Download www.osf.bg

EXCHANGE-RATE REGIME
AND RESPONSE TO THE CRISIS
IN THE EU NEW MEMBER
STATES
KALIN HRISTOV
OUTLINE
• CONVENTIONAL VIEW ON EXCHANGE RATE
REGIMES AND COMPETITIVENESS
• DEVELOPMENTS IN PRICE BASED
MEASURES OF COMPETITIVENESS – ULC,
REER
• VALIDITY OF CONVENTIONAL VIEW IN
PRACTICE
• EXPERIENCE DURING THE RECENT CRISIS –
EXCHANGE RATE DEVELOPMENTS, EXPORT
PERFORMANCE, GROWTH AND INFLATION
CONVENTIONAL VIEW EXCHANGE RATE AND
COMPETITIVENESS
• There is a conventional view that exchange rate
flexibility allows a conduct of a countercyclical
monetary policy and provides short term
competitive advantage. This view is based on a
number of assumptions:
– Law of one price holds
– Exchange rate pass-through (ERPT) is low
– No balance sheet (BS) effects ( no borrowing and saving in
foreign currency)
– Low bargaining power of the labor unions
– Marshall-Lerner condition holds
– No “fear of floating” or “fear of losing international
reserves”
DEVELOPMENTS IN COMPETITIVENESS– ULC
• EU NMS experience a process of deepening trade
and financial integration and rapid nominal and
real convergence. This is reflected in ULC and
REER developments
• The dynamics of ULC in the EU NMS shows two
common trends:
– the nominal convergence with EU 15 is related
to an increase in prices and wages which is
reflected in a steady increase in nominal ULC
before the crisis
– competitiveness is however maintained which is
reflected in the relatively stable real ULC for the
majority of the countries
NOMINAL ULC IN NATIONAL CURRENCY, 2000=100
(four-quarter moving average)
350
350
300
300
250
250
200
200
150
150
100
100
50
2000
50
2001
2002
2003
2004
2005
2006
2007
2008
2009
Romania
Latvia
Bulgaria
Hungary
Lithuania
Slovenia
Slovakia
Czech Republic
Poland
Estonia
Source: ECB
Note: in descending order as of 2009:q2
NOMINAL UNIT LABOR COST IN EURO
2000=100
200
200
180
180
160
160
140
140
120
120
100
100
80
2000
Romania
Hungary
80
2001
2002
2003
Estonia
Lithuania
2004
2005
Czech Republic
Slovenia
2006
Latvia
Poland
Source: European Commission, AMECO database, last update: 22 Apr 2009
Note: in descending order as of 2008. EC forecast for 2009
2007
2008
2009
Slovakia
Bulgaria
REAL UNIT LABOR COST
2000=100
125
125
120
120
115
115
110
110
105
105
100
100
95
95
90
90
85
85
80
80
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Estonia
Latvia
Lithuania
Hungary
Bulgaria
Slovenia
Slovakia
Romania
Poland
Czech Republic
Source: European Commission, AMECO database, last update: 22 Apr 2009
Note: in descending order as of 2008. EC forecast for 2009
DEVELOPMENTS IN COMPETITIVENESS – REER
• The dynamics of the real effective exchange rate
based on nominal ULC shows trend of gradual
increase during the last ten years in all EU new
member countries which is due to the process of
nominal and real convergence
• The appreciation reflects productivity gains in
these countries
• Reflecting
predominantly
equilibrium
trend
appreciation the rise in REER does not erode
competitiveness
REAL EFFECTIVE EXCHANGE RATE, ULC BASED,
1999=100
240
240
220
220
200
200
180
180
160
160
140
140
120
120
100
100
80
80
01'99
01'00
01'01
01'02
01'03
01'04
01'05
01'06
01'07
01'08
Romania
Slovakia
Latvia
Hungary
Estonia
Lithuania
Bulgaria
Poland
Slovenia
Czech Rep
Source: European Commission, Price and Cost Competitiveness, May 2009
Note: in descending order as of 2008:q4. The REER index for each of the countries is calculated relative to a basket of 36
industrial countries.
