Factors Influencing the Development of the Czech Crown

Lots of possible explanations of the development of the exchange rate can be found in the available literature. The aim of this paper is to find which factors influence the development of the Czech currency (measured as real bilateral exchange rate compared to euro area – CZK/EUR expressed in real terms) and to assess periods with overvalued and undervalued exchange rate. A long run relationship among exchange rate, approximation of Balassa-Samuelson effect, short run interest rate differential, government debt differential, terms of trade, government expenditures and domestic and foreign investments has been found using quarterly data for 2000Q1–2015Q3 periods.