Currency and Competitiveness in Europe
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Currency and Competitiveness in Europe

Edited by Klaus Liebscher, Josef Christl, Peter Mooslechner and Doris Ritzberger-Grünwald

This book combines currency matters with competitiveness considerations, with a view to raising the understanding of exchange rate dynamics and to analysing the role of exchange rates in reinforcing economic competitiveness.
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Chapter 9: Real Exchange Rate Dynamics in Transition Economies: The Role of Investment in Quality

Jan Brůha and Jiří Podpiera


Jan Bru 1 and Jirí Podpiera2 ˚ha ˇ INTRODUCTION 9.1 The real exchange rate is an important policy variable, for instance determining – to some extent – monetary policy conditions in open economies and conditioning the optimal timing for monetary integration. In addition, to the extent the real exchange rate trend is an equilibrium convergence phenomenon it does not adversely impact converging country competitiveness. Therefore, an explanation of the trend real exchange rate dynamics that is consistent with the rest of the economic variables is an important step for appropriate policy implementation and, in a European context, also for monetary union integration. Economic developments in transition countries in Central and Eastern Europe, specifically the so-called Visegrad-4 countries – the Czech Republic, Hungary, Poland and Slovakia – during the transition decade 1995–2005 (that is, with the basic institutional foundations of a market economy already in place) can be summarized with five facts:3 ● ● ● Fact 1: GDP per capita convergence of the Visegrad-4 country average to the EU-15 average attained 1 per cent a year on average over the decade. Fact 2: Significant trade integration pushed up the average export-toGDP ratio of the Visegrad-4 countries by 2 per cent a year over the decade. Thus, the trade balance, initially in deficit by around 5 per cent, reached a balanced position at the end of the decade. Fact 3: The privatization and economic attractiveness of the region resulted in a significant inflow of foreign direct investment (FDI); on average FDI inflows...

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