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Would Fast Sailing towards the Euro Be Smooth? What Fundamental Real Exchange Rates Tells Us about Acceding Economies

Katerina Smidkova and Ales Bulir ()

No 64, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: Computed fundamental real exchange rates in four acceding countries point out to difficulties in entering the ERM II too soon after the EU entry. Computations suggest that it is unlikely for the Czech, Hungarian and Polish economies to maintain low inflation during 2004-2010, and at the same time, to keep their currencies within the ERM II. In addition, those currencies were overvalued in 2003. Moreover, experience of Greece, Portugal, and Spain – viewed through the fundamental real exchange rates goggles - indicate both more stable paths of real exchange rates as well as smaller currency misalignments prior to the euro adoption than what can be expected from the acceding countries in the forthcoming years. If acceding countries sail too fast towards the euro, their sailing may not be as smooth as the one of frontrunners.

Keywords: fundamental real exchange rates; foreign direct investment; Euro; acceding economies (search for similar items in EconPapers)
JEL-codes: F31 F33 F41 F47 (search for similar items in EconPapers)
Date: 2004, Revised 2004
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