1. Exchange Rate Regimes and Sustainable Parities for CEECs in the Run-up to EMU Membership Virginie Coudert, Cécile Couharde z Aim of the paper: Provide equilibrium exchange rate ’s estimations for the currencies of Central and Eastern Europe Countries z Why the issue of equilibrium of exchange rates? Participation in the European Exchange Rate Mechanism (ERM2) z Context in which currencies of these countries have undergone a massive real appreciation

2. CURRENCY BOARDS Exchange rate versus Euro (100 = 01/93)

3. PEGS Exchange rate versus Euro (100 = 01/93)

4. CRAWLING PEGS Exchange rate versus Euro (100 = 01/93)

5. MANAGED FLOATS Exchange rate versus Euro (100 = 01/93)

6. What methodology to estimate CEEC equilibrium exchange rates? PPP approach  Relative version : PPP compares the real exchange rate with its level in a reference period in which the parity is thought to be in equilibrium Reference period 1993-2001  a sustained trend of RER appreciation in most CEECs during this period, at least with CPI deflators - Does this overvaluation still exist when taking tradable prices as deflators? - Do the last nine years constitute an adequate reference period?

7.  Absolute version: PPP defines equilibrium exchange rates consistent with equalisation of price levels across countries Price levels are much lower in CEECs than in the euro area. This reflects the Balassa effect. Do these price discrepancies are in line with what is observed in other emerging countries?  Regression of price levels on GDP per capita (sample including 168 countries in the world). The fitted values could be interpreted as a reference for a PPP parity taking into account the Balassa effect.

9. FEER approach z Definition of the equilibrium exchange rate: Real effective exchange rate consistent with internal equilibrium (in terms of the goods and labours markets) and external equilibrium (in terms of sustainable current accounts) z Main advantage : Provide a multilateral framework for calculating equilibrium exchange rates consistent at a world level  The exchange rate misalignment depends on both imbalances of the particular country involved and the imbalances of others countries

10. z Main drawbacks : Difficulty in applying this approach to CEECs. Approach mainly focusing on industrialised countries. 1. Problem of trade elasticities 2. Calculate of internal and external equilibrium  We modify trade elasticities and the current account targets and in order to find out whether the results heavily depend on these assumptions.

11. Methodology: Resolution of a long-term model based on Nigem for fourteen leading industrialised countries and five CEECs : the Czech Republic, Hungary, Poland, Slovenia and Estonia Single relationship between a currency’s misalignment and the deviation of the structural current account from its medium-run equilibrium level as a % of GDP.

13. Exogenous variables: output gap and deviation from the current account balance target z Internal imbalances computing domestic output gaps by using a Hodrick-Prescott filter. z Sustainable levels of current accounts: fitted value of an econometric model of equilibrium saving-investment balances High public savings and high growth of the capital share in added value (a proxy for the saving capacity of firms) contribute to domestic savings, whereas the share of the private sector in domestic output and income per capita are proxies for the level of investment.