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

Katerina Smidkova and Ales Bulir ()

Prague Economic Papers, 2005, vol. 2005, issue 4, 291-316

Abstract: 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 (search for similar items in EconPapers)
JEL-codes: F31 F33 F41 F47 (search for similar items in EconPapers)
Date: 2005
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