exchange-rate regime and response to the crisis in the eu new member states kalin hristov
DESCRIPTION
EXCHANGE-RATE REGIME AND RESPONSE TO THE CRISIS IN THE EU NEW MEMBER STATES KALIN HRISTOV. OUTLINE. CONVENTIONAL VIEW ON EXCHANGE RATE REGIMES AND COMPETITIVENESS DEVELOPMENTS IN PRICE BASED MEASURES OF COMPETITIVENESS – ULC, REER VALIDITY OF CONVENTIONAL VIEW IN PRACTICE - PowerPoint PPT PresentationTRANSCRIPT
EXCHANGE-RATE REGIMEAND RESPONSE TO THE CRISIS
IN THE EU NEW MEMBER STATES
KALIN HRISTOV
OUTLINE
• CONVENTIONAL VIEW ON EXCHANGE RATE REGIMES AND COMPETITIVENESS
• DEVELOPMENTS IN PRICE BASED MEASURES OF COMPETITIVENESS – ULC, REER
• VALIDITY OF CONVENTIONAL VIEW IN PRACTICE
• EXPERIENCE DURING THE RECENT CRISIS – EXCHANGE RATE DEVELOPMENTS, EXPORT PERFORMANCE, GROWTH AND INFLATION
CONVENTIONAL VIEW EXCHANGE RATE AND COMPETITIVENESS
• There is a conventional view that exchange rate flexibility allows a conduct of a countercyclical monetary policy and provides short term competitive advantage. This view is based on a number of assumptions:– Law of one price holds – Exchange rate pass-through (ERPT) is low– No balance sheet (BS) effects ( no borrowing and saving
in foreign currency)– Low bargaining power of the labor unions– Marshall-Lerner condition holds– No “fear of floating” or “fear of losing international
reserves”
DEVELOPMENTS IN COMPETITIVENESS– ULC
• EU NMS experience a process of deepening trade and financial integration and rapid nominal and real convergence. This is reflected in ULC and REER developments
• The dynamics of ULC in the EU NMS shows two common trends: – the nominal convergence with EU 15 is related
to an increase in prices and wages which is reflected in a steady increase in nominal ULC before the crisis
– competitiveness is however maintained which is reflected in the relatively stable real ULC for the majority of the countries
NOMINAL ULC IN NATIONAL CURRENCY, 2000=100 (four-quarter moving average)
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: ECB
Note: in descending order as of 2009:q2
50
100
150
200
250
300
350
Romania Latvia Bulgaria Hungary Lithuania
Slovenia Slovakia Czech Republic Poland Estonia
NOMINAL UNIT LABOR COST IN EURO2000=100
80
100
120
140
160
180
200
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
80
100
120
140
160
180
200
Romania Estonia Czech Republic Latvia SlovakiaHungary Lithuania Slovenia Poland Bulgaria
Source: European Commission, AMECO database, last update: 22 Apr 2009
Note: in descending order as of 2008. EC forecast for 2009
REAL UNIT LABOR COST 2000=100
80
85
90
95
100
105
110
115
120
125
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
80
85
90
95
100
105
110
115
120
125
Estonia Latvia Lithuania Hungary Bulgaria
Slovenia Slovakia Romania Poland Czech RepublicSource: European Commission, AMECO database, last update: 22 Apr 2009
Note: in descending order as of 2008. EC forecast for 2009
DEVELOPMENTS IN COMPETITIVENESS – REER
• The dynamics of the real effective exchange rate based on nominal ULC shows trend of gradual increase during the last ten years in all EU new member countries which is due to the process of nominal and real convergence
• The appreciation reflects productivity gains in these countries
• Reflecting predominantly equilibrium trend appreciation the rise in REER does not erode competitiveness
REAL EFFECTIVE EXCHANGE RATE, ULC BASED, 1999=100
80
100
120
140
160
180
200
220
240
01'99 01'00 01'01 01'02 01'03 01'04 01'05 01'06 01'07 01'08
80
100
120
140
160
180
200
220
240
Romania Slovakia Latvia Hungary Estonia
Lithuania Bulgaria Poland Slovenia Czech RepSource: European Commission, Price and Cost Competitiveness, May 2009
Note: in descending order as of 2008:q4. The REER index for each of the countries is calculated relative to a basket of 36
industrial countries.
