Equilibrium Exchange Rates in the Eu New Members: Methodology, Estimation and Applicability to ERM II
2007
Abstract
In this paper we discuss the estimation and methodology of the real equilibrium exchange rate partial equilibrium models and analyse to what extent the resulting estimates are applicable for setting the central parity prior to ERM II entry in the New EU Member States. Given the uncertainty surrounding the estimates, we argue that they are informative in the sign rather than the size of the misalignment of the exchange rate, but may still serve as useful consistency checks for the decision on the setting of the central parity.
We argue that policy makers should consider the estimates in their decision-making only if the real exchange rate is substantially misaligned.