Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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”)