The behavioral equilibrium exchange rate (BEER) model of the Czech koruna is derived in this paper and estimated by three methods suitable for nonsta-tionary time series. The considered potential determinants of the real equilibrium exchange rate are the productivity differential, the interest rate differential, the terms of trade, net foreign direct investment, net foreign assets, government consumption, and the degree of openness. We find that the Czech koruna was on average undervalued over the period from 1994 to 2004 by about 7 percent with respect to the estimated BEER. The significant determinants of the equilibrium exchange rate of the Czech koruna appear to be the productivity differential, the real interest rate differential, the terms of trade, and the net foreign direct investment.
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