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Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries

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  • Marek A. Dabrowski
  • Justyna Wróblewska

Abstract

We examine the insulating property of flexible exchange rates in CEE economies considering thatthey have adopted different regimes. We estimate a set of Bayesian structural VAR models withcommon serial correlations using data spanning 1998q1-2015q4. We derive the long-term iden-tifying restrictions from a macroeconomic model. We find that irrespective of the exchange rateregime, real shocks primarily drive output. However, its reactions to these shocks are substan-tially stronger under less flexible regimes, whereas the responses to nominal shocks are similar.Hence, the insulating property of flexible regimes can reduce the costs from economic shocks.

Suggested Citation

  • Marek A. Dabrowski & Justyna Wróblewska, 2020. "Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries," International Economics, CEPII research center, issue 162, pages 34-49.
    • Handle: RePEc:cii:cepiie:2020-q2-162-3
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    More about this item

    Keywords

    Open economy macroeconomics; Exchange rate regimes; Real and nominal shocks; Bayesian structural VAR; Common serial correlation;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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