slide1 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
The stock-flow approach to the real exchange rate of CEE transition economies Balázs Égert Oesterreichische National PowerPoint Presentation
Download Presentation
The stock-flow approach to the real exchange rate of CEE transition economies Balázs Égert Oesterreichische National

Loading in 2 Seconds...

play fullscreen
1 / 35

The stock-flow approach to the real exchange rate of CEE transition economies Balázs Égert Oesterreichische National - PowerPoint PPT Presentation


  • 107 Views
  • Uploaded on

The stock-flow approach to the real exchange rate of CEE transition economies Balázs Égert Oesterreichische Nationalbank, UPX, WDI Amina Lahrèche-Révil CEPII Paris Kirsten Lommatzsch DIW Berlin. Motivation Transition countries economies have been on a path of

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'The stock-flow approach to the real exchange rate of CEE transition economies Balázs Égert Oesterreichische National' - guido


Download Now An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1

The stock-flow approach to the real exchange

rate of CEE transition economies

Balázs Égert

Oesterreichische Nationalbank, UPX, WDI

Amina Lahrèche-Révil

CEPII Paris

Kirsten Lommatzsch

DIW Berlin

slide2

Motivation

  • Transition countries economies have been on a path of
  • real appreciation since the initial macroeconomic
  • stabilisation was achieved.
  • What are its causes?
  • equilibrium appreciation related to catch-up process
  • unsustainable imbalances
  • correction of undervaluation in the early years of
    • the transition
slide4

Problem

  • How to test for determinants of the real exchange rates and
  • for causes of the appreciation in transition economies?
  • short time series, methods may yield unreliable results
  • early transition period could bias the overall results
  • If currencies had been undervalued in the planned era + the
  • early years of the transition as suggested e.g. by
  • Halpern/Wyplosz (1997),
  • then a problem of a biased constant would arise
  • (Maeso-Fernandez et al. 2004, 2005)
  • equilibrium appreciation would be over-estimated
slide5

Motivation

  • panel estimates to correct for low number of observations
  • problem of biased constants remains
  • Maeso-Fernandez et al. :
  • derive equilibrium rates with relationships determined
  • in out of sample panels
  • But: what if the initial undervaluation does not explain
  • the steady real appreciation in any significant way?
  • what if the relationships and the parameters differ
  • between the panel of reference countries (e.g. OECD)
  • and the transition economies?
  • what if short to medium term determinants dominate
  • in the transition economies?
slide6

Aim of the paper is therefore to

- investigate determinants of the real exchange rate

based on a stock-flow model

- compare in-sample and out-of-sample

estimations

slide7

Model based on macroeconomic balance and adjustment

of stock of foreign assets

(Aglietta et al. 1997, Faruqee 1995)

Equilibrium exchange rate prevails at simultaneous internal

and external equilibrium (macroeconomic balance);

abstraction from short-term fluctuations

slide8

Internal equilibrium can be related to a cleared market for

non-tradables (e.g. Balassa-Samuelson model)

and is reflected in the prices of non-tradables

External equilibrium requires sustainability of the current account

related to

desired capital flows (capital account)

income payments from stock of assets

determinants of the trade balance

(real exchange rate, non-price competitiveness)

slide9

According to stock-flow models, countries have a desired

stock of capital F;

adjustment to it is partial

In all periods, the “equilibrium“ current account will be equal

to this capital flow (= capital account dominates).

it can also be interpreted as a path of savings and

investment in line with long-term income and

consumption patterns

The transition economies have run large current account deficits;

the debts and the income payments have grown.

slide13

The determinants of the current account have to yield the

position given by the adjustment of the stock of

foreign assets.

  • - income flows due to existing stock of foreign assets
  • - real exchange rate based on traded goods prices
  • in standard elasticities models: higher growth requires
  • depreciation to sustain trade balance
  • - non-price competitiveness factors
  • imply a reduction in the price elasticity of demand for
    • exports (and for imports)
slide14

non-price competitiveness in the transition economies

  • Main idea:
  • In the planned era and the early years of the transition
  • domestic supply was of low quality and low technological
    • content compared with more developed economies
  • domestic supply lacked competitiveness in domestic and foreign
    • markets
  • devaluations at the time of the trade liberalisations reflected the
  • competitiveness problem
slide15

Catch-up process means

  • increasing capacity of the countries to produce goods of
  • higher quality (= higher productivity)
  • the composition of the goods produced changes towards
  • higher technology goods (e.g. due to FDI)
  • upgraded supply can be interpreted as an improvement
  • in the non-price competitiveness
  • it shifts demand both of domestic and foreign consumers
  • towards the goods of the country in the catch-up process
slide16

Consumers demand domestic and foreign goods based on e.g.

