Germany: Bundesbank Monthly Report: Fundamental determinants of real exchange rate movements in the central and east European accession countries

In the years of reform and reconstruction, the currencies of all the EU accession countries in central and eastern Europe have appreciated in real terms. The relatively large increases in productivity during the economic catchingup process are the most common explanation given for this. In principle, however, other factors may also play a role in influencing shifts in the international price relationships between the advanced economies and countries that are catching up. This article first provides a brief overview of the real exchange rate movements in the central and east European accession countries and then, on the strength of this, reports on the results of an analysis of the underlying determinants. This reveals that the relatively large productivity increases which characterise the catchingup and development processes are the prime, but by no means the sole, cause of the real currency appreciation in those countries. The transmission mechanisms which lie behind this are, nevertheless, more complex than is sometimes assumed