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Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries

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  • Dąbrowski, Marek A.
  • Wróblewska, Justyna

Abstract

We examine the insulating property of flexible exchange rates in CEE economies considering that they have adopted different regimes. We estimate a set of Bayesian structural VAR models with common serial correlations using data spanning 1998q1-2015q4. We derive the long-term identifying restrictions from a macroeconomic model. We find that irrespective of the exchange rate regime, real shocks primarily drive output. However, its reactions to these shocks are substantially stronger under less flexible regimes, whereas the responses to nominal shocks are similar. Hence, the insulating property of flexible regimes can reduce the costs from economic shocks.

Suggested Citation

  • Dąbrowski, Marek A. & Wróblewska, Justyna, 2020. "Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries," International Economics, Elsevier, vol. 162(C), pages 34-49.
  • Handle: RePEc:eee:inteco:v:162:y:2020:i:c:p:34-49
    DOI: 10.1016/j.inteco.2020.03.002
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    Keywords

    Open economy macroeconomics; Exchange rate regimes; Real and nominal shocks; Bayesian structural VAR; Common serial correlation;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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