DP1145 Equilibrium Real Exchange Rates in Transition

Author(s): László Halpern , Charles Wyplosz

Publication Date: April 1995

Keyword(s): Central and Eastern Europe , Exchange Rate , Overvaluation , Transition

JEL(s): E63 , F31 , P41 , P52

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP1145.asp

This paper tests two central assumptions regarding transforming economies: that the initial exchange rates were strongly undervalued and that the subsequent evolution of the real exchange rate was both a response to the initial undervaluation and an equilibrium real appreciation. The econometric results support both assumptions. The degree of initial overvaluation varies from country to country, ranging from very little in the case of Hungary to more than 100% in most other countries. It is estimated using a sample of 49 high-and middle-income countries, with five observations per country (1970, 1975, 1980, 1985, 1990). The subsequent process of equilibrium appreciation is estimated with pooled data for six countries (Croatia, the Czech Republic, Hungary, Poland, Slovakia and Slovenia) covering the period after inflation stabilization.