Similar to Hungary's experience over the past two years, several countries around the world have experienced rapid and large-scale real exchange rate appreciation. This study does not draw conclusions about the optimal disinflation process (i.e., which leads to a permanent decrease in inflation with the least real economic cost) and the real exchange rate. To promote widespread comparisons, the study used real exchange rate figures based on the consumer price index, but wherever possible also included wage developments.
Real exchange rate appreciation cannot in itself be analyzed as deviations from the equilibrium real rate that can cause macroeconomic effects. The two main lessons from the paper emphasize the importance of the real equilibrium exchange rate and macroeconomic policies. Under a floating exchange rate regime, two-thirds of the real exchange rate appreciation was the result of nominal exchange rate appreciation.
Strict tightening is evident: Previous real interest rates of around four percent have risen to more than six percent, which may have played a role in the appreciation of the nominal exchange rate.
Introduction
We start with those countries where the appreciation proved to be transitory and continue with those where the appreciation remained permanent.
Transitory Appreciation
Disinflation based on fixed exchange rate in countries having high inflation ___________ 6
These countries implemented policies that differ in many respects from the Latin American countries described above. A significant difference from the Latin American examples arises with regard to the current balance of payments deficit. These facts imply that shares were not necessarily affected by developments in the real exchange rate.
Only a detailed analysis of the development of the real exchange rate and/or its future will reveal whether the level of appreciation in the Czech Republic will be sustained. The appreciation of the three Baltic states has been fairly rapid since the beginning of the transition, but in the last two or three years the real exchange rate time series has leveled off, without a crisis. Portugal: The real exchange rate appreciated by about 30 percent from 1988 to 1991, a level that remained permanently stable after the transitional impact of the EMS crisis of 1992/93.
Switzerland: A sustained appreciation of 30-40 percent occurred in the early 1970s, which can be attributed to the adjustment of the undervalued real exchange rate that developed during the fixed undervalued nominal exchange rate of the Bretton-Woods system.
Portugal: _______________________________________________________________ 17
- Appreciation Prior to 1992
- The considerable deterioration in the current account balance prior to EMU
In the previous methodology, current account (CA), capital account (CA) balances and change in reserves sum to zero, taking into account net errors and omissions (NEO). In the previous methodology, all unilateral irreversible transfers, such as EU subsidies and migrant remittances, formed part of the current balance of payments. In the new methodology, the actual current balance of payments was divided into two: the current account (CA) and the capital account (KA), moreover, the capital account of the old methodology was renamed the financial account (FA).
Therefore, the term "capital account" unfortunately refers to two fundamentally separate concepts in the two methods. Part of the EU transfers thus remained in the current account, while others were moved to the capital account. In Portugal and probably in many other countries, data facilitating the breakdown of the old current account are not available retroactively, therefore current data calculated according to the old method (their source is the Banco de Portugal) are presented in the figures to promote comparison.
In the second half of the 1990s, the difference between the two balances amounted to approximately two percent of GDP. In the two years after stabilization, the difference between exports and imports improved in favor of exports. It is notable that by the early 1990s the real exchange rate had risen to the same level as in the mid-1970s, and while in the 1970s it proved to be only transitory, the high exchange rate in the 1990s, after some fluctuations, remained permanent (and will certainly remained due to the monetary union).
The foreign cycle became critical in the early 1990s, and real interest rates rose gradually until 1993. The same factors are seen in advanced sliding countries (Section 2.2), but the result was relative growth (compared to trading partners) throughout better in Portugal (picture on page 13). The evolution of the equilibrium exchange rate is also important for the persistence of real appreciation in the 1990s.
As shown in the figure on page 20, the balance was close to zero until 1995 when significant deterioration developed. No relative market loss therefore occurred in the export markets (as also shown in the figure on page 9 for 1992+6 years, taking into account the seven most important trading partners).
Real exchange rate trends __________________________________________________ 25
- Baltic and Eastern Countries
- Further Industrial Countries
- Latin America
A remarkably rapid appreciation occurred in the Baltic countries, while the fact that they started at an extremely low wage and price level after the regime change makes their assessment difficult. Rapid two-year appreciation periods are noticeable in the last three countries even after the crises. The Bulgarian real exchange rate is striking as it visibly returned to the same trend line after the 1996 hyperinflationary crisis.
