Equilibrium Exchange Rates and Exchange Rate Misalignments in the Visegrad Group

• Název práce v češtině: Rovnovážné měnové kurzy a odchylky kurzů od rovnováhy ve Visegrádské skupině zemí
• Název v anglickém jazyce: Equilibrium Exchange Rates and Exchange Rate Misalignments in the Visegrad Group
• Akademický rok vypsání: 2018/2019
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: doc. Mgr. Tomáš Holub, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 29.07.2019
• Datum zadání: 29.07.2019
• Datum a čas obhajoby: 16.09.2019 09:00
• Místo konání obhajoby: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Datum odevzdání elektronické podoby: 31.07.2019
• Datum proběhlé obhajoby: 16.09.2019
• Oponenti: prof. Ing. Evžen Kočenda, M.A., Ph.D., DSc.

Zásady pro vypracování

The primary goal of this thesis is to study, estimate and forecast the equilibrium exchange rate and its misalignments in the Czech Republic, Hungary, Poland and Slovakia. The main goal is to understand better the macroeconomic impacts that the framework has on these countries and on their policies, via real and nominal shocks or international capital flows.

Equilibrium exchange rate plays crucial role as one of the key indicators of the monetary policy influence on the economy. When the exchange rate is overvalued, it has restrictive impact on the economy. It means worsening of the next exports and price competitiveness of the country, i.e. the country becomes expensive and its production is replaced by imports. On the other hand, with an undervalued exchange rate, the economy might over heat and inflation might start to growth. Analyzing equilibrium exchange rate helps to understand those possible future movements, costs of macroeconomic changes and how real exchange rate is able to absorb shocks.

The choice of countries to be compared in this thesis is strategic, as those countries are connected thought common history and similar development, yet each preserving its unique features. The Visegrad Group was formed based on continuance of those strong connections. They all together entered the European Union in 2004, however, only the Slovak Republic has already entered euro area as well. The rest have no target date nor the fixed date to join ERMI II (fifth euro-convergence criterion). Furthermore, in November 2013, Czech National Bank introduced publicly declared, one-sided exchange rate commitment, which was held until 2017.

This diploma thesis targets the estimation of equilibrium of exchange rates in those countries, analysis of the macroeconomic development from such point of view and comparation of those countries.

The main hypotheses of this thesis are related with the development of equilibrium exchange rate in the analyzed region. They examine the shock responses and the factors influencing the equilibrium in each country.

1. Hypothesis #1: Equilibrium exchange rate has comparable development across the Visegrad Group regardless of the applied monetary policy regime.
2. Hypothesis #2: All countries from Visegrad Group suffered from similar external shocks, but the responses of real exchange rates differed.
3. Hypothesis #3: Are Balassa-Samuelson effects present?

Seznam odborné literatury

Directorate General for Economic and Financial Affairs, European Commission (2000). Estimation of Real Equilibrium Exchange Rates. [online] European Communities. Available at: http://ec.europa.eu/economy_finance/publications/pages/publication11128_en.pdf [Accessed 28 May 2018].

UNIVERSITY OF MICHIGAN (2005). Equilibrium Exchange Rates in Transition Economies: Taking Stock of the Issues. [online] THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN. Available at: http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.472.4319&rep=rep1&type=pdf [Accessed 28 May 2018].

MacDonald, Ronald, and Jerome L. Stein, eds. Equilibrium exchange rates. Vol. 69. Springer Science & Business Media, 2012.

Clark P.B., MacDonald R. (1999) Exchange Rates and Economic Fundamentals: A Methodological Comparison of Beers and Feers. In: MacDonald R., Stein J.L. (eds) Equilibrium Exchange Rates. Recent Economic Thought Series, vol 69. Springer, Dordrecht

Iimi, Atsushi. Exchange rate misalignment: An application of the behavioral equilibrium exchange rate (BEER) to Botswana. No. 6-140. International Monetary Fund, 2006.

Bęza-Bojanowska, Joanna and Ronald MacDonald. "THE BEHAVIOURAL ZLOTY/EURO EQUILIBRIUM EXCHANGE RATE." n.d.

Czech National Bank. The equilibrium koruna-euro exchange rate. 2003-2018.

Driver, Rebecca L. and Peter F. Westaway. Concepts of equilibrium exchange rates. London: Bank of England, 2003. <https://www.mnb.hu/letoltes/paper-driver.pdf>.

Krugman, Paul R. "Equilibrium Exchange Rates ." 1990. <http://www.nber.org/chapters/c6948.pdf>.

Salto, Matteo and Alessandro Turrini. Comparing alternative methodologies. Brussels: European Commission, 2010. <http://ec.europa.eu/economy_finance/publications/economic_paper/2010/pdf/ecp427_en.pdf>.

Předběžná náplň práce v anglickém jazyce

The first estimation attempts of equilibrium exchange rate were based on Purchasing Power Parity, but because of poor empirical proof there was a need for more sophisticated methods. That is why FEER and BEER models were introduced and both along with NATREX model will be used in the diploma thesis.

The Fundamental Equilibrium Exchange Rate model (FEER) has both an, internal and external equilibrium. The internal estimates the output level with concern of full employment (taking into account the unemployment given by NAIRU) and inflation rate. The external equilibrium is defined by net flow of resources between countries, when internal equilibrium is reached. This model abstracts from short-run cyclical anomalies and temporary events and focuses on fundamental factors that last over longer periods such as current account balance or sustainable net external debt.

The Behavioral Equilibrium Exchange Rate model (BEER), on the other hand, estimates the misalignments as a combination of effect of transitory factors and random disturbances. This model is able to provide solid explanation of cyclical movements in real exchange rate.

The Natural Real Exchange Rate (NATREX) model determines net capital flows as the difference of national savings and investment. The capital account is driven by the productivity (foreign exogenous and domestic) and thrift. The model as a whole takes into account the stock equilibrium conditions; therefore, the steady state is at the point where domestic capital stock and net foreign assets reach their long run values.

The dataset used in the empirical part will cover the period from approximately 1995 till presence and will cover many important historical events, such the entry of all of these countries into the European Union or the crisis from 2008. The diploma thesis will examine the monetary policies and exchange rates development and investigate the factors that are influencing the equilibrium in each country. The chosen hypotheses will allow to study thoroughly the development of equilibrium exchange rates and observe the similarities and differences of those countries. The nature of the region and diversity of the policies are suggesting interesting results, that may conclude contractual findings.

The outline of the thesis will be as follows:

1. Introduction
1.1. What is Equilibrium Exchange Rate?
1.2. The Equilibrium Exchange Rate Theories and Implications
1.3. The Equilibrium Exchange Rate in terms of monetary policies
2. The Monetary Policies of countries of Visegrad Group
3. The methods of estimation of Equilibrium Exchange Rate
3.1. Commonly used estimation methods
3.2. The methods used in the Visegrad Group
4. Empirical Analysis
4.1. Data and Methodology
4.2. FEER, BEER and NATREX estimations
4.3. Regression Results
5. Conclusions and Remarks
6. Bibliography
7. Appendix