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Exchange Rates in Central Europe: a Blessing or a Curse?

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Author Info
Alain Borghijs
Louis Kuijs
Abstract

Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECs-the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia-empirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/2.

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Length: 29 pages
Date of creation: 23 Jan 2004
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Handle: RePEc:imf:imfwpa:04/2

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Keywords: Exchange rates Czech Republic Hungary Poland Slovak Republic Slovenia

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References listed on IDEAS
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  1. Clarida, Richard & Galí, Jordi, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," CEPR Discussion Papers 951, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Alexander W. Hoffmaister & Carlos A. Végh Gramont, 1995. "Disinflation and the Recession-Now-Versus-Recession-Later Hypothesis: Evidence from Uruguay," IMF Working Papers 95/99, International Monetary Fund.
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  4. Enders, Walter & Lee, Bong-Soo, 1997. "Accounting for real and nominal exchange rate movements in the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 233-254, April. [Downloadable!] (restricted)
  5. Matthew B. Canzoneri & Javier Vallés & José Viñals, 1996. "Do Exchange Rate Move to Address International Macroeconomic Imbalances?," Banco de España Working Papers 9626, Banco de España.
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  1. Filacek, Jan & Horvath, Roman & Skorepa, Michal, 2006. "Monetary Policy before Euro Adoption: Challenges for EU New Members," MPRA Paper 879, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Roman Hotvath, 2005. "Real Equilibrium Exchange Rate Estimates: To What Extent Applicable for Setting the Central Parity?," International Finance 0509006, EconWPA. [Downloadable!]
  3. Roman Horvath, 2005. "Exchange Rate Variability, Pressures and Optimum Currency Area Criteria: Lessons for the Central and Eastern European Countries," Working Papers 2005/08, Czech National Bank, Research Department. [Downloadable!]
  4. Marcus Pramor & Natalia T. Tamirisa, 2006. "Common Volatility Trends in the Central and Eastern European Currencies and the Euro," IMF Working Papers 06/206, International Monetary Fund. [Downloadable!]
  5. Andrea M. Maechler & Srobona Mitra & DeLisle Worrell, 2007. "Decomposing Financial Risks and Vulnerabilities in Eastern Europe," IMF Working Papers 07/248, International Monetary Fund. [Downloadable!]
  6. Zenon Kontolemis & Kevin Ross, 2005. "Exchange Rate Fluctuations in the New Member States of the European Union," Macroeconomics 0504015, EconWPA. [Downloadable!]
  7. Sfia, Mohamed Daly, 2006. "Tunisia: Sources Of Real Exchange Rate Fluctuations," MPRA Paper 3129, University Library of Munich, Germany. [Downloadable!]
  8. Horvath, Roman & Komarek, Lubos, 2006. "Equilibrium Exchange Rates in EU New Members: Applicable for Setting the ERM II Central Parity?," MPRA Paper 1180, University Library of Munich, Germany. [Downloadable!]
  9. Roman Horváth, 2005. "Real Equilibrium Exchange Rate Estimates: To What Extent Are They Applicable for Setting the Central Parity?," Working Papers IES 75, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised 2005. [Downloadable!]
  10. Philipp Maier, 2004. "EMU enlargement, inflation and adjustment of tradable goods prices: What to expect?," DNB Working Papers 010, Netherlands Central Bank, Research Department. [Downloadable!]
  11. Katerina Smidkova & Ales Bulir, 2004. "Would Fast Sailing Towards the Euro Be Smooth?: What Fundamental Real Exchange Rates Tell Us About Acceding Economies," Macroeconomics 0408002, EconWPA. [Downloadable!]
    Other versions:
  12. Alexius, Annika & Post, Erik, 2006. "Cointegration and the stabilizing role of exchange rates," Working Paper Series 2006:8, Uppsala University, Department of Economics. [Downloadable!]
  13. Jesús Rodríguez López & José Luis Torres Chacón, 2006. "Following the yellow brick road? The Euro, the Czech Republic, Hungary and Poland," Working Papers 06.12, Universidad Pablo de Olavide, Departamento de Economía. [Downloadable!]
    Other versions:
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