On the Way to European Union: Nominal and Real Convergence in Transition Countries

The paper provides an introduction to essays published in this volume, which focus on nominal and real convergence in transition countries. The paper is based on the idea that the process of convergence can, to a large extent, be viewed via developments in real exchange rates. Key issues associated with real exchange rate developments in transition countries are defined and the consequent challenges for policy makers are discussed. A trend towards real appreciation has been observed in the data since the outset of transition, though it has slowed in the past two years. Now it appears that the most economically successful transition countries are turning away from the trend via the inflation differential and toward a stronger reliance on nominal exchange rate changes. Policy makers will be challenged by the issue as to what level of real appreciation is sustainable, i.e., compatible with sufficient external competitiveness and macroeconomic stability.