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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
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rate of CEE transition economies
Oesterreichische Nationalbank, UPX, WDI
- investigate determinants of the real exchange rate
based on a stock-flow model
- compare in-sample and out-of-sample
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
non-tradables (e.g. Balassa-Samuelson model)
and is reflected in the prices of non-tradables
External equilibrium requires sustainability of the current account
desired capital flows (capital account)
income payments from stock of assets
determinants of the trade balance
(real exchange rate, non-price competitiveness)
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
The transition economies have run large current account deficits;
the debts and the income payments have grown.
position given by the adjustment of the stock of
the same applies to the foreign economy
(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.
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
Reduced form equations
Real exchange rate in the open sector
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
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.