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Effective Exchange Rates in Central and Eastern European Countries: Cyclicality and Relationship with Macroeconomic Fundamentals

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  • Stavárek Daniel

    (Department of Finance and Accounting, School of Business Administration, Silesian University, Univerzitní nám. 1934/3, 733 40 Karviná, Czechia)

  • Miglietti Cynthia

    (Department of Finance and Accounting, School of Business Administration, Silesian University, Univerzitní nám. 1934/3, 733 40 Karviná, Czechia)

Abstract

This paper examines the evolution of effective exchange rates in nine Central and Eastern European countries in terms of development trends, volatility and cyclicality. Consequently, it provides direct empirical evidence on the nature of the relationship between effective exchange rates and selected macroeconomic fundamentals, addressing a key precondition of numerous exchange rate determination models and theories that attempt to explain the role of exchange rates in the economy. The results suggest that flexible exchange rate arrangements are reflected in both nominal and real effective exchange rates having higher volatility and variability. Furthermore, the results provide mixed evidence in terms of intensity, direction and cyclicality, but show a weak correlation between exchange rates and fundamentals. Sufficiently high coefficients are found only for money supply. Consequently, using fundamentals for the determination of exchange rates and using the exchange rate to explain economic development may be of limited use for the countries analyzed.

Suggested Citation

  • Stavárek Daniel & Miglietti Cynthia, 2015. "Effective Exchange Rates in Central and Eastern European Countries: Cyclicality and Relationship with Macroeconomic Fundamentals," Review of Economic Perspectives, Sciendo, vol. 15(2), pages 157-177, June.
    • Handle: RePEc:vrs:reoecp:v:15:y:2015:i:2:p:157-177:n:3
    DOI: 10.1515/revecp-2015-0015
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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