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Determinants of Exchange-Rate Volatility: The Case of the New EU Members

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    Exchange-rate stability is not only a criterion for joining the Economic Monetary Union (EMU) but also a fundamental property of stable economic development. At present, new members of the European Union are trying to achieve this stability. However, there are several factors that could slow or interrupt these countries’ EMU-integration process. For this reason, this paper analyzes key factors contributing to euro exchange-rate volatility in the new EU members: economic openness, the “news” factor, and the exchange-rate regime. A TARCH (threshold autoregressive conditional heteroskedasticity) model is employed to model the volatility of exchange rates. Although this paper focuses on each country separately, in general the results suggest that economic openness has a calming effect on exchange-rate volatility, news significantly affects volatility, and flexible regimes experience higher degrees of volatility. The extent of all these effects varies substantially across country, however.

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    Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

    Volume (Year): 57 (2007)
    Issue (Month): 9-10 (October)
    Pages: 414-432

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    Handle: RePEc:fau:fauart:v:57:y:2007:i:9-10:p:414-432
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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
    2. Kobor, Adam & Szekely, Istvan P., 2004. "Foreign exchange market volatility in EU accession countries in the run-up to Euro adoption: weathering uncharted waters," Economic Systems, Elsevier, vol. 28(4), pages 337-352, December.
    3. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    4. Christopher F. Baum & Mustafa Caglayan & Neslihan Ozkan, 2004. "Nonlinear effects of exchange rate volatility on the volume of bilateral exports," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 19(1), pages 1-23.
    5. Gabriele Galati & Corrinne Ho, 2001. "Macroeconomic news and the euro/dollar exchange rate," BIS Working Papers 105, Bank for International Settlements.
    6. Hau, Harald, 2002. "Real Exchange Rate Volatility and Economic Openness: Theory and Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(3), pages 611-30, August.
    7. Ansgar Belke & Ralph Setzer, 2003. "Exchange Rate Variability and Labor Market Performance in the Visegrád Countries," Economic Change and Restructuring, Springer, vol. 36(2), pages 153-175, June.
    8. Ales Bulir, 2004. "Liberalized Markets Have More Stable Exchange Rates; Short-Run Evidence From Four Transition Countries," IMF Working Papers 04/35, International Monetary Fund.
    9. Giovanni Dell'Ariccia, 1998. "Exchange Rate Fluctuations and Trade Flows; Evidence From the European Union," IMF Working Papers 98/107, International Monetary Fund.
    10. Engle, Robert F & Ng, Victor K, 1993. " Measuring and Testing the Impact of News on Volatility," Journal of Finance, American Finance Association, vol. 48(5), pages 1749-78, December.
    11. McKenzie, Michael, 2002. "The Economics of Exchange Rate Volatility Asymmetry," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 7(3), pages 247-60, July.
    12. Orlowski, Lucjan T., 2004. "Exchange rate risk and convergence to the Euro," ZEI Working Papers B 25-2004, ZEI - Center for European Integration Studies, University of Bonn.
    13. Choudhry, Taufiq, 2005. "Exchange rate volatility and the United States exports: evidence from Canada and Japan," Journal of the Japanese and International Economies, Elsevier, vol. 19(1), pages 51-71, March.
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