Crucial assumption

positive

the same applies to the foreign economy

negative

slide17

If (by assumption) only the domestic economy grows

(by the number of available goods varieties), the share of income

devoted to the goods of the country catching up increases

in both countries.

Demand shifts towards the goods of the country catching up.

It can be shown that under certain conditions

a real appreciation will follow growth in varieties,

if the demand shift effect dominates the import

growth due to the higher income.

slide18

Higher non-price competitiveness should be reflected

in productivity growth in industry and

the prices of industrial goods (or tradables)

In other papers (as in Aglietta et al 1997), non-price

competitiveness is measured by R&D expenditures.

But the catch-up process of the CEE transition countries is

not primarily based on shifts of the technological

frontier, but the gradual introduction of more

state of the art technology.

Labour productivity growth is taken as indicator of increasing

non-price competitiveness.

slide19

Labour productivity in industry – a measure of non-price

  • competitiveness?
  • If labour productivity gains lead to production increases
  • with no quality improvement, the relative price of domestic
  • tradable goods should be stable or decreasing.
  • (the price-elasticity of demand is unchanged,
  • higher production level leads to a stability (small country)
  • or even decrease (large country) in the relative price of
  • the tradable goods)
  • But if labour productivity is associated to quality improvements,
  • or a better product differentiation, the relative price of
  • tradable goods can increase, because demand becomes
  • less price-elastic.
slide23

Empirical testing

Reduced form equations

slide24

Productivity gains

Real exchange rate in the open sector

(non-price competitivenenss)

Real

Exchange

Rate

Balassa-Samuelson effect

CPI-to-PPI

ratio

    • Demand-side pressure
  • indirect taxes
  • regulated prices
  • quality changes in services
slide25

Data

  • 3 country sets
  • transition economies (Bulgaria, Croatia, Czech Republic, Estonia,
    • Hungary, Latvia, Lithuania, Romania, Slovakia, Slovenia)
  • OECD countries (Austria, Australia, Belgium, Denmark,
  • Netherlands, Sweden, Canada, Finland, Greece, Ireland,
  • Portugal, Spain, New Zealand, South Africa, South Korea)
  • - emerging countries (Brazil, Chile, Mexico, Indonesia, Malaysia,
  • Singapore. Thailand, Turkey).
  • Time period:
  • Transition countries 1992/1993 – 2002
  • OECD countries 1970 – 2002
  • Emerging countries 1980/1990 - 2002
slide26

Data

Real exchange rates : “effective“

weighted average of the real exchange rate towards

euro area core (proxied by Germany and France) and

towards the USA

decline in RER = appreciation

Productivity is measured as productivity in industry

(industrial production divided by employment)

Relative price ratio CPI / PPI

Net foreign assets as per cent of GDP

cumulated current accounts over nominal GDP

slide27

Econometrics

  • Fixed effect OLS
  • 2) Mean group of individual dynamic OLS estimates
  • 3) Mean group of individual estimates based on
  • ECM in ARDL
  • 4) Pooled mean group estimator based on ARDL
slide28

CPI based real exchange rate

Notes DOLS_SIC are the DOLS estimates obtained on the basis of the Schwarz information criterion. The same applies to the mean group estimators (MGE_SIC). *,*** and *** denote respectively statistical significance at the 10%, 5% and 1% levels. In the row “coint” under MGE_SIC and PMGE are shown the error correction terms.

slide33

Summary of results

  • Transition economies seem to have some distinct features
  • which cannot be accounted for in out-of-sample
  • estimations
  • Productivity growth in the transition economies reflects
  • the nature of the catch-up process: they grow by
  • adopting higher technology and by producing
  • goods of higher quality (shift in the composition of GDP)
  • 3) Time period matters for the impact of NFA: in the short to
  • medium term, for the transition countries the inflow
  • and debt creation dominated the income payments
  • effect