Equilibrium exchange rate in the Czech Republic

Lots of possible explanations of the development of the exchange rate can be found in the available literature. The aim of this paper is to find which factors influence the development of the Czech currency (measured as real effective exchange rate) using the Equilibrium Exchange Rate Approach (EER) and to assess periods with over valuated and under valuated exchange rate. This approach defines variables that cause changes in the level of the exchange rate and assess its effect on equilibrium exchange rate. In the case of empirical analysis, there exist a lot of econometric methods that can be used. This article is based on the (Johansen) cointegration analysis. Since principal of EER is to find lung run equilibrium, Vector Error Correction Model (VECM) is constructed. Economic theory defines some variables that influence equilibrium exchange rate. The most important of them are the labour productivity, interest rates and government or foreign debt. These variables are also used in this article. We use quarterly data from 2000 to 2014.