Fixing the Central Parity and the Evolution of the Currency within the Exchange Rate Mechanism II in the Countries that Joined the Euro Zone

Authors

  • Lucian ANGHEL National University of Political Studies and Public Administration
  • Florina PÎNZARU National University of Political Studies and Public Administration
  • Mihaela DINU National University of Political Studies and Public Administration
  • Laurenţiu-Mihai TREAPĂT National University of Political Studies and Public Administration

Abstract

The present paper presents the models used by the countries that joined the Euro zone after 2000, in fixing the central parity and the evolution of the local currency towards Euro, when participating in Exchange Rate Mechanism II (ERM II). It synthesizes the main theories for determining the equilibrium exchange rate. It also presents the modality of putting them into practice in the countries that had already become members of the Euro zone. The better we know the other countries’ experience in the respect of the joining process to the Euro zone, the better will Romania be able to prepare itself for adopting the unique European currency. Thus, we will be synthesize the main approaches within literature and also in the economic policy deciders’ practice concerning the estimation of the equilibrium exchange rate and implicitly, of the central parity. The paper presents the modality of fixing the central parity and the experience of participating in ERM II for a number of member states that joined the Euro zone after 2000: Greece, Slovakia, Slovenia, Malta, Cyprus and Estonia. For these states we also analyze the evolution of the currency towards Euro while participating in ERM II. Starting from these examples, we explain the advantages and the disadvantages in fixing the central parity over/at/under the value of the exchange rate on the market at the moment of joining ERM II and we underline the problems that might occur in the case of choosing a central parity that is not compatible with the equilibrium value of the exchange rate.

Author Biographies

Lucian ANGHEL, National University of Political Studies and Public Administration

College of Management, NUPSPA, 6 Povernei St., Sector 1, 010643, Bucharest, Romania

Florina PÎNZARU, National University of Political Studies and Public Administration

College of Management, NUPSPA, 6 Povernei St., Sector 1, 010643, Bucharest, Romania

Mihaela DINU, National University of Political Studies and Public Administration

College of Management, NUPSPA, 6 Povernei St., Sector 1, 010643, Bucharest, Romania

Laurenţiu-Mihai TREAPĂT, National University of Political Studies and Public Administration

College of Management, NUPSPA, 6 Povernei St., Sector 1, 010643, Bucharest, Romania

References

Adam, T. (2012). Models of Equilibrium Exchange Rates used at the CNB. Comp Net Workshop, ECB. Retrieved from http://www.ecb.int/home/pdf/research/compnet/Adam-2012_04_02_ECB_general.pdf?d7a97e7167a572b40ae2103b18a4df9b.

Aggarwal, S. (2013). The Uncovered Interest Rate Parity Puzzle in the Foreign Exchange Market. Retrieved from http://web-docs.stern.nyu.edu/old_web/economics/docs/workingpapers/2013/Aggarwal_ParityPuzzle_May2013.pdf.

Ajevskis V., Rimgailaite R., Rutkaste U., and Tkačevs O. (2012). The Assessment of Equilibrium Real Exchange rate of Latvia, Bank of Latvia, Working Paper 4/2012, ISBN 978-9984-888-11-8.

Alonso-Gamo, P., Fabrizio, S., Kramarenko, V., and Wang, Q. (2002). Lithuania: History and Future of the Currency Board Arrangement. IMF Working Paper 02/127.

Altăr, M., Albu, L.L., Dumitru, I., and Necula, C. (2009). Estimarea cursului real de echilibru şi a deviaţiilor pentru România. National Institute of Economic Research, Studii Economice 090706.

Anghel, L.C., Ciurila, N., and Bojesteanu, E. (2012). Rata de schimb de echilibru și factorii săi. Cazul României., Bucharest: Editura Economică.

Anghel, L.C. (2014). Economia europeană între mișcările FED, reducerea vitezei de croazieră a Chinei și problema datoriilor suverane. ASEBUSS, 11 ianuarie 2014.

Babecky, J., Bulir, A., and Smidkova, K. (2010). Sustainable Real Exchange Rates in the New EU Member States: What did the Great Recession Change? IMF Working Paper 198.

Balassa, B. (1964). The Purchasing Power Parity Doctrine: A Reappraisal. Journal of Political Economy, 72 (6), 584–596.

Banka Slovenije, Vlada Republike Slovenije (2003). Program for ERM II Entry and Adoption of the Euro: Joint Report of the Slovenian government and the Bank of Slovenia. Retrieved from

http://www.bsi.si/en/publications.asp?MapaId=717.

Bank of Latvia, On Latvia's Participation in the Exchange Rate Mechanism II, consultat in ianuarie 2014, Retrieved from http://www.bank.lv/en/about-the-bank-of-latvia/on-latvia-s-participation-in-the-exchange-rate-mechanism-ii.

Beguna, A. (2002). Competitiveness and the Equilibrium Exchange Rate in Latvia. Euro Faculty Working Paper in Economics 16. August. Riga: University of Latvia and Euro Faculty.

Benkovskis, K., and Wortz, J. (2012). Evaluation of Non-Price Competitiveness of Exports from Central, Eastern and South-Eastern Countries in the EU market. Bank of Latvia Working Paper.

Bitans, M. (2002). Real Exchange Rate in Latvia: 1994–2001. Latvijas Banka Working Paper.

Bitans, M., and Tillers, I. (2003). Estimates of Equilibrium Exchange Rate in Latvia. Latvijas Banka. Analysis of the Real Exchange Rate in Latvia: 1994–2001. Latvijas Banka. Mimeo.

