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Macroeconomic Aspects of Real Exchange Rate Volatility in the Central European Countries

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  • Mirdala, Rajmund

Abstract

Exchange rate unexpected fluctuations determine economic development of countries the way quite similar to any other type of exogenous shocks. Unpredicted volatility in exchange rate short-run path affects macroeconomic performance the way that may be a subject of academic as well as economic policy discussions. Overall exposure of countries to negative implications of exchange rate volatility represents one of the areas of empirical investigations related to fixed versus flexible exchange rate dilemma. Rigorous analysis of various aspects of exchange rate fluctuations in terms of macroeconomic performance causal effects is considered to be a crucial outcome of not only exchange rate determining potential but also key information for exchange rate policy or policy decisions related to exchange rate regime shifts. In the paper we analyze macroeconomic aspects of the real exchange rate volatility in the Central European countries. VAR (vector autoregression) methodology is implemented to estimate effects of the real exchange rate fluctuations on the selected main macroeconomic indicators variability. Structural exogenous shocks are identified by applying the Cholesky decomposition of variance-covariance matrix of the reduced-form VAR residuals. Variance decomposition and impulse-response functions of selected endogenous variables to positive one standard deviation real exchange rate shock are computed for two models covering time series for two periods - 2000-2007 (model A) and 2000-2011 (model B) to determine the role of economic crises on presented results (changes in the exchange rate determining potential during the crisis period are expected to be revealed). Ordering of the endogenous variables in both models is also considered to check the robustness of the empirical results of the estimated econometric model in the selected group of countries.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 40910.

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Date of creation: May 2012
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Publication status: Published in Journal of Applied Economic Sciences 2.7(2012): pp. 163-178
Handle: RePEc:pra:mprapa:40910

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Keywords: exchange rate volatility; economic growth; economic crisis; vector autoregression; variance decomposition; impulse-response function;

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  1. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  2. Michael G. Arghyrou & Georgios Chortareas, 2008. "Current Account Imbalances and Real Exchange Rates in the Euro Area," Review of International Economics, Wiley Blackwell, vol. 16(4), pages 747-764, 09.
  3. Arratibel, Olga & Furceri, Davide & Martin, Reiner & Zdzienicka, Aleksandra, 2011. "The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries," Economic Systems, Elsevier, vol. 35(2), pages 261-277, June.
  4. Maurice Obstfeld, 1985. "Floating Exchange Rates: Experience and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 369-464.
  5. Lee, J. & Chinn, M.D., 1998. "The Current Account and the Real Exchange Rate: A Structural VAR Analysis of Major Currencies," Papers 97-98-17, California Irvine - School of Social Sciences.
  6. Maurice Obstfeld & Kenneth S. Rogoff, 2005. "Global Current Account Imbalances and Exchange Rate Adjustments," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 36(1), pages 67-146.
  7. Monica DAMIAN, 2011. "The Comparative Analysis Of The Monetary Policy Strategies Before The Adoption Of The Euro Currency And The Impact Upon The Maastricht Criteria," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 6(3(17)/ Fa), pages 222-229.
  8. Kosta Josifidis & Jean-Pierre Allegret & Emilija Beker Pucar, 2009. "Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 199-226, June.
  9. Frait , Jan & Komárek, Luboš, 2001. "REAL Exchange rate trends in transitional countries," The Warwick Economics Research Paper Series (TWERPS) 596, University of Warwick, Department of Economics.
  10. Kollmann, Robert, 2001. "The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation," Journal of International Economics, Elsevier, vol. 55(2), pages 243-262, December.
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Cited by:
  1. Mirdala, Rajmund, 2012. "Sources of exchange rate volatility in the european transition economies (effects of economic crisis revealed)," MPRA Paper 42060, University Library of Munich, Germany.

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