12%
LABOR PRODUCTIVITY DIFFERENTIALS BETWEEN NMS
and EU15
10%
12%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
2001
Romania
Hungary
Latvia
2002
2003
2004
Lithuania
Poland
Bulgaria
2005
2006
2007
Slovakia
Slovenia
Source: European Commission, AMECO database, last update: 22 Apr 2009
Note: in descending order as of 2008. EC forecast for 2009
2008
2009
Czech Republic
Estonia
VALIDITY OF CONVENTIONAL VIEW IN PRACTICE
• The assumptions of the traditional view are rarely
met in practice:
– EU NMS are small open economies with free capital
mobility and trade
– Their recent development has been influenced by large
capital inflows
– High level of euroisation (credit, deposits) which implies
big balance sheet effects
– NMS’ exporters have low international pricing power
– The impacts of the ERPT, BS effects, labor unions and
Marshall-Lerner condition vary across EU NMS
• Hence, competitiveness implications of ER regime
are not straightforward (contrary to the traditional
view)
EXPERIENCE DURING THE RECENT CRISIS –
EXCHANGE RATE DEVELOPMENTS
• Is the view of a higher vulnerability of the fixed
exchange rate regime supported by the latest
empirical data?
• Do countries with flexible exchange rate which
potentially can allow depreciation of their exchange
rate have better export performance during the
current crisis?
• Is the division between countries with fixed and
flexible exchange rate regime relevant during the
current crisis?
EXPERIENCE DURING THE RECENT CRISIS – REAL
ACTIVITY AND EXPORT PERFORMANCE
•
GDP and unemployment developments as well
as export dynamics in euro follow similar
patterns across countries (although magnitudes
vary)
•
The exchange rate regime (fixed or flexible) not a
dividing characteristic
•
Trade is shrinking in all countries (having fixed
or flexible exchange rate) because of the
common shock – decrease of the volume of the
world trade
GDP REAL GROWTH RATES , y-o-y (%)
15
15
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
-20
-20
-25
-25
q1'07
q2'07
Poland
Romania
Latvia
q3'07
q4'07
Bulgaria
Slovenia
Hungary
Source: Eurostat
Note: in descending order as of 2009:H1
q1'08
q2'08
q3'08
q4'08
Czech Republic
Estonia
q1'09
q2'09
Slovakia
Lithuania
GDP GROWTH RATES
10
5
0
-5
%
-10
-15
-20
-25
2008
BULGARIA
CZECH REP.
ESTONIA
2009f
HUNGARY
LATVIA
LITHUANIA
POLAND
ROMANIA
FISCAL POSITION
2
1
0
% of GDP
-1
-2
-3
-4
-5
-6
-7
-8
2008
BULGARIA
CZECH REP.
ESTONIA
2009f
HUNGARY
LATVIA
LITHUANIA
POLAND
ROMANIA
CURRENT ACCOUNT
10
5
0
% of GDP
-5
-10
-15
-20
-25
-30
2008
BULGARIA
CZECH REP.
