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Exchange Rate Risk and Convergence to the Euro

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  • Lucjan T Orlowski

    (Sacred Heart University)

Abstract

This paper proposes a new monetary policy framework for effectively navigating the path to adopting the euro. The proposed policy is based on relative inflation forecast targeting and incorporates an ancillary target of declining exchange rate risk, which is suggested as a key criterion for evaluating the currency stability. A model linking exchange rate volatility to differentials over the euro zone in both inflation (target variable) and interest rate (instrument variable) is proposed. The model is empirically tested for the Czech Republic, Poland and Hungary, the selected new Member States of the EU that use direct inflation targeting to guide their monetary policies. The empirical methodology is based on the TARCH(p,q,r)-M model.

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File URL: http://128.118.178.162/eps/mac/papers/0501/0501034.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0501034.

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Length: 34 pages
Date of creation: 28 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0501034

Note: Type of Document - pdf; pages: 34
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Web page: http://128.118.178.162

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Keywords: exchange rate risk; inflation targeting; monetary convergence; euro area; new EU Member States;

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References

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Citations

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Cited by:
  1. Tigran Poghosyan & Evzen Kocenda, 2006. "Foreign Exchange Risk Premium Determinants: Case of Armenia," William Davidson Institute Working Papers Series wp811, William Davidson Institute at the University of Michigan.
  2. Orlowski, Lucjan T. & Rybinski, Krzysztof, 2006. "Implications of ERM2 for Poland's monetary policy," Economic Systems, Elsevier, vol. 30(4), pages 346-365, December.
  3. Ryan Ratcliff, 2010. "Predicting nominal exchange rate movements using skewness information from options prices," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(1), pages 75-92.
  4. Kocenda, Evzen & Valachy, Juraj, 2006. "Exchange rate volatility and regime change: A Visegrad comparison," Journal of Comparative Economics, Elsevier, vol. 34(4), pages 727-753, December.
  5. Evžen Koèenda & Tigran Poghosyan, 2010. "Exchange Rate Risk in Central European Countries," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 60(1), pages 22-39, February.
  6. Mikek, Peter, 2008. "Alternative monetary policies and fiscal regime in new EU members," Economic Systems, Elsevier, vol. 32(4), pages 335-353, December.
  7. Juraj Stanèík, 2007. "Determinants of Exchange-Rate Volatility: The Case of the New EU Members," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, Charles University Prague, Faculty of Social Sciences, vol. 57(9-10), pages 414-432, October.

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