With a fixed exchange rate, as we have with the Litas, a currency appreciates when prices rise by more than price increases in countries with which economic transactions occur. The real exchange rate for the Litas has appreciated against the more stable currencies of Europe and the US, while it had depreciated against those of the former Soviet states. Because of the large weight of the latter in Lithuania s transactions, on average, the Litas appears to have depreciated in real terms. There is no obvious evidence that the Litas is overvalued at this time. While Lithuania has experienced some erosion of its competitiveness since 1993, competitive signs are still generally positive.
Flexibility helps in the adjustment of real exchange rates to changing external circumstances.
Flexibility of wages, interest rates, prices and employment conditions as well as flexibility in allocating capital resources determine the speed and timeliness of adjustment. The exchange rate is a macro tool. It is used to bring macroeconomic variables into a sustainable balance. It is not a tool for stimulating exports from any specific sector and is not a tool per se for stimulating exports at all. Observations of the merchandise trade balance should not be the only or even the main force driving decisions about exchange rate management.