Maintaining competitiveness under equilibrium real appreciation: The case of Slovakia

This paper estimates the equilibrium real exchange rate path for the Slovak koruna. It finds that the real exchange rate was undervalued until recently, as Slovak prices were low even when adjusted for differences in income and productivity. However, substantial increases in administered prices and indirect taxes have reduced most of this initial undervaluation and have brought the real exchange rate near equilibrium. Taking into account this “catch-up” effect, the productivity-driven equilibrium real appreciation rate during 2005−2009 is estimated at close to 3% per year, but can be significantly lower with the help of fiscal consolidation.