IMF Staff Country Report 00/56 (Washington: International Monetary Fund), pp. 26–38.
Szapáry, György, 2000, “Maastricht and the Choice of Exchange Rate Regime in Transition Countries During the Run-up to EMU,” NBH Working Paper 2000/7.
We would like to thank Enrique Alberola-lla, Tamim Bayoumi, Peter Christoffersen, Hali Edison, Juha Kähkönen, Byung-Yeon Kim, Ronald MacDonald, and participants in an internal seminar at the IMF and in a workshop at BOFIT, Helsinki, for comments and suggestions.
Applications of the Balassa-Samuelson approach to non-transition countries can be found in, for example, Alberola, Cervero, Lopez, and Ubide (1999), Bayoumi, Isard, Ito, and Symansky (1996), Calderón (2000), Canzoneri, Cumby, and Diba (1999), Chinn and Johnston (1997), De Gregorio and Wolf (1994); for a literature survey on this empirical work, see MacDonald (1998).
For a descriptive study of real exchange rate movements in six transition countries in the early transition years, see Liargovas (1999).
A study by Cipriani (2000) is also close to this paper, but it focuses on aggregate inflation rather than the real exchange rate. Cipriani examines the presence of a Balassa-Samuelson effect in ten EU accession countries for the period 1995–99, and finds that a one percent increase in relative labor productivity generates, on average, a 0.7 percent increase in the relative price of nontradables.
The Halpern and Wyplosz paper also analyses in more detail the forces that brought the real exchange rate back to its equilibrium path. Based on a sample of monthly data for the period 1991–96, the real exchange rate regressions are augmented with a number of variables that capture the dynamics of the real exchange rate. The additional estimation results confirm that the speed at which the real exchange rate converged to equilibrium was quite slow, as changes in the nominal exchange rate resulted in longer-lasting deviations of the real rate from equilibrium.
The ratio between the two exchange rates can therefore be interpreted as a ratio measuring the cost of goods in the domestic economy relative to the cost in the United States (the numéraire country) using the U.S. dollar as numéraire.
The exchange rate ratio data are based on the 1996 round of surveys from the International Comparison Programme (additional details are provided in the data appendix). There are 149 countries in the sample, ranging from low to high income countries. The estimation results change little if the 51 nonbenchmark countries, the International Comparison Programme data for which are regression-based, are excluded from the analysis.
1993 was chosen as initial year since by that time exchange rates had become market-determined in most transition countries.
The upper confidence interval is calculated as ((constant + standard deviation) + (coefficient + one standard deviation)*Log(PPP GDP)), and similarly with the lower confidence interval.
According to these criteria, one year prior to joining EMU, the candidate country’s rate of inflation should not be more than 1½ percentage point higher than the average rate of inflation in those three EU countries where inflation is the lowest. See, for instance, Begg, Halpern, and Wyplosz (1999) and Szapáry (2000) on this issue.
This has the advantage of giving a higher weight to open European countries that are proximate to the transition countries than would occur if (say) GDP weights were used.
Evidence for the Baltics, and Russia and the other countries of the former Soviet Union suggests that total factor productivity and average labor productivity moved closely together in the initial transition years (De Broeck and Koen, 2000).
For some of the countries the series is somewhat shorter, while for the EU accession countries also 1999 data were collected. In the appendix a complete list of countries and data sources is provided.
The terms of trade variable is only significant for the OECD countries, reflecting the more stable economic environment in these countries during the sample period. As a result, the terms of trade variable is not dominated by other explanatory variables that tend to capture macroeconomic and structural developments typically associated with the transition. In the longer run, when the process of structural adjustment has come to completion, it can be expected that the terms of trade will also be important for the transition countries.