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Sources of Real Exchange Rate Fluctuations in Central and Eastern Europe – Temporary or Permanent?

This paper investigates, using the SVAR model of Clarida and Gali (1994), the sources of real exchange rate fluctuations in eight Central and East European new EU member states. Theoretically, one should expect the real exchange rates of Exchange Rate Mechanism II participants to be primarily driven by temporary shocks and those of ERM II “outs” by permanent shocks. Our results reveal an opposite pattern. We conclude that the sources of real exchange rate movements – and the usefulness of nominal exchange rates as shock absorbing instruments – were not the decisive factor behind these countries’ decisions concerning the ERM II participation.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2006/wp-cesifo-2006-12/cesifo1_wp1876.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1876.

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Date of creation: 2006
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Handle: RePEc:ces:ceswps:_1876
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  1. Richard Clarida & Jordi Gali, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," NBER Working Papers 4658, National Bureau of Economic Research, Inc.
  2. Claudio Soto, 2003. "The Effects of Nominal and Real Shocks on the Chilean Real Exchange Rate During the Nineties," Working Papers Central Bank of Chile 220, Central Bank of Chile.
  3. Louis Kuijs & Alain Borghijs, 2004. "Exchange Rates in Central Europe; A Blessing o+L2762r a Curse?," IMF Working Papers 04/2, International Monetary Fund.
  4. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," International Finance Discussion Papers 462, Board of Governors of the Federal Reserve System (U.S.).
  5. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities Between the G3-Economies," Discussion Paper Serie B 419, University of Bonn, Germany.
  6. Michael Artis & Michael Ehrmann, 2000. "The Exchange Rate -a Shock-Absorber or Source of Shocks? A Study of Four Open Economies," EUI-RSCAS Working Papers 38, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  7. Maurice Obstfeld and Kenneth Rogoff., 2000. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," Center for International and Development Economics Research (CIDER) Working Papers C00-112, University of California at Berkeley.
  8. Michael Funke, 2000. "Macroeconomic Shocks in Euroland vs. the UK: Supply, Demand, or Nominal?," EUI-RSCAS Working Papers 37, European University Institute (EUI), Robert Schuman Centre of Advanced Studies (RSCAS).
  9. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-39, August.
  10. Eswar Prasad & Bankim Chadha, 1996. "Real Exchange Rate Fluctuations and the Business Cycle; Evidence From Japan," IMF Working Papers 96/132, International Monetary Fund.
  11. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-93, December.
  12. Stockman, Alan C. & Stockman, Alan C., 1983. "Real exchange rates under alternative nominal exchange-rate systems," Journal of International Money and Finance, Elsevier, vol. 2(2), pages 147-166, August.
  13. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-52, June.
  14. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  15. Juselius, Katarina, 2006. "The Cointegrated VAR Model: Methodology and Applications," OUP Catalogue, Oxford University Press, number 9780199285679.
  16. Zenon Kontolemis & Kevin Ross, 2005. "Exchange Rate Fluctuations in the New Member States of the European Union," Macroeconomics 0504015, EconWPA.
  17. Weber, Axel A., 1997. "Sources of Purchasing Power Disparities between the G3 Economies," Journal of the Japanese and International Economies, Elsevier, vol. 11(4), pages 548-583, December.
  18. John H. Rogers, 1998. "Monetary shocks and real exchange rates," International Finance Discussion Papers 612, Board of Governors of the Federal Reserve System (U.S.).
  19. Alan C. Stockman, 1988. "Real Exchange Rate Variability under Pegged and Floating Nominal Exchange Rate Systems: An Equilibrium Theory," NBER Working Papers 2565, National Bureau of Economic Research, Inc.
  20. K. Farrant & G. Peersman, 2005. "Is the exchange rate a shock absorber or a source of shocks? New empirical evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/285, Ghent University, Faculty of Economics and Business Administration.
  21. Charles Engel, 2000. "Comments on Obstfeld and Rogoff's "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?"," NBER Working Papers 7818, National Bureau of Economic Research, Inc.
  22. Tamim Bayoumi, 1992. "The Effect of the ERM on Participating Economies," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 330-356, June.
  23. Enders, Walter & Lee, Bong-Soo, 1997. "Accounting for real and nominal exchange rate movements in the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 233-254, April.
  24. Dibooglu, Selahattin & Kutan, Ali M., 2000. "Sources of real exchange rate fluctuations in transition economies: The case of Ploand and Hungary," ZEI Working Papers B 14-2000, ZEI - Center for European Integration Studies, University of Bonn.
  25. J. Marcus Fleming, 1962. "Domestic Financial Policies under Fixed and under Floating Exchange Rates (Politiques finacièrieures intérieures avec un système de taux de change fixe et avec un système de taux de change fluctua," IMF Staff Papers, Palgrave Macmillan, vol. 9(3), pages 369-380, November.
  26. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
  27. Blanchard, Olivier Jean & Quah, Danny, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Reply," American Economic Review, American Economic Association, vol. