Towards the estimation of equilibrium exchange rates for transition economies: Methodological issues and a panel cointegration perspective

In this paper, we discuss methodological issues relating to the estimation of equilibrium exchange rates for transition countries. Given the limited availability of data and the rapid structural change transition countries have been undergoing, we investigate the merits of a two-step approach that consists of estimating the relationship between exchange rates and fundamentals in a panel cointegration setting by using a sample that excludes transition countries and then extrapolating the estimated relationships to the latter. While focusing on the first step of this approach, we discuss technical aspects underlying the extrapolation stage. As a result, we provide the methodological and empirical ingredients for computing equilibrium exchange rates for transition countries. Journal of Comparative Economics 34 (3) (2006) 499-517.