Jaromír Šindel ECES Real and Nominal Convergence Process - Different Methods of Comparison The Puzzles of Central and Eastern Europe Transformation and.

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Jaromír Šindel ECES Real and Nominal Convergence Process - Different Methods of Comparison The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Topics International Comparison –Purchasing parity concept, … CEE countries and European Union –Importance of CEEC, desegregation of GDP, … Alternative measure –Process of the real appreciation of national currency, … The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Internatinal Comparison – PPP Concept PPP Comparative Price Level Exchange Rate Deviation Index The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Real and Nominal Convergence Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, GPD per capita (in PPP $) and Comparative Price Level (OECD 30 = 100) in 2002 The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

GDP growth - Slovakia Source: The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Real and Nominal Convergence Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, PPP Development in Vysegrad Countries The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Real convergence process GDP per capita in PPS (EU-12 = 100) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Ministry of Finance, Czech Republic Portugal Slovenia Slovakia Poland Greece Czech R. Hungary

Nominal convergence process GDP per capita in euro (EU-12 = 100) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Ministry of Finance, Czech Republic Portugal Slovenia Slovakia Poland Greece Czech R. Hungary

Comparative Price Level Comparative price level development The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Ministry of Finance, Czech Republic Portugal Slovenia Slovakia Poland Greece Czech R. Hungary

Real and Nominal Convergence Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, GPD per capita (in PPP $) and Comparative Price Level (OECD 30 = 100) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

PPP and Exchange rate comparison Source: Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005 Average wage in comparison with Austria in 2003 – which columns are in exchange rate terms and which one in PPP? The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague EURAustria = 100EUR (PPP)Austria = 100 Czech Rep Hungary Poland Slovakia Slovenia Estonia Latvia Lithunia Austria

International Comparison in 2002 Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

International Comparison in 2002 Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

International Comparison in 1999 Source: OECD: Purchasing Power Parities and Real Expenditures 1999 BENCHMARK YEAR, The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

International Comparison in 2002 Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$)

International Comparison in 2002 Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$)

International Comparison in 2002 Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$)

International Comparison in 2002 Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, KV (expenditures p.c.) and CPL (both OECD 30 = 100) and PPP (per 1$) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Alternative measure of growth or real convergence process GDP growth in euro currency –The real convergence process of CEEC will be finished in Eurozone –The growth will be announced in euro currency –The cohesion of the real and nominal convergence process Concept ot the Real Gross Domestic Income –Terms of trade development The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Alternative measure of growth – GDP growth in euro Euro –The real convergence process of CEEC will be finished in Eurozone –The growth will be announced in euro currency Price convergence process –Later, but it has two channels – price differential and exchange rate development – real exchange rate appreciation –Case study of Czech Republic Alternative measure –Growth in euro currency The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Growth in national currency & in euro Avg. CZ-0,32,75,84,4 -0,8-1,00,53,32,02,1 SVK-3,75,26,55,85,63,91,32,23,34,43,4 HUN-0,63,11,4 4,54,94,25,23,73,23,1 PLN3,85,17,16,06,94,84,0 1,01,34,4 EU-12-0,82,3 1,52,42,92,83,51,50,81,9 EU-15-0,32,82,51,72,62,92,83,41,60,92,1 Source: Šaroch, S., Tomšík, V., Srholec, M. (2003) Growth in national currency in (avg.=average) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Avg. CZ23,39,410,411,60,67,8-1,38,29,411,28,9 SVK17,09,911,39,510,85,1-0,815,25,96,99,0 HUN12,73,0-5,24,710,23,68,09,911,611,86,9 PLN16,38,214,921,112,85,91,616,912,4-4,010,4 EU-12-0,82,3 1,52,42,92,83,51,50,82,0 Growth in national currency in (avg.=average)

