Sources of exchange rate dynamics in the European transition economies

Mirdala, Rajmund (2010): Sources of exchange rate dynamics in the European transition economies. Published in: Journal of Advanced Studies in Finance , Vol. Volume, No. Issue Number 1 (June 2010): pp. 60-71.

Abstract

Exchange rates in the European transition economies are currently exposed to the exogenous shocks as a result of higher uncertainty on the foreign exchange markets related to the various kinds of world economic crisis implications. Higher vulnerability of exchange rates of these countries to the exogenous shocks reflects decreased confidence of financial markets to the recovery process as well as an ability of the governments to sustain persisting fiscal pressures leading to higher fiscal deficits and public debt. Another issue that emphasizes the role of exogenous shocks in determining the exchange rate development in the European transition economies is the ability of national central banks to perform “suitable” monetary policy that would be able to support the recovery process in these economies while still being able to protect exchange rate of the national currency against speculative attacks and to keep exchange rate stable in the medium term horizon. In the paper we analyze the sources of exchange rate movements in the European transition economies (Bulgaria, the Czech republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania) in the period 2000-2009 using SVAR (structural vector autoregression) approach applied on each country individual data as well as panel data. We decompose the variability of NEER and REER in these countries to permanent and temporary shocks. Impulse-response functions are also computed in order to estimate the behaviour of NEER and REER after structural one standard deviation innovations. The relevant outcomes of the analysis we compare with the results of the tests for the whole euro area (represented here by old EU member countries - EU-12 group). This approach helps us to understand the common as well as differing features of NEER and REER determination in the European transition economies and the old EU member countries.

• Item Type: MPRA Paper
• Language: English
• Keywords: exchange rates, exogenous shocks, structural vector autoregression, variance decomposition, impulse-response function, panel data analysis
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

1.Bayoumi, Tamin A. and Eichengreen, Barry (1992) Shocking Aspects of European Monetary Unification, [NBER Working Paper, no. 3949.] Cambridge, National Bureau of Economic Research.

2.Ben Arfa, N. (2009) Analysis of Shocks Affecting Europe: EMU and some Central and Eastern Acceding Countries. In: Panoeconomicus. 1(56): 21-38

3.Borghijs, Alain and Kuijs, Louis (2004) Exchange rate in the Central Europe, [IMF Working Paper, no. 04/02.] Washington, International Monetary Fund.

4.Clarida, Richard and Gali, Jordi (1994) Sources of Real Exchange Rate Fluctuations: How Important Are Nominal Shocks? Carnegie-Rochester Conference Series on Public Policy 41, p. 1-56.

5.Fidrmuc, Jarko and Korhonen, Iikka (2001) Similarity of supply and demand shocks between the Euro area and the CEECs, BOFIT Discussion Papers 14/2001, Bank of Finland, Institute for Economies in Transition

6.Gonda, Vladimír (2006) European Monetary Union in the Context of Global Processes in World Economy, Journal of Economics (Ekonomicky casopis), 4(54): 352-367.

7.Iša, Ján and Okáli, Ivan (2008) European Monetary Union, Optimum Currency Area and Possible Effects of the Slovakia’s Joining the Euro Area, Politicka ekonomie, 3(56): 318-344.

8.Mirdala, Rajmund (2009): Exchange rate pass-through to domestic prices in the selected Central European countries, Journal of Applied Economic Sciences, 3(4): 408-424

9.Mirdala, Rajmund (2009) Shocking aspects of monetary integration (SVAR approach), Journal of Applied Research in Finance, 1(1): 52-63.

10.Stazka, Agniezska (2006) Sources of Real Exchange Rate Fluctuation in Central and Eastern Europe, [CESifo Working Paper, no. 1876.] Munich, CESifo GmbH.