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Sources of Real Exchange Rate Variability in Central and Eastern European Countries: Evidence from Structural Bayesian MSH-VAR Models

Author

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  • Marek A. Dąbrowski

    (Cracow University of Economics, Department of Macroeconomics)

  • Łukasz Kwiatkowski

    (Cracow University of Economics, Department of Econometrics and Operational Research)

  • Justyna Wróblewska

    (Cracow University of Economics, Department of Econometrics and Operational Research)

Abstract

This paper investigates the relative importance of cost, demand, financial and monetary shocks in driving real exchange rates in four CEE countries over 2000–2018. A two-country New Keynesian open economy model is used as a theoretical framework. In the empirical part, a Bayesian SVAR model with Markov switching heteroscedasticity is employed. The structural shocks are identified on the basis of volatility changes and named with reference to the sign restrictions derived from the economic model. Main findings are fourfold. First, real and financial shocks have similar contributions to real exchange variability, whereas that of monetary shocks is small. Second, financial shocks amplify exchange rate fluctuations stemming from real shocks. Third, even though the exchange rate gaps change over time, they remain quite similar across CEE countries except for Slovakia. Fourth, Slovakia introduced the euro at the time of a relatively large real overvaluation, which subsided after a lengthy adjustment process.

Suggested Citation

  • Marek A. Dąbrowski & Łukasz Kwiatkowski & Justyna Wróblewska, 2020. "Sources of Real Exchange Rate Variability in Central and Eastern European Countries: Evidence from Structural Bayesian MSH-VAR Models," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 12(4), pages 369-412, December.
  • Handle: RePEc:psc:journl:v:12:y:2020:i:4:p:369-412
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    More about this item

    Keywords

    open economy macroeconomics; real exchange rate; real and nominal shocks; Bayesian MS-VAR models; structural VAR models;
    All these keywords.

    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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