However, Turkey's experience in the second half of the 1990s is a good example where crisis arose after a rapid appreciation period lasting seven years. Of the five "peripheral" EMU member states, the real exchange rate in Portugal strengthened by almost 30 percent - as examined in detail above - between 1988 and 1991/92, remaining mostly stable but temporarily weakening as a result of the ERM crisis. While a period of depreciation preceded appreciation in the early 1980s, this may have been a result of transient appreciation that preceded it.
A ten-year period of appreciation was also observed in Greece from 1986, but its rate was only about two percent per year. All five countries (Austria, Denmark, Japan, Norway and Switzerland) experienced sustained appreciation when the Bretton Woods system collapsed, most likely due to the undervaluation caused by the fixed exchange rate system. On the other hand, the Danish real exchange rate is similar to the Portuguese real exchange rate reviewed above, and Norway also shows similar processes in the mid-1980s.
Widespread appreciation occurred in all 21 countries included in the survey, with most experiencing the aforementioned "worst case scenario." Barbados presents a somewhat bizarre picture, with a current account deficit of 20 percent of GDP at the start of the great appreciation of 1972-75, while the trend has been improving. At the start of the second major appreciation in 1982-85, there were several major shortfalls, but the balance quickly turned positive and remained in near-equilibrium for fifteen years.
It is also important to note that the favorable economic growth that follows both periods of broad appreciation is a foreign phenomenon from the failed countries of Latin America. Hyperinflation hampers the estimation of Peru's figures: that is, because the uncertainty of price indices increases in such cases, so that the real estimate of more than 100 percent that results permanently may also be the result of a measurement error.
Some Conclusions Regarding the Hungarian Real Exchange Rate
The conclusion that the National Bank of the Czech Republic had no real chance to significantly reduce appreciation, even under an alternative monetary regime, cannot be ruled out either. At the same time, the Hungarian situation differs from theirs on several points: while the real exchange rate appreciation in Latin America stemmed from higher inflation under a fixed exchange rate regime, in Hungary it was due as much to the strengthening of the nominal exchange rate and to higher inflation compared to foreign countries. Permanent exchange rate appreciation had no fundamental basis in the Latin American countries, while it does in Hungary.
In contrast to the high inflation in Latin America, inflation in Hungary was around ten percent when the rapid appreciation of the exchange rate began, and the rate of appreciation also remained below the figures observed in those countries. Finally, perhaps one of the most important aspects is that the Hungarian government is committed to reducing the budget deficit, which was also foreseen in the Medium-Term Program of Economic Policy. At the same time, it is important to note that Hungary differs from the two groups in that it is on track to project an appreciation of the equilibrium real exchange rate, and perhaps also in that the real exchange rate is undervalued in a a certain amount before starting the rapid assessment.
When analyzing the actual and expected consequences of valuation, no signs of processes approaching the scale of adverse macroeconomic outcomes after interim valuation periods are evident. Although figures measuring medium-term valuation effects will only be available in the future, and in 2002 GDP growth slowed, investment declined and the unemployment rate rose slightly, market expectations and current growth figures indicate a very positive picture when compared to international ones. experience. Despite the fact that in Hungary – similar to Portugal and countries experiencing temporary appreciation – the foreign business cycle developed negatively and the GDP growth rate did not decrease to the same extent as observed in the above-mentioned countries, but it was 3.3 percent in 2002.
This was probably partly due to the expansionary fiscal policy, while in Latin America, where the fiscal deficit also rose to eight percent of GDP on average, a process of substantial decline in GDP began already in the appreciation period. In addition, market analysts do not expect a deterioration of the current account to GDP ratio, and in their view, appreciation and decline in inflation will be permanent. Furthermore, they expect a further minor fall in inflation and further weak appreciation of the real exchange rate.
Of course, the real economic effects of rapid appreciation can only be fully analyzed in the future, but it seems certain that these effects will be strongly influenced by fiscal and income policies. In floating exchange rate regimes, where real exchange rate appreciation was transitory, but prone.
Appendix “A”: Macroeconomic Figures of Countries Exhibiting Transitory
Appendix “B”: Macroeconomic Figures of Countries Exhibiting Transitory
Appendix “C”: Heterogeneity of Macroeconomic Processes in Developed Industrial
Appendix “D”: Macroeconomic Figures of Countries Exhibiting Permanent
Appendix “D”: Data sources and countries studied
The weighted average of the standardized share of total or regional imports from major foreign trading partners (excluding Japan and Venezuela), where the weights are derived from the export figures for the country under study.
