Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries

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Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries

Author Info

Aleš Bulíř () (International Monetary Fund)

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Ales Bulir

Abstract

The paper looks at the hypothesis that financial-market liberalization can create a basis for more stable exchange rates, as deviations of exchange rates from equilibrium levels bring forth stabilizing flows of liquidity. This hypothesis suggests that opening up financial markets militates in favor of exchange-rate flexibility by increasing the viability of a floating regime as well as making it more difficult to maintain a peg. The paper examines this hypothesis in a sample of four transition economies and finds that exchange rates tend to return faster to their Hodrick-Prescott-based values where markets are liberalized. The results suggest that early and successful foreign-exchange liberalization pays off in terms of depth of the market and, hence, faster adjustment of the exchange rate to shocks. Moreover, it implies that central banks should not be overly concerned with short-run volatility of their national exchange rates.

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Publisher Info
Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 55 (2005)
Issue (Month): 5-6 (May)
Pages: 206-231
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Handle: RePEc:fau:fauart:v:55:y:2005:i:5-6:p:206-231

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Paper
- AleÅ¡ Bulir, 2004. "Liberalized Markets Have More Stable Exchange Rates: Short-Run Evidence from Four Transition Countries," IMF Working Papers 04/35, International Monetary Fund. [Downloadable!]

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Juraj Stančík, 2007. "Determinants of Exchange-Rate Volatility: The Case of the New EU Members," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(9-10), pages 414-432, October. [Downloadable!]
Gilda Fernandez & Cem Karacadag & Rupa Duttagupta, 2004. "From Fixed to Float: Operational Aspects of Moving Towards Exchange Rate Flexibility," IMF Working Papers 04/126, International Monetary Fund. [Downloadable!]

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