LABOR PRODUCTIVITY DIFFERENTIALS BETWEEN NMS and EU15
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: European Commission, AMECO database, last update: 22 Apr 2009Note: in descending order as of 2008. EC forecast for 2009
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
Romania Lithuania Slovakia Czech RepublicHungary Poland Slovenia EstoniaLatvia Bulgaria
VALIDITY OF CONVENTIONAL VIEW IN PRACTICE
• The assumptions of the traditional view are rarely met in practice:– EU NMS are small open economies with free capital
mobility and trade
– Their recent development has been influenced by large capital inflows
– High level of euroisation (credit, deposits) which implies big balance sheet effects
– NMS’ exporters have low international pricing power
– The impacts of the ERPT, BS effects, labor unions and Marshall-Lerner condition vary across EU NMS
• Hence, competitiveness implications of ER regime are not straightforward (contrary to the traditional view)
EXPERIENCE DURING THE RECENT CRISIS – EXCHANGE RATE DEVELOPMENTS
• Is the view of a higher vulnerability of the fixed exchange rate regime supported by the latest empirical data?
• Do countries with flexible exchange rate which potentially can allow depreciation of their exchange rate have better export performance during the current crisis?
• Is the division between countries with fixed and flexible exchange rate regime relevant during the current crisis?
EXPERIENCE DURING THE RECENT CRISIS – REAL
ACTIVITY AND EXPORT PERFORMANCE • GDP and unemployment developments as well
as export dynamics in euro follow similar patterns across countries (although magnitudes vary)
• The exchange rate regime (fixed or flexible) not a dividing characteristic
• Trade is shrinking in all countries (having fixed or flexible exchange rate) because of the common shock – decrease of the volume of the world trade
GDP REAL GROWTH RATES , y-o-y (%)
-25
-20
-15
-10
-5
0
5
10
15
q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 q4'08 q1'09 q2'09
-25
-20
-15
-10
-5
0
5
10
15
Poland Bulgaria Czech Republic SlovakiaRomania Slovenia Estonia LithuaniaLatvia Hungary
Source: Eurostat
Note: in descending order as of 2009:H1
GDP GROWTH RATES
-25
-20
-15
-10
-5
0
5
10
2008 2009f
%
BULGARIA CZECH REP. ESTONIA HUNGARY LATVIA LITHUANIA POLAND ROMANIA
FISCAL POSITION
-8
-7
-6
-5
-4
-3
-2
-1
0
1
2
2008 2009f
% o
f G
DP
BULGARIA CZECH REP. ESTONIA HUNGARY LATVIA LITHUANIA POLAND ROMANIA
CURRENT ACCOUNT
-30
-25
-20
-15
-10
-5
0
5
10
2008 2009f
% o
f G
DP
BULGARIA CZECH REP. ESTONIA HUNGARY LATVIA LITHUANIA POLAND ROMANIA
UNEMPLOYMENT RATES, seasonally adjusted (%)
2
4
6
8
10
12
14
16
18Ja
n-0
8
Feb
-08
Mar
-08
Apr
-08
May
-08
Jun
-08
Jul-
08
Au
g-08
Sep
-08
Oct
-08
Nov
-08
Dec
-08
Jan
-09
Feb
-09
Mar
-09
Apr
-09
May
-09
Jun
-09
Jul-
09
2
4
6
8
10
12
14
16
18
Latvia Lithuania Estonia Slovakia Poland
Bulgaria Czech Republic Slovenia Romania HungarySource: Eurostat
Note: in descending order as of the last 3 months
SHARE OF EXPORT OF GOODS IN WORLD EXPORT, 1999=100
50
100
150
200
250
300
350
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
50
100
150
200
250
300
350
Lithuania Slovakia Poland LatviaRomania Bulgaria Czech Republic EstoniaHungary Slovenia
Source: European Commission, AMECO database, last update: 22 April 2009
Note: in descending order as of 2008. EC forecast for 2009-2010
100
120
140
160
180
200
220
240
q1'02 q3'02 q1'03 q3'03 q1'04q3'04 q1'05 q3'05 q1'06 q3'06q1'07 q3'07 q1'08 q3'08 q1'09
100
120
140
160
180
200
220
240
Slovakia Lithuania Romania BulgariaCzech Republic Hungary Slovenia LatviaEstonia Poland
EXPORT SHARES of EU NMS in EU27 IMPORTS
(annualized index, 2000=100)
Source: Eurostat,BNB
Note: in descending order as of 2009:q2
-40
-30
-20
-10
0
10
20
30
40
01'07 04'07 07'07 10'07 01'08 04'08 07'08 10'08 01'09 04'09 07'09
%
-40
-30
-20
-10
0
10
20
30
40
%
Hungary Poland Slovenia Estonia Bulgaria
Czech Republic Slovakia Latvia Lithuania Romania
Source: Eurostat, BNB
Note: in descending order as of J uly 2009
(annual growth, 3-month moving average in %)
EXPORTS of EU NMS in EURO
EXCHANGE RATE FLEXIBILITY AND COMPETITIVENESS – RECENT EXPERIENCE
• Possible reasons for the failure of the nominal exchange rate depreciation to improve competitiveness:– depreciation leads to more expensive imports (imports
of raw materials and investment goods), thus increases costs of production
– depreciation increases the inflation rate which pushes up wages
– depreciation leads to balance sheet effects and increases cost of financing for the corporate sector
– External demand is depressed
ANNUAL HICP INFLATION
-5
0
5
10
15
20
2001 2002 2003 2004 2005 2006 2007 2008 2009
%
-5
0
5
10
15
20
%
Romania Poland Lithuania Latvia Bulgaria
Slovakia Czech Republic Slovenia Estonia Hungary
Source: EurostatNote: in descending order as of the latest three months
EXCHANGE RATE DEVELOPMENTS
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
5
1001/09/2008
11/09/2008
21/09/2008
01/10/2008
11/10/2008
21/10/2008
31/10/2008
10/11/2008
20/11/2008
30/11/2008
10/12/2008
20/12/2008
30/12/2008
09/01/2009
19/01/2009
29/01/2009
08/02/2009
18/02/2009
28/02/2009
10/03/2009
20/03/2009
30/03/2009
09/04/2009
19/04/2009
29/04/2009
09/05/2009
19/05/2009
29/05/2009
08/06/2009
18/06/2009
28/06/2009
08/07/2009
18/07/2009
28/07/2009
07/08/2009
17/08/2009
27/08/2009
06/09/2009
16/09/2009
26/09/2009
06/10/2009
%
-50
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
%
EUR-RON X-RATE EUR-PLN X-RATE EUR-CZK X-RATE EUR-HUF X-RATE
Accumulated Development, Sept '08 - Mar '09
Poland
Hungary
Czech Republic
Romania
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
0% 5% 10% 15% 20% 25% 30% 35% 40%
Exchange rate depreciation
Inflati
on
Source: ECB, BNB
EXCHANGE RATE REGIME AND MONETARY CONDITIONS DURING THE RECENT CRISIS
• The choice of an exchange rate regime cannot unequivocally be associated with advantages or disadvantages
• Problems of the autonomous monetary policy’s capabilities during the crisis:– Transmission of the conducted monetary policy
is limited
– Pursuing multiple domestic economic objectives is difficult
– Asymmetric autonomy (“Yes” in “good times”, “No” in “bad times”)