A Long-Term Real Appreciation as the Phenomenon of Economic Convergence

The paper discusses the phenomenon of long-term real equilibrium appreciation of the koruna in the context of economic, i.e. nominal and real convergence. The real appreciation can take place either through a nominal exchange rate channel or through inflation differential channel vis-á-vis the reference country, or through a combination of those two channels. However, the choice of monetary policy regime predetermines the occurrence and intensity of those channels. Subsequently, the paper summarizes the sources of equilibrium real appreciation, i.e. Balassa-Samuelson effect, the effect of terms of trade, FDI inflows, the impact of changes in the structure of domestic consumption and the effect of state administrative prices. It also presents range of models which are applicable for estimation of equilibrium (real) exchange rate. Finally, the paper presents and discusses trajectory of equilibrium real appreciation resulting from models of the CNB (QPM, g3 and others).