The BEER Formula: Analysis of Equilibrium Exchange Rate of Czech Koruna

• Název práce v češtině: Receptura BEER: Analýza Rovnovážného Měnového Kurzu České Koruny
• Název v anglickém jazyce: The BEER Formula: Analysis of Equilibrium Exchange Rate of Czech Koruna
• Klíčová slova: Nesladěnost, ECM, RIRD, BEER
• Klíčová slova anglicky: Misalignment, ECM, RIRD, BEER
• Akademický rok vypsání: 2023/2024
• Typ práce: bakalářská práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: prof. Ing. et Ing. Luboš Komárek, M.Sc., MBA, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 26.06.2024
• Datum zadání: 26.06.2024
• Datum a čas obhajoby: 09.06.2025 09:00
• Místo konání obhajoby: Opletalova, O206, místnost. č. 206
• Datum odevzdání elektronické podoby: 27.04.2025
• Datum proběhlé obhajoby: 09.06.2025
• Oponenti: Mgr. Ing. Tomáš Šestořád

Seznam odborné literatury

Melecký, M., & Komárek, L. (2007). The Behavioral Equilibrium Exchange Rate of the Czech Koruna. [Transition Studies Review ], [Volume 14], pages 105-121

Adler, G., & Grisse, C. (2017). Thousands of BEERs: Take your pick. [Wiley Blackwell], [Volume 25](5), pages 1078-1104

Stein, J. L., & MacDonald, R. (1999). Equilibrium Exchange Rates.

Stein, J. L., & Allen, P. R. (1998). Fundamental Determinants of Exchange Rates.

Polek, Michal. "Behaviorální a fundamentální rovnovážný měnový kurz české koruny." Available at: https://polek.vse.cz/pdfs/pol/2012/02/01.pdf

Krugman, Paul R. (1990). "Equilibrium Exchange Rates."
Škop, Jiří, and Jan Vejmělek. "Od parity kupní síly k NATREXu - Případ české koruny." Komerční banka, a.s., Praha.

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

Belloc, M., & Federici, D. (2010). Journal of International Money and Finance, [Volume 29], Issue 2, March, Pages 315-335.

Předběžná náplň práce v anglickém jazyce

Research question and motivation

The primary objective of my bachelor’s thesis is to investigate the real value of equilibrium exchange rates among the chosen countries from the European Union, with a primary focus on the Czech Republic.
The equilibrium exchange rate is a crucial indicator for monetary policy (Krugman, Paul R., 1990), as it reflects the fundamental value of a currency relative to others and helps in assessing the appropriateness of current exchange rates. All the countries selected for this research are long-standing members of the European Union. However, they exhibit variations in their economic conditions and their stance on adopting the common currency, euro. Additionally, these countries differ in the fundamental factors and their respective significance within the behavioral exchange rate model. In this study, I will analyze these fundamental factors and attempt to determine the real equilibrium exchange rate and its degree of misalignment across selected countries.
This topic holds significant importance, as the equilibrium exchange rate serves as a crucial indicator of the influence of monetary policy on an economy. It is commonly acknowledged that both overvaluation and undervaluation of a domestic currency can negatively impact a country's economy (Rodrik, D., 2008). Furthermore, exchange rates provide valuable insights into the evolution of an economy’s price competitiveness, with the exchange rate itself playing a decisive role. Additionally, they offer essential knowledge on potential exchange rate misalignments during the process of joining a monetary union, such as the euro area, including the determination of the central parity before ERM II (Exchange Rate Mechanism) entry or the conversion rate prior to euro area accession. Therefore, it is highly desirable for the actual current exchange rate to be as close to the equilibrium exchange rate as possible to maximize the country's economic growth. The bachelor’s thesis will specifically focus on investigating the real value of the equilibrium exchange rate, as well as examining the differences between the current exchange rate and the equilibrium exchange rate in the selected countries.
By examining the determinants of these equilibrium exchange rates and their deviations from actual exchange rates, this thesis aims to provide a deeper understanding of the economic dynamics within the selected countries and their implications for regional economic stability and policy making.

Contribution

Examining the equilibrium exchange rate is essential, as it serves as a critical indicator of the impact of monetary policy on the economy. Consequently, this research will provide valuable insights not only to the central banks of the selected countries but also to the European Central Bank (ECB), thereby supporting the convergence of economies within the European Union.
It will be particularly interesting to observe how the influence of specific fundamentals, such as interest rate differentials, has evolved during and after the Covid-19 period. Interest rate differentials have varied considerably across countries in recent years, potentially contributing to significant exchange rate movements. Analyzing these fluctuations using recent data could yield crucial insights into the dynamics of exchange rates and the role of monetary policy during this period of volatility.
The findings of this bachelor thesis may lead the central banks of the selected countries to adjust their monetary policies to better align their current exchange rates with the equilibrium exchange rate. By doing so, central banks could further enhance the development and stability of their domestic economies.



Methodology


In this study, the Behavioral Equilibrium Exchange Rate (BEER) method will be employed to estimate equilibrium exchange rates (Komárek & Motl, 2012), incorporating the most suitable combination of determinants. "Drawing upon insights from the seminal paper 'Thousands of BEERs: Take Your Pick' (Adler & Grisse, 2017), the BEER method will be adapted to integrate the optimal determinants identified in prior research, with particular emphasis on including the interest rate differential as one of the fundamental factors. The selection of determinants will also draw inspiration from the BEER model used by the Czech National Bank and potentially expand it with additional explanatory variables, such as those mentioned above.
Utilizing the R programming language and regression analysis, this approach will enable the estimation of equilibrium exchange rates tailored to the unique characteristics of each selected country. Data pertaining to the determinants of equilibrium exchange rates will be sourced from the Czech Statistical Office and other relevant databases accessible through the Czech National Bank.


Outline


1. Abstract

2. Introduction
a. Motivation for the topic and an explanation of what an equilibrium exchange rate is
b. Introduction to existing models of equilibrium exchange rates
c. Gathering information about the NATREX model
d. My contribution to existing research
e. Results of the study

3. Literature review and hypotheses
a. Literature on the determinants of the equilibrium real exchange rate
b. Literature on BEER and NATREX equilibrium exchange rate estimation
c. Literature on reactions to overvalued or undervalued currency
d. Stating the hypothesis

4. Methodology and data description
a. Relevant description of data
b. Description of the determinants and their meaning
c. Process of performing the test

5. Results
a. Rejecting or accepting hypotheses regarding the equilibrium exchange rate.
b. The effects of the observed equilibrium exchange rate on the economy

6. Conclusion
a. Broader interpretation of results
b. Implications for practice