Lommatzsch and Tober (2005).7 Desai (1998) suggests that the real appreciations in the
transition economies were simply due to the stabilization policies that maintained the nominal
rate of depreciation below the rate of inflation. Brada (1998), Drabek and Brada (1998), and
Liargovas (1999) observe that the massive capital inflows and high rates of inflation in the
transition economies could be the reasons for the real appreciation of the exchange rates.
Dibooglu and Kutan (2001) argue that nominal shocks had a major influence on the real
exchange rate movements in Poland, but real shocks could explain the movements of the real
exchange rate in Hungary.
Therefore, rather than PPP based definitions we employ the definition of the long run
equilibrium real exchange rate and analytical approach utilized by Edwards (1989, 1994) and
Williamson (1985), inter alia. The long run equilibrium real exchange rate is that rate, which,
given the permanent values of the macroeconomic fundamentals, ensures the simultaneous
attainment of internal and external equilibrium. Hence, the long run equilibrium real exchange
rate may be specified as a function of the ‘sustainable’ values of the macroeconomic
fundamentals under conditions of internal and external balance.8 This framework is employed in
the exchange rate misalignment literature and the currency crisis literature.
Kemme and Teng (2000) provide a brief review of currency misalignment literature,
while examining the determinants of the equilibrium real exchange rate using both purchasing
power parity measures and estimates of the real exchange rate as a function of macroeconomic
fundamentals for Poland. Balazs and Lahreche-Revil (2003), Kemme and Roy (2003), and
7 However, Begg (1998) argues that there might not have been sufficient productivity growth in the Czech
Republic to account for the real appreciation.
8 This notion was originally proposed by Nurske (1944) and has been employed extensively, e.g., by Baffes,
Elbadawi, and O’Connell (1999), Barrell and Wren-Lewis (1989), Bayoumi, Clark, Symansky and Taylor, (1994),
Church (1992) Currie and Wren Lewis (1989), Edwards (1989), (1994), , Elbadawi (1994), , Elbadawi and
O’Connell (1990), Elbadawi and Soto (1994, 1995), Williamson (1985, 1991, 1994), Williamson and Miller (19870,
inter alia.