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Some Exchange Rates Are More Stable than Others: Short-Run Evidence from Transition Countries

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  • Ales Bulir

Abstract

The paper investigates empirically the endogenous liquidity nexus of exchange rate determination on a sample of four transition economies. We find evidence in favor of the hypothesis of a nonlinear error correction process vis-a-vis longer-term trend deviations. The results suggest that early and successful exchange-rate market and financial-account liberalization pays off in terms of depth of the market and, hence, faster adjustment of national currencies to short-term shocks to the exchange rate.

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File URL: http://www.cnb.cz/en/research/research_publications/cnb_wp/download/wp5-2003.pdf
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Bibliographic Info

Paper provided by Czech National Bank, Research Department in its series Working Papers with number 2003/05.

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Date of creation: Jun 2003
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Handle: RePEc:cnb:wpaper:2003/05

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Keywords: Exchange rate; endogenous liquidity; error-correction mechanism; nonlinearity.;

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References

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  1. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
  2. Devereux, Michael B & Lane, Philip R., 2002. "Understanding Bilateral Exchange Rate Volatility," CEPR Discussion Papers 3518, C.E.P.R. Discussion Papers.
  3. Siklos, Pierre L. & Granger, Clive W.J., 1997. "Regime-Sensitive Cointegration With An Application To Interest-Rate Parity," Macroeconomic Dynamics, Cambridge University Press, vol. 1(03), pages 640-657, September.
  4. Tomas Holub, 2004. "Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience," Research and Policy Notes 2004/01, Czech National Bank, Research Department.
  5. Hamid Faruqee & Lee Redding, 1999. "Endogenous Liquidity Providers and Exchange Rate Dynamics," Canadian Journal of Economics, Canadian Economics Association, vol. 32(4), pages 976-994, August.
  6. Bacchetta, Philippe & van Wincoop, Eric, 2003. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," CEPR Discussion Papers 3808, C.E.P.R. Discussion Papers.
  7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  8. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  9. Lucio Sarno, 2003. "Nonlinear Exchange Rate Models: A Selective Overview," Rivista di Politica Economica, SIPI Spa, vol. 93(4), pages 3-46, July-Augu.
  10. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  11. repec:cup:macdyn:v:1:y:1997:i:3:p:640-57 is not listed on IDEAS
  12. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
  13. Siklos, P.L. & Granger, C.W.J., 1997. "Regime Sensitive Cointegration with an Application to Interest rate Parity," Working Papers 97-5, Wilfrid Laurier University, Department of Economics.
  14. Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  15. Darvas, Zsolt & Szapary, Gyorgy, 2000. "Financial Contagion in Five Small Open Economies: Does the Exchange Rate Regime Really Matter?," International Finance, Wiley Blackwell, vol. 3(1), pages 25-51, April.
  16. Bofinger, Peter & Wollmershäuser, Timo, 2001. "Managed floating: Understanding the new international monetary order," W.E.P. - Würzburg Economic Papers 30, University of Würzburg, Chair for Monetary Policy and International Economics.
  17. Lucio Sarno, 2003. "Nonlinear Exchange Rate Models," IMF Working Papers 03/111, International Monetary Fund.
  18. Alexis Derviz, 2003. "Components of the Czech Koruna Risk Premium in a Multiple-Dealer FX Market," Working Papers 2003/04, Czech National Bank, Research Department.
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Cited by:
  1. Tomas Holub, 2005. "Forex interventions: the Czech experience," BIS Papers chapters, in: Bank for International Settlements (ed.), Foreign exchange market intervention in emerging markets: motives, techniques and implications, volume 24, pages 150-61 Bank for International Settlements.
  2. Adam Gersl & Tomás Holub, 2006. "Foreign Exchange Interventions Under Inflation Targeting: The Czech Experience," Contemporary Economic Policy, Western Economic Association International, vol. 24(4), pages 475-491, October.
  3. Sandrine Levasseur, 2004. "Why not euroisation?," Revue de l'OFCE, Presses de Sciences-Po, vol. 91(5), pages 121-156.

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