ESTONIA
2009f
HUNGARY
LATVIA
LITHUANIA
POLAND
ROMANIA
UNEMPLOYMENT RATES, seasonally adjusted (%)
18
18
16
16
14
14
12
12
10
10
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
2
Jul-08
2
Jun-08
4
May-08
4
Apr-08
6
Mar-08
6
Feb-08
8
Jan-08
8
Latvia
Lithuania
Estonia
Slovakia
Poland
Bulgaria
Czech Republic
Slovenia
Romania
Hungary
Source: Eurostat
Note: in descending order as of the last 3 months
SHARE OF EXPORT OF GOODS IN WORLD EXPORT, 1999=100
350
350
300
300
250
250
200
200
150
150
100
100
50
50
2000
2001
Lithuania
Romania
Hungary
2002
2003
2004
2005
Slovakia
Bulgaria
Slovenia
2006
P oland
Czech Republic
Source: European Commission, AMECO database, last update: 22 April 2009
Note: in descending order as of 2008. EC forecast for 2009-2010
2007
2008
2009
2010
Latvia
Estonia
EXPORT SHARES of EU NMS in EU27 IMPORTS
(annualized index, 2000=100)
240
240
220
220
200
200
180
180
160
160
140
140
120
120
100
100
q1'02 q3'02 q1'03 q3'03 q1'04 q3'04 q1'05 q3'05 q1'06 q3'06 q1'07 q3'07 q1'08 q3'08 q1'09
Slovakia
Czech Republic
Estonia
Source: Eurostat,BNB
Note: in descending order as of 2009:q2
Lithuania
Hungary
Poland
Romania
Slovenia
Bulgaria
Latvia
EXPORTS of EU NMS in EURO
(annual growth, 3-month moving average in %)
%
40
40
30
30
20
20
10
10
0
0
%
-10
-10
-20
-20
-30
-30
-40
-40
01'07 04'07 07'07
Hungary
Czech Republic
10'07 01'08
Poland
Slovakia
Source: Eurostat, BNB
Note: in descending order as of July 2009
04'08 07'08
Slovenia
Latvia
10'08 01'09 04'09 07'09
Estonia
Lithuania
Bulgaria
Romania
EXCHANGE RATE FLEXIBILITY AND
COMPETITIVENESS – RECENT EXPERIENCE
• Possible reasons for the failure of the nominal
exchange rate depreciation to improve
competitiveness:
– depreciation leads to more expensive imports (imports of
raw materials and investment goods), thus increases costs
of production
– depreciation increases the inflation rate which pushes up
wages
– depreciation leads to balance sheet effects and increases
cost of financing for the corporate sector
– External demand is depressed
ANNUAL HICP INFLATION
20
20
15
15
10
10
%
%
5
5
0
0
-5
-5
2001
2002
2003
2004
2005
2006
2007
2008
2009
Romania
Poland
Lithuania
Latvia
Bulgaria
Slovakia
Czech Republic
Slovenia
Estonia
Hungary
Source: Eurostat
Note: in descending order as of the latest three months
-25
-25
-30
-30
-35
-35
-40
-40
-45
-45
-50
-50
EUR-RON X-RATE
EUR-PLN X-RATE
EUR-CZK X-RATE
EUR-HUF X-RATE
06/10/2009
06/09/2009
16/09/2009
26/09/2009
17/08/2009
27/08/2009
18/07/2009
28/07/2009
07/08/2009
18/06/2009
28/06/2009
08/07/2009
29/05/2009
08/06/2009
29/04/2009
09/05/2009
19/05/2009
09/04/2009
19/04/2009
10/03/2009
20/03/2009
30/03/2009
18/02/2009
28/02/2009
19/01/2009
29/01/2009
08/02/2009
30/12/2008
09/01/2009
30/11/2008
10/12/2008
20/12/2008
31/10/2008
10/11/2008
20/11/2008
11/10/2008
21/10/2008
11/09/2008
21/09/2008
01/10/2008
01/09/2008
EXCHANGE RATE DEVELOPMENTS
10
10
5
5
0
0
-5
-5
-10
-10
-15
-15
% -20
-20 %
Accumulated Development, Sept '08 - Mar '09
5.0%
4.5%
Romania
4.0%
Inflation
3.5%
3.0%
Poland
2.5%
2.0%
Hungary
1.5%
1.0%
Czech Republic
0.5%
0.0%
0%
5%
10%
15%
20%
25%
Exchange rate depreciation
Source: ECB, BNB
30%
35%
40%
EXCHANGE RATE REGIME AND MONETARY
CONDITIONS DURING THE RECENT CRISIS
• The choice of an exchange rate regime
cannot unequivocally be associated with
advantages or disadvantages
• Problems of the autonomous monetary
policy’s capabilities during the crisis:
– Transmission of the conducted monetary policy
is limited
– Pursuing multiple domestic economic objectives
is difficult
– Asymmetric autonomy (“Yes” in “good times”,
“No” in “bad times”)