jaromír Šindel eces monetary or exchange rate based stabilization programme the puzzles of central...
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Jaromír Šindel
ECES
Monetary or Exchange Rate Based Stabilization Programme
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Topics• Exchange rate and transition
– Devaulation, appreaciation trends, ...
• Nominal and Real Exchange Rate– Inflation differentials, exchange rate
arrangements
• Exchange rate and Interest Groups– Competitiveness, …
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Exchange rate regime classification• Floating rate regimes
– Floating rate with inflation targeting – Managed exchange rates without explicit targets (“dirty float”)– Pure floating rates: No CB intervention
• Fixed-rate regimes
– Soft pegs: Explicit targets without full monetary adjustment– Exchange rate bands and target zones – Crawling pegs, corridors, and tabilias– Use of sterilized intervention
– Hard pegs: Full use of automatic monetary adjustment– Currency unions– “Dollarization”– Currency boards
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Exchange rate regime classificationT
he P
uzzles o
f Cen
tral and
Eastern
Eu
rop
e Tran
sform
ation
and
Integ
ration
EC
ES
, Prag
ueSource: Holub, T.: Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience. ČNB (2004).
Exchange rate and transitionThe theoretical paths of the real exchange rate in transitional economies
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eSource: Frait, Komárek (1998)
Why RER appreciation?a)Improvement in the terms of trade
– Exporters and domestic producers improve the quality of their products.
b)Wages in the non-tradable good sectors rise relative to wages in the traded good sector are lower than those ones in the traditional industry-based tradable good sector.
c)Initially wages far exceed productivity in the traded good sector – therefore the subsequent correction of these
imbalances leads to a real appreciation as prices in nontradable goods absorb the rise in costs.
d)The Ballasa and Samuelson effect.
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Different CurrenciesT
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Country Currency Country Currency
Czech Republic koruna Estonia kroon
Slovakia koruna Latvia lats
Poland zloty Lithunia litas
Hungary forint Bulgaria lev
Slovenia tolar Romania new leu
Croatia kuna
France euro
USA dollar Germany euro
United Kingdom pound
Switzerland franc Monte Negro euro
Exchange rate and transition
Source: Kočenda (1998)
Monetary Regimes in the C&EE till 1997
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Different CurrenciesT
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Country Currency Country Currency
Czech Republic koruna Estonia kroon
Slovakia koruna Latvia lats
Poland zloty Lithunia litas
Hungary forint Bulgaria lev
Slovenia tolar Romania new leu
Croatia kuna
France euro
USA dollar Germany euro
United Kingdom pound
Switzerland franc Monte Negro euro
Nominal and Real ER of C&EE Currencies against Germany Mark
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Nominal Czech republic Real
Source: Kočenda (1998)
Nominal and Real ER of C&EE Currencies against Germany Mark
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Nominal Hungary Real
Source: Kočenda (1998)
Nominal and Real ER of C&EE Currencies against Germany Mark
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Nominal Slovakia Real
Source: Kočenda (1998)
Nominal and Real ER of C&EE Currencies against Germany Mark
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Nominal Poland Real
Source: Kočenda (1998)
Exchange rate and transition
Source: Frait, Komárek (1998)
Alternative exchange rate scenarios
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Inflation differentials, nominal and real ER of the CEE countries
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Czech Republic Slovakia
Source: Frait, Komárek (1998)
Inflation differentials, nominal and real ER of the CEE countries
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Hungary Poland
Source: Frait, Komárek (1998)
Inflation differentials, nominal and real ER of the CEE countries
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Estonia Slovenia
Source: Frait, Komárek (1998)
Following Generalisations about ER Path in Transition
a) Significant nominal exchange rate depreciation - the exchange rate flexibility at the beginning of the 1990s - Slovenia, Hungary, Poland.
b) fixed exchange rate - lower inflation (The Czech Republic, Slovakia, Estonia).
c) A trend towards real appreciation can be found in all accession countries, even though with profound differences. The strongest one is confirmed in Estonia and significantly applies also to the Czech Republic, Poland and Slovakia. On the other hand, Hungary and Slovenia experienced only mild real appreciation.– Real appreciation in Czech R. (Inflation differential) x Poland
(inflation caused by devaluation)d) convergence process - slowe) Since 1999 - switch from nominal exchange rate depreciation to
nominal exchange rate stability or even appreciation
Th
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Interest Groups and Exchange Rate Development
• Consumers – imported goods (appreciation) x wages (competitiveness - depreciation); foreign assets (depreciation) x foreign debt (depreciation)
• Government – foreign debt + foreign bonds (appreciation) x privatisation (not appreciation)
• Exporters - competitiveness (depreciation) x ? Share of imported goods; Dual Economy?
• Importers – appreciation
• Domestic Firms – not appreciation (competitiveness against importers)
• Foreign Investors – privatisation (depreciation) x assets (appreciation)
• Multinational Corporation – stable ER, appreciation (if Czech firms are suppliers)
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Competitiveness and ER appreciation – how to cope with it?
• Improve image and export at a higher price
• Increase labour productivity at constant wages
• Pay lower wages at unchanged productivity
• Shift from domestic production to more import
• Shift production to another country
• Exert political pressure against appreciation
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Exchange Rate in CR? Who is Winner and who is Looser
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Development of the Czech Crown
Source: Holub, T.: Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience. ČNB (2004).
Impossible Trinity
• Fixed ER + Free Foreign Capital + Inflation (Interest Rates)
• … IRtr - IReu = appreciation of tr´ currency
• ? floating + inflation targeting – you can not allowed depreciation for increase the competitiveness
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Lessons for future. T
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• Design exchange rate arrangements for Cuba and China.
• Goals, solutions, reasons, impact on interest groups.