Estimating the equilibrium exchange rate of the Central and Eastern European acceding countries: The challenge of euro adoption

Abstract

This study estimates the equilibrium real and nominal exchange rates for five Central and Eastern European (CEE) countries. A new approach is adopted, which combines the fundamental equilibrium exchange rate (FEER) with the behavioural equilibrium exchange rate (BEER) methodology. In a VAR-based 3-equation cointegration system, we estimate structural equations for internal and external balances and link them to the real exchange rate. The estimated misalignment is used to derive equilibrium nominal exchange rates. The sustainability of an ERM-II-type exchange rate regime is investigated on ex post data, and the credibility problem of fixing the currencies of CEE countries vis-a-vis the single European currency is analysed. JEL no. E31, F31, O11, P17