Real Exchange Rates in Central and Eastern Europe

Abstract

In this article, we study the fundamental macroeconomic determinants of both the inflation-based (i.e., CPI) and the tradable price-based (i.e., PPI) real effective exchange rate in five acceding countries from Central and Eastern Europe, that is, the Czech Republic, Hungary, Poland, Slovakia, and Slovenia. The article is based on the combination of two approaches widely used for transition economies, namely, the behavioral equilibrium exchange rate and the structural vector autoregression. Indeed, a cointegration approach is adopted, and an estimated vector error correction model attempts to connect in a structural way the real effective exchange rate to labor productivity, the relative price of nontradable goods, public deficit, and the current account position. Impulse-response functions are subsequently employed to investigate how shocks in the underlying fundamentals impact on the effective real exchange rates.