On the way to European Union: Nominal and real convergence in transition countries

The paper provides an introduction to essays published in this volume, whic h 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 an d the consequent challenges for policy makers are discussed. A trend toward s real appreciation has been observed in the data since the outset of trans ition, 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 nom inal exchange rate changes. Policy makers will be challenged by the issue a s to what level of real appreciation is sustainable, i.e., compatible with sufficient external competitiveness and macroeconomic stability.