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Sustainable Exchange Rates When Trade Winds Are Plentiful

Published online by Cambridge University Press:  26 March 2020

Jan Babecký ,
Aleš Bulíř  and
Kateřina Šmídkova
Jan Babecký*
Affiliation:
Czech National Bank
Aleš Bulíř*
Affiliation:
International Monetary Fund
Kateřina Šmídkova*
Affiliation:
Czech National Bank
*
e-mail [email protected]
e-mail [email protected]
e-mail [email protected]
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Abstract

Estimation and simulation of sustainable real exchange rates in a sample of EU member countries find vulnerabilities connected to the adoption of the euro if the rate vis-à-vis the euro were to be fixed with weak fundamentals and inappropriate policies. Sample countries have benefited from dramatic improvements in their external positions, in part driven by inflows of foreign direct investment. As a result, exchange rate misalignments have narrowed in most countries and, looking ahead, are expected to narrow further. These results are conditional, however, on optimistic projections with respect to world import demand and foreign direct investment inflows.

Keywords

Sustainable real exchange ratesforeign direct investmentERM2F31F33F36F47
Type
Articles
Information
National Institute Economic Review , Volume 204 , April 2008 , pp. 98 - 107
Copyright
Copyright © 2008 National Institute of Economic and Social Research

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Footnotes

∗

The authors acknowledge the support of colleagues at the National Institute of Economic and Social Research. The previous versions of the paper benefited from comments by Ignazio Angeloni, Carsten Detken, László Halpern, Katarina Juselius, Jan Kodera, Louis Kuijs, Kirsten Lommatzsch, Martin Mandel, Alessandro Rebucci and participants at seminars at the European University Institute, International Monetary Fund, Prague University of Economics, Czech National Bank and the European Central Bank. Views expressed in this paper are those of the authors and do not necessarily represent those of the Czech National Bank or the International Monetary Fund.

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