Exchange rate stability was defined as one of the prerequisites for monetary integration in Europe. In this paper, we analyze recent developments in the volatility of exchange rates of the Central European countries (the Visegrad Group) and a selected group of European Union countries (the Snake) participating in the former European Monetary System. We compare volatilities in the currencies of both groups under specific exchange rate regimes using two different approaches to modeling exchange rate volatility: squared returns parametric model and GARCH. Both methods provide identical results for the currencies of the Visegrad group: an increase in volatility after a floating exchange rate regime was introduced. The case of the Snake countries exhibits mixed results for two currencies and a concurring result for the others: a decrease in volatility. In one case we are left with an insignificant coefficient. We consider the results as robust and suitable for policy making decisions.
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Length: 32 pages Date of creation: 01 Oct 2003 Date of revision: Handle: RePEc:wdi:papers:2003-622
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Find related papers by JEL classification: C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates F31 - International Economics - - International Finance - - - Foreign Exchange F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration P59 - Economic Systems - - Comparative Economic Systems - - - Other
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