Long-run real exchange rate determinants: Evidence from eight new EU member states, 1993-2003

In this paper, we estimate bilateral equilibrium real exchange rates for a group of eight new EU member states against the euro, using new and sophisticated panel-cointegration techniques. We document a stable significant positive link between productivity levels and the corresponding real exchange rate levels and a stable significant and negative link between openness and the real exchange rate. We find real exchange rate misalignments to be small and weakly mean-reverting. In the context of entry into ERM-II and EMU for most of these countries over time, the results stress the importance of allowing countries to adjust to inflation pressure and real exchange rate appreciation, either through nominal appreciation or temporarily higher domestic inflation. Journal of Comparative Economics 35 (1) (2007) 87-107.