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Exchange Rate Fluctuations in the New Member States of the European Union

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Author Info

  • Zenon Kontolemis

    (International Monetary Fund)

  • Kevin Ross

    (International Monetary Fund)

Abstract

This paper assesses the role of exchange rates in moderating the impact of economic disturbances in the new member states of the European Union, and finds some evidence in favour of this proposition. Exchange rates are mostly driven by real (demand) shocks, whilst output by real supply shocks. Nominal shocks, which have no long-run impact on output, are nevertheless important in explaining exchange rate fluctuations implying that less exchange rate flexibility may indeed be warranted in the run- up to the adoption of the euro. We find that while interest rate shocks generally do not explain exchange rate fluctuations, credit shocks matter in certain cases and seem to have considerable impact on exchange rate developments (e.g., for Poland). The analysis also shows that based on the average responses of exchange rates to different shocks, the adoption of narrow bands inside ERM II may be risky.

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File URL: http://128.118.178.162/eps/mac/papers/0504/0504015.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0504015.

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Length: 35 pages
Date of creation: 08 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0504015

Note: Type of Document - pdf; pages: 35
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Web page: http://128.118.178.162

Related research

Keywords: Exchange rate fluctuations; transmission economies; ERM II; EMU; structural VAR;

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References

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  1. Obstfeld, Maurice, 2002. "Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics," Center for International and Development Economics Research, Working Paper Series qt5t38s42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  2. Buiter, Willem H & Grafe, Clemens, 2002. "Anchor, Float or Abandon Ship: Exchange Rate Regimes for Accession Countries," CEPR Discussion Papers 3184, C.E.P.R. Discussion Papers.
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  16. Jorge Braga de Macedo & Helmut Reisen, 2003. "Float in Order to Fix?: Lessons from Emerging Markets for EU Accession Countries," OECD Development Centre Working Papers 218, OECD Publishing.
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  18. Lúcio Vinhas de Souza & Elisabeth Ledrut, 2002. "Alternative Paths Towards EMU: Lessons from an Expanded Mundell-Fleming Model for the Accession Countries," Kiel Working Papers 1132, Kiel Institute for the World Economy.
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Citations

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Cited by:
  1. Ivan Todorov, 2012. "European Economic Integration Theories and Criteria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 131-152.
  2. Agnieszka Stazka, 2006. "Sources of Real Exchange Rate Fluctuations in Central and Eastern Europe – Temporary or Permanent?," CESifo Working Paper Series 1876, CESifo Group Munich.
  3. Sfia, Mohamed Daly, 2006. "Tunisia: Sources Of Real Exchange Rate Fluctuations," MPRA Paper 3129, University Library of Munich, Germany.

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