Determinants of the Real Exchange Rate, Misalignment and Implications for Growth in Poland

Exchange rate misalignment may exacerbate the costs of transition for the former socialist economies. We examine the exchange rate policies of Poland, calculate the real exchange rate based upon the CPI, PPI, wage rates and profits and then calculate misalignment. Purchasing power parity misalignment indicates the zloty was persistently overvalued from December 1990 to May 1999. In contrast, misalignment based upon sustainable macroeconomic fundamentals indicates the zloty is initially overvalued, then undervalued in the mid-1990s. Then, with the advent of the gliding band the zloty becomes overvalued. This measure of currency overvaluation is also negatively correlated with real export growth. Policy makers should be concerned about the growing overvaluation, as real export growth would be expected to decline