Poland's Accession to EMU - Choosing the Exchange Rate Parity

Lukasz Rawdanowicz ()

No 247, CASE Network Studies and Analyses from CASE-Center for Social and Economic Research

Abstract: This paper deals with the choice of the exchange rate parity upon Poland's entry to EMU. Given that the euro parity should reflect some equilibrium exchange rate, two theoretical concepts are discussed: fundamental and behavioural equilibrium exchange rates. These approaches are then estimated. According to these calculations, the zlotyeuro exchange rate in 2002 is not far from the level consistent with the current state of fundamentals (as indicted by BEER) and requires some depreciation to be in line with the equilibrium level of fundamentals (as indicated by FEER). The possible FEERs range between 3.88 and 4.08 zlotys per euro depending on the variant and REER definition. The results should be treated with great caution as they are demonstrated to be sensitive to the adopted assumptions and model specifications. It is argued that the range of "optimal" exchange rates is quiet wide. This stems from the fact that consequences of exchange rate misalignment depend primarily on its degree as well as due to the intrinsic uncertainty about empirical estimates of equilibrium exchange rate. Moreover, the scope for depreciation of the nominal zloty-euro exchange rate is limited by the ensuing costs to the economy, needs to meet Maastricht criteria, and political bargain.

Keywords: real exchange rates; equilibrium exchange rates; EMU enlargement (search for similar items in EconPapers)
Pages: 36 Pages
Date: 2002
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Citations: View citations in EconPapers (6)

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