Are the CEECs ready for the ERM II?
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Authors: Wong, T. and Hölscher, J.
Journal: Problems and Perspectives in Management
The aim of this paper is to investigate whether the chosen accession countries are ready to join the ERM II, if so, should they join over or under-valued. The four most advanced candidate countries are chosen, namely the Czech Republic, Hungary, Poland, and Estonia. The method of fundamental equilibrium exchange rate and the asset price approach are adopted for the empirical test. Empirical testing has been adopted to test exchange rate misalignment and to construct the FEER series, based on the asset market approach and the FEER models. The testing period is set from the first quarter of 1995 to the second quarter of 2002. FEER estimation results along with additional research concluded that exchange rates in the four candidate countries were more so at their equilibrium levels in 2001, and within the allowance of the ERM II fluctuation band, +/-15%. In order for the four countries to join the ERM II in 2004, their exchange rates need to depreciate more to avoid overvalued entry, in particular Poland.