25-08-2017, 09:32 PM
EXCHANGE-RATE REGIME AND RESPONSE TO THE CRISIS IN THE EU NEW MEMBER STATES
EXCHANGE-RATE REGIME.ppt (Size: 5.36 MB / Downloads: 28)
CONVENTIONAL VIEW EXCHANGE RATE AND COMPETITIVENESS
There is a conventional view that exchange rate flexibility allows a conduct of a countercyclical monetary policy and provides short term competitive advantage. This view is based on a number of assumptions:
Law of one price holds
Exchange rate pass-through (ERPT) is low
No balance sheet (BS) effects ( no borrowing and saving in foreign currency)
Low bargaining power of the labor unions
Marshall-Lerner condition holds
No “fear of floating” or “fear of losing international reserves”
DEVELOPMENTS IN COMPETITIVENESS– ULC
EU NMS experience a process of deepening trade and financial integration and rapid nominal and real convergence. This is reflected in ULC and REER developments
The dynamics of ULC in the EU NMS shows two common trends:
the nominal convergence with EU 15 is related to an increase in prices and wages which is reflected in a steady increase in nominal ULC before the crisis
competitiveness is however maintained which is reflected in the relatively stable real ULC for the majority of the countries
DEVELOPMENTS IN COMPETITIVENESS – REER
The dynamics of the real effective exchange rate based on nominal ULC shows trend of gradual increase during the last ten years in all EU new member countries which is due to the process of nominal and real convergence
The appreciation reflects productivity gains in these countries
Reflecting predominantly equilibrium trend appreciation the rise in REER does not erode competitiveness
VALIDITY OF CONVENTIONAL VIEW IN PRACTICE
The assumptions of the traditional view are rarely met in practice:
EU NMS are small open economies with free capital mobility and trade
Their recent development has been influenced by large capital inflows
High level of euroisation (credit, deposits) which implies big balance sheet effects
NMS’ exporters have low international pricing power
The impacts of the ERPT, BS effects, labor unions and Marshall-Lerner condition vary across EU NMS
Hence, competitiveness implications of ER regime are not straightforward (contrary to the traditional view)