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Volume 55, Issue 5 -6

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Equilibrium Exchange Rate in the Czech Republic: How Good is the Czech BEER? (in English)

Babetskii, Ian; Égert, Balázs

Year: 2005   Volume: 55   Issue: 5 -6   Pages: 232-252

Abstract: The paper investigates the equilibrium exchange rate of the Czech koruna using the reduced-form equation of the stock-flow approach advocated by, for example, Faruqee (1995) and Alberola et al. (1999). We investigate whether the observed real exchange rate of the Czech koruna is close to its equilibrium value over the period from 1993 to 2004. Our empirical approach is tantamount to the behavioral equilibrium exchange rate (BEER), popularized by MacDonald (1997) and Clark and MacDonald (1998), in that the Czech real exchange rate vis-?-vis the euro is regressed on the dual productivity differential; and the net foreign assets position, based on which actual and total misalignment figures, are derived in a time-series context. In other words, we check the quality of the Czech BEER. We also study the impact of a possible initial undervaluation on the estimated equilibrium exchange rate. Employing monthly time series from 1993, and applying several alternative cointegration techniques, we identify a period of an overvaluation in 1997 and in 1999, an increasing overvaluation afterwards, an undervaluation in 2003, and a correction toward equilibrium in the second half of 2004.

JEL classification: F31

Keywords: behavioral equilibrium exchange rate; Czech koruna; equilibrium exchange rate; productivity; real exchange rate; stock-flow approach; transition economies

RePEc: http://ideas.repec.org/a/fau/fauart/v55y2005i5-6p232-252.html

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