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Are the exchange rates of EMU candidate countries anchored by their expected euro locking rates?

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Author Info
Anna Naszódi () (Magyar Nemzeti Bank)

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Abstract

This paper tests whether the exchange rates of the Czech koruna, the Hungarian forint, and the Polish zloty were anchored by market expectations concerning their euro locking rates. First, the process of the exchange rate is derived as a function of the following factors: (i) latent exchange rate, (ii) market expectations concerning locking rate, (iii) market expectations concerning locking date. Then, the locking dates and rates are filtered from historical exchange rates, currency option prices and yield curves. The main finding of the paper is that the relatively stable market expectations concerning the locking rates have substantially stabilized the three analyzed exchange rates.

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Publisher Info
Paper provided by Magyar Nemzeti Bank (The Central Bank of Hungary) in its series MNB Working Papers with number 2008/1.

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Length: 50 pages
Date of creation: 2008
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Handle: RePEc:mnb:wpaper:2008/1

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Related research
Keywords: Monetary union eurozone entry factor model Kalman filter exchange rate stabilization asset-pricing exchange rate model.

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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  1. Frankel, Jeffrey A, 1979. "On the Mark: A Theory of Floating Exchange Rates Based on Real Interest Differentials," American Economic Review, American Economic Association, vol. 69(4), pages 610-22, September. [Downloadable!] (restricted)
  2. Attila Csajbók & András Rezessy, 2006. "Hungary's Eurozone Entry Date: What do the Markets Think and What If They Change Their Minds?," Contemporary Economic Policy, Oxford University Press, vol. 24(3), pages 343-356, July.
  3. Péter Karádi, 2005. "Exchange Rate Smoothing in Hungary," MNB Working Papers 2005/06, Magyar Nemzeti Bank (The Central Bank of Hungary). [Downloadable!]
  4. Robert P. Flood & Peter M. Garber, 1983. "A Model of Stochastic Process Switching," NBER Working Papers 0626, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Charles Engel and Kenneth D. West, 2005. "Exchange Rates and Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 113(3), pages 485-517, June.
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  6. Kenneth A. Froot & Maurice Obstfeld, 1991. "Stochastic Process Switching: Some Simple Solutions," NBER Working Papers 2998, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Attila Csajbók & András Rezessy, 2006. "Hungary's Eurozone Entry Date: What Do the Markets Think and What If They Change Their Minds?," Contemporary Economic Policy, Oxford University Press, vol. 24(4), pages 343-356, October.
  8. De Grauwe, Paul & Dewachter, Hans & Veestraeten, Dirk, 1999. "Price dynamics under stochastic process switching: some extensions and an application to EMU1," Journal of International Money and Finance, Elsevier, vol. 18(2), pages 195-224, February. [Downloadable!] (restricted)
  9. Favero, Carlo A. & Giavazzi, Francesco & Iacone, Fabrizio & Guido Tabellini, 2000. "Extracting information from asset prices: The methodology of EMU calculators," European Economic Review, Elsevier, vol. 44(9), pages 1607-1632, October. [Downloadable!] (restricted)
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  10. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-53, March. [Downloadable!] (restricted)
  11. Jeffrey A. Frankel & Kenneth A. Froot, 1987. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Djajic, Slobodan, 1989. "Dynamics of the exchange rate in anticipation of pegging," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 559-571, December. [Downloadable!] (restricted)
  13. Froot, Kenneth A & Frankel, Jeffrey A, 1989. "Forward Discount Bias: Is It an Exchange Risk Premium?," The Quarterly Journal of Economics, MIT Press, vol. 104(1), pages 139-61, February. [Downloadable!] (restricted)
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