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Following the yellow brick road? The Euro, the Czech Republic, Hungary and Poland

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  • Jesús Rodríguez López
  • José L. Torres

Abstract

This paper uses a combination of VAR and bootstrapping techniques to analyze whether the exchange rates of some New Member States of the EU have been used as output stabilizers (those of the Czech Republic, Hungary and Poland), during 1993-2004. This question is important because it provides a prior evaluation on the costs and benefits involved in entering the European Monetary Union (EMU). Joining the EMU is not optional for these countries but mandatory, although there is no de…nite deadline. Therefore, if the exchange rate works as a shock absorber, monetary independence could be retained for a longer period. Our main …nding is that the exchange rate could be a stabilizing tool in Poland and the Czech Republic, although in Hungary it appears to act as a propagator of shocks. In addition, in these three countries, demand and monetary shocks account for most of the variability in both nominal and real exchange rates.

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Paper provided by FEDEA in its series Working Papers on International Economics and Finance with number 06-03.

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Handle: RePEc:fda:fdadef:06-03

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