Pitfalls in estimating equilibrium exchange rates for transition economies |
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| Affiliation: | 1. University of Murcia, Murcia, Spain;2. European Central Bank, External Developments Division, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany;1. Czech National Bank, Na Příkopě 28, 115 03 Praha 1, Czech Republic;2. Charles University, Prague, Czech Republic;3. VSB-Technical University, Ostrava, Czech Republic;1. Deakin University, Deakin Business School, Department of Finance, 221 Burwood Highway, Burwood Campus, Melbourne, Victoria 3125, Australia;2. Department of Economics, University of South Africa, P.O. Box 392, UNISA0003, Pretoria, South Africa;1. Sun Yat-sen Business School, Sun Yat-sen University, Guangzhou 510275, PR China;2. College of Management and Economics, Tianjin University, Tianjin 300072, PR China;3. China Center for Social Computing and Analytics, Tianjin University, Tianjin 300072, PR China;4. UTS Business School, University of Technology, Sydney, PO Box 123, Broadway, Ultimo 2007, NSW, Australia;1. Institute of Economic Research, Hitotsubashi University, Naka 2-1, Kunitachi, Tokyo 186-8603, Japan;2. Institute of Economic Studies, Charles University, Opletalova 26, 110 00, Prague, Czech Republic;3. CESifo, Munich, Germany;4. IOS, Regensburg, Germany;1. Asian Growth Research Institute and Osaka University, 11–4 Otemachi, Kokura-kita, Kitakyushu, Fukuoka, 803–0814, Japan;2. Faculty of Economics, Keio University, 2–15–45 Mita, Minato-ku, Tokyo, 108–8345, Japan;1. Università di Torino, Departimento di Economia “Cognetti de Martiis”, Lungo Dora Siena 100A, 10153 Turin, Italy;2. Collegio Carlo Alberto, BRICK, via Real Collegio 30, 10024 Moncalieri, Turin, Italy |
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| Abstract: | The literature on equilibrium exchange rates for the central and eastern European countries has mushroomed in recent years. In this paper, we discuss the econometric pitfalls involved in such estimations and endow the reader with the methodological ingredients to avoid such biases. We review the commonly used approaches and identify problems related to the most straightforward econometric procedures as they often do not take the transition process properly into account. As an alternative, we propose a two-stage “out-of-sample” strategy that consists of estimating the relationship between the exchange rates and fundamentals and the extrapolation of these relationships to transition economies. |
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