Bojeşteanu, E. (2010). Relaţii Monetar-Financiare Internaţionale. Bucharest: ASE Publihing House.

Bojeşteanu, E., Iordache, Ş., Leonte, A., and Manu, A.S. (2012). Ajustarea dezechilibrului extern în economiile emergente. Este experienţa României diferită? lecture at Colocviile BNR de

Politică Monetară: Elemente ale cadrului de analiză şi prognoză al politicii monetare.

Buldorini, L., Makrydakis, S., and Thimann, C. (2002). The effective exchange rates of the euro. European Central Bank Occasional Paper Series no. 2.

Burgess, R., Fabrizio, S., and Xiao, Y. (2003). Competitiveness in the Baltics in the Run-Up to EU Accession. IMF Country Report No. 114.

Central Bank of Malta (2006). A Study of the Equilibrium Real Exchange Rate of the Maltese Lira. Retrieved from http://www.centralbankmalta.org/updates/downloads/pdfs/A%20Study%20of%

the%20Equilibrium%20Real%20Exchange.pdf.

Codirlaşu, A., and Chideşciuc, A.N. (2004). Estimarea efectului Balassa-Samuelson în România. Reseracg presented at the Tineri Economişti Conference (National Bank of Romania, Bucharest).

De Broeck, M., and Sløk, T. (2001). Interpreting Real Exchange Rate Movements in Transition Countries. IMF Working Paper No. 56.

Dumitru, I. (2008). Efectul Balassa-Samuelson în România – rolul preţurilor reglementate. MPRA Working Paper no. 18611.

Genorio, H., and Kozarmenik, D. (2004). FEER estimates – the Slovenian case. Prikazi in analize XII/1, Banka Slovenije.

Hinosaar, M., Kaadu, H., and Uskula, L. (2005). Estimating the Equilibrium Exchange Rate of the Estonian Kroon. Working Papers of Eesti Pank, no. 2 2005.

International Monetary Fund, 2010. Romania—Staff Report for the 2010 Article IV Consultation, Fourth Review Under the Stand-By Arrangement, and Requests for Modification and Waiver of

Nonobservance of Performance Criteria. Retrieved from http://www.imf.org/external/pubs/ft/scr/2010/cr10227.pdf

International Monetary Fund (2012). Annual Report on exchange arrangements and exchange restrictions. Retrieved from http://www.imf.org/external/pubs/nft/2012/eaer/ar2012.pdf.

International Monetary Fund (2012). Romania—Fifth Review Under the Stand-By Arrangement, and Requests for Modification and Waiver of Nonobservance of Performance Criteria.

http://www.imf.org/external/pubs/ft/scr/2012/cr12157.pdfs.

Isărescu, M. (2008). Probleme ale politicii monetare într-o economie emergentă. Cazul României. Lecture at the Royal Academy of Economic and Financial Sciences.

Isard, P., Faruquee, H., Kincaid, G.R., and Fetherston, M. (2001). Methodology for Current Account and Exchange Rate Assessements, IMF Occasional Paper 209.

Isard, P. (2007). Equilibrium Exchange Rates: Assessement Methodologies, IMF Working Papers 07/296, International Monetary Fund.

Lee, J., Milesi-Ferretti, G.M., Ricci, L.A. (2008). Real Exchange Rates and Fundamentals: A Cross-Country Perspective, IMF Working Papers 08/13, International Monetary Fund.

Komerek, L., and Melecky, M. (2004). The Behavioural Equilibrium Exchange Rate of the Czech Koruna. Czech National Bank Project, no. A2/04.

Kyriacou, G., and Papageourghiu, M. (2010). Assessing the Equilibrium Exchange Rate of the Cyprus Pound at the time of Euro Adoption. Central Bank of Cyprus Working Paper 2010-6.

Maeso-Fernandez F., Osbat C., and Schatz, B. (2004). Towards the estimation of equilibrium exchange rates for CEE acceding countries: methodological issues and a panel cointegration perspective. ECB Working Paper Series, no. 353.

Oomes, N. (2005). Maintaing Competitiveness Under Equilibrium Real Appreciation: The Case of Slovakia. IMF WP/05/65.

Penkova-Pearson, E. (2011). Trade, Convergence and Exchange Rate Regime: Evidence from Bulgaria and Romania. National Bank of Bulgaria Discussion Papers, no. 85/2011.

Salto M, and Turrini, A. (European Commission) 2010. Comparing alternative methodologies for real exchange rate assessment. European Economy. Economic Papers. September 2010. Brussels.

Williamson, J. (1994). Estimating Equilibrium Exchange Rates. Peterson Institute Press: All Books, Peterson Institute for International Economics, no. 17, April.

Zumer, T. (2002). Estimation of the Balassa-Samuelson effect in Slovenia. Prikazi in analize X/1, Banka Slovenije.

Downloads

Published

2014-06-05

How to Cite

ANGHEL, L., PÎNZARU, F., DINU, M., & TREAPĂT, L.-M. (2014). Fixing the Central Parity and the Evolution of the Currency within the Exchange Rate Mechanism II in the Countries that Joined the Euro Zone. Management Dynamics in the Knowledge Economy, 2(1), 21–40. Retrieved from https://www.managementdynamics.ro/index.php/journal/article/view/48

Issue

Vol. 2 No. 1 (2014): Issue 4

Section

Articles

License

Under the Creative Commons Attribution-NonCommercial-NoDerivs license, the users are free to share (copy, distribute and transmit the contribution) with the condition to attribute the contribution in the manner specified by the author or licensor. They may not alter, transform, or build upon this work.