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Markov-switching regimes and the monetary model of exchange rate determination: Evidence from the Central and Eastern European markets

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  • Syllignakis, Manolis N.
  • Kouretas, Georgios P.

Abstract

This paper examines the dynamic relationship between the bilateral exchange rates of 10 Central and Eastern European emerging markets against the euro and their fundamentals, using data from the early 1990s to the middle of 2010, within the framework provided by the monetary model of exchange rate determination. Given that these countries have adopted alternative exchange rate regimes over this period, we employed a Markov-switching vector error correction model which allowed for regime shifts in the entire set of parameters and the variance–covariance matrix. The main finding of the analysis was that depending on the nominal exchange rate regime in operation, the adjustment to the long run implied by the monetary model of the exchange rate determination came either from the exchange rate or from the monetary fundamentals. Moreover, based on a Regime Classification Measure, we showed that our chosen Markov-switching specification performed well in distinguishing between the two regimes for all cases.

Suggested Citation

  • Syllignakis, Manolis N. & Kouretas, Georgios P., 2011. "Markov-switching regimes and the monetary model of exchange rate determination: Evidence from the Central and Eastern European markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(5), pages 707-723.
  • Handle: RePEc:eee:intfin:v:21:y:2011:i:5:p:707-723
    DOI: 10.1016/j.intfin.2011.04.005
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    References listed on IDEAS

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    Cited by:

    1. Viktors Ajevskis & Ramune Rimgailaite & Uldis Rutkaste & Olegs Tkacevs, 2012. "The Assesment of Equilibrium Real Echange Rate of Latvia," Working Papers 2012/04, Latvijas Banka.

    More about this item

    Keywords

    Central and Eastern European foreign exchange markets; Monetary fundamentals; Nonlinearity; Regime switching;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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