Case study – Czech Republic average GDP growth in CZK-0,32,75,84,4-0,8-1,01,7 Inflation in CZE20,810,09,18,98,410,611,2 CZK/EUR34,1134,0634,3134,0135,7535,8934,68 Nominal appreciation CZK/EUR6,8-0,1-1,50,9-5,1-0,40,0 Inflation in EU-124,03,23,02,51,91,42,7 Inflation differential16,86,86,16,46,59,28,6 Real appreciation CZK/EUR23,66,74,67,31,48,88,5 GDP growth in EUR23,39,410,411,60,67,810,3 Source: Šaroch, S., Tomšík, V., Srholec, M. (2003) GDP Growth in Czech Republic, The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague GDP Growth in Czech Republic, average average GDP growth in CZK0,53,33,12,02,21,9 Inflation in CZE2,13,94,71,83,17,9 CZK/EUR36,8735,6134,0630,8134,3234,54 Nominal appreciation CZK/EUR-2,73,44,39,63,61,4 Inflation in EU-121,22,42,72,22,12,4 Inflation differential0,91,52,0-0,41,05,6 Real appreciation CZK/EUR-1,84,96,39,24,66,9 GDP growth in EUR-1,38,29,411,26,88,9

Case study – Czech Republic - Conclusions First period –Price differentials were higher in first period –No nominal exchange rate appreciation Second Period –Nominal exchange rate appreciation was the stronger channel in the second period But in 2010 euro instead of CZK –The real convergence process of CEEC will be finished in Euro zone –The growth will be announced in euro currency, but no nominal appreciation (overflow into inflation) Implications to ERM-II and Euro zone –Inflation and ER development – later … The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Alternative measure - critique Nominal and real convergence process put together –Yes, it is true, but … Process of real exchange rate appreciation –!! Appreciation has to be sustainable –Quality measure error –Deregulation of prices –Balassa-Samuelson problem –FDI inflow with positive effect on current account development –Better conditions for exports – customs duty, political restrictions, psychological restrictions, transaction costs, … The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Šaroch, S., Tomšík, V., Srholec, M. (2003)

Data –Use data from Deutsche Bank database Conclusions Case studies – CEE countries - Conclusions The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague

Concept ot the Real Gross Domestic Income Source: Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005 Terms of Trade Development The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Czech Rep. Germany Austria France Hungary Poland Slovakia Slovenia

Concept ot the Real Gross Domestic Income Source: Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005 Index of GDP growth per capita The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Rank of countries – GDP or RGDI development (average in ) Source: Ždárek, V.,Ekonomická výkonnost země (alternativní pohled). Bulletin CES VŠEM, č. 8, Czech Republic Slovakia Hungary Poland In turn ofDiffence (perc. points) GDPRGDI Czech Rep.41- 1,1 Hungary24- 0,2 Poland550,4 Slovakia120,7 Slovenia33- 0,5

Concept ot the Real Gross Domestic Income Source: Vintrová, R., Ždárek, V.: HDP zrychluje, ale reálný důchod zpomaluje. (2005), ekonom.ihned.cz Different Development of RGDI and GDP in Czech Republic The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague RGDIGDPDifferences (percentage points) 20002,13,9-1, ,32,61, ,71,52, ,33,20, ,64,40,2 Average ,11,50,6 Average ,92,10,8 Average ,02,91,1 1st half of 20053,74,9-1,2

Comparative Price Level Source: ČNB: ANALYSES OF THE CZECH REPUBLIC’S CURRENT ECONOMIC ALIGNMENT WITH THE EURO AREA and Vintrová, R.: Co neodhaluje HDP při analýze ek. růstu a reálné konvergence. Working Paper CES VŠEM No. 1/2005 Comparative price increases with real exchange rate appreciation The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Czech Republic Slovakia Hungary Poland Increase in p.p. CR =

Nominal convergence process GDP per capita in euro (EU-12 = 100) The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: Ministry of Finance, Czech Republic Portugal Slovenia Slovakia Poland Greece Czech R. Hungary

Comparative Price Level – Private Final Consumption – September 2005 The Puzzles of Central and Eastern Europe Transformation and Integration ECES, Prague Source: OECD: Purchasing Power Parities and Real Expenditures 2002 BENCHMARK YEAR, 2005.