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Exchange rate as a shock absorber in Poland and Slovakia: Evidence from Bayesian SVAR models with common serial correlation

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  • Dąbrowski, Marek A.
  • Wróblewska, Justyna

Abstract

The paper examines whether exchange rates in Poland and Slovakia acted as shock absorbers or shock-propagating mechanisms. A set of Bayesian structural VAR models is built for each country that enables us to identify supply, demand, monetary and financial shocks. Identifying restrictions are derived from the extended stochastic macroeconomic model of an open economy. Sample covers quarterly data 1998–2013. Three main conclusions are as follows. First, it is demonstrated that overly parsimonious VAR models result in an imperfect identification of shocks that distorts the results. Second, empirical evidence is found that the higher exchange rate flexibility in Poland than in Slovakia contributed to the absorption of real shocks. Third, though financial shocks were important source of exchange rate changes in Poland, especially in the run-up to the crisis, their impact on output remained similar to that in Slovakia.

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  • Dąbrowski, Marek A. & Wróblewska, Justyna, 2016. "Exchange rate as a shock absorber in Poland and Slovakia: Evidence from Bayesian SVAR models with common serial correlation," Economic Modelling, Elsevier, vol. 58(C), pages 249-262.
    • Handle: RePEc:eee:ecmode:v:58:y:2016:i:c:p:249-262
    DOI: 10.1016/j.econmod.2016.05.013
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    Cited by:

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    2. Monoj Kumar Majumder & Mala Valliammai Raghavan & Joaquin L. Vespignani, 2021. "Impact of commodity price volatility on external debt: the role of exchange rate regimes," Applied Economics, Taylor & Francis Journals, vol. 53(57), pages 6626-6640, December.
    3. Dąbrowski, Marek A. & Papież, Monika & Śmiech, Sławomir, 2021. "Output volatility and exchange rates: New evidence from the updated de facto exchange rate regime classifications," MPRA Paper 107133, University Library of Munich, Germany.
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    5. Dąbrowski, Marek A. & Wróblewska, Justyna, 2020. "Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries," International Economics, Elsevier, vol. 162(C), pages 34-49.
    6. De, Kuhelika & Sun, Wei, 2020. "Is the exchange rate a shock absorber or a source of shocks? Evidence from the U.S," Economic Modelling, Elsevier, vol. 89(C), pages 1-9.

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    More about this item

    Keywords

    Open economy macroeconomics; Real exchange rate; Shock absorption; Monetary integration; Bayesian structural VAR; Common serial correlation;
    All these keywords.

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • 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
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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