Prague Economic Papers 2005, 14(4):291-316 | DOI: 10.18267/j.pep.267

Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us

Kateřina ©mídková1, Aleą Bulíř2
1 Czech National Bank, Na Příkopě 28, CZ - 115 03 Prague 1 (e-mail: smidkova@cnb.cz).
2 International Monetary Fund, 700 19 th St. NW. Washington, DC 20431 (e-mail: abulir@imf.org).

Computed fundamental real exchange rates in four new EU members point to difficulties in jointly entering the ERM II soon after the EU entry. Three currencies out of the four were overvalued prior to EU entry. Computations suggest that it is unlikely that the Czech, Hungarian and Polish economies will maintain low inflation during 2004 - 2010 and at the same time keep their currencies within the ERM II easily. Moreover, the experience of Greece, Portugal and Spain - viewed through fundamental real exchange rate goggles - indicates more stable real exchange rate paths and smaller currency misalignments prior to euro adoption than can be expected from the newcomers in the forthcoming years. If the newcomers sail too fast towards the euro, their sailing may not be as smooth as that of the front runners.

Keywords: foreign direct investment, fundamental real exchange rates, euro, acceding economies
JEL classification: F31, F33, F41, F47

Published: January 1, 2005  Show citation

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©mídková, K., & Bulíř, A. (2005). Would Fast Sailing Towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tell Us. Prague Economic Papers, 14(4), 291-316. doi: 10.18267/j.pep.267
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