2/2005 Marit Hinnosaar, Hannes Kaadu and Lenno Uusküla. Estimating the equilibrium exchange rate of the Estonian kroon

Working Papers of Eesti Pank. No 2, 2005

The paper presents empirical estimations of the equilibrium exchange rate of the Estonian kroon. The behavioural equilibrium exchange rate (BEER) approach is used to analyse the dynamics of the real effective exchange rate in the time period from 1995 to 2002. The estimates range from a 15% undervaluation to a small overvaluation of the kroon in the beginning of the period and indicate a position close to equilibrium in 2002.
JEL Code: C22, F31
Key words: equilibrium exchange rate, BEER, cointegration, Estonia

* The authors of the paper would like to thank Reimo Juks, Martti Randveer, Aurelijus Dabušinskas, Balász Égert, David Mayes, Lúcio Vinhas de Souza and the participants of the seminars at Eesti Pank and the European Central Bank for their valuable comments.

Authors' e-mail addresses: marit [at] hinnosaar.net, hannes.kaadu [at] tukkk.fi, lenno.uuskyla [at] epbe.ee

The views expressed are those of the authors and do not necessarily represent the official view of Eesti Pank.

Contents

Introduction
1. Empirical Estimates of the Equilibrium REER of the Estonian Kroon
2. REER Indexes in Estonia 1995Q1-2003Q1
3. BEER Approach to an Equilibrium Real Exchange Rate
3.1. Methodology
3.2. Data Description
3.3. Empirical Results
3.4. Equilibrium of Fundamentals and the Equilibrium Exchange Rate Calculation
4. Summary
References
Appendix 1. Strengths and weaknesses of different price indices for the REER
Appendix 2. Data sources for price indexes
Appendix 3. Different REER indices
Appendix 4. Estimations of the Balassa-Samuelson Effect
Appendix 5. Acronyms
Appendix 6. Relative productivity
Appendix 7. Graphical description of data
Appendix 8. Calculated equilibrium exchange rates

Estimating the Equilibrium Exchange Rate of the Estonian Kroon, Working Papers of Eesti Pank No 2, 2005 (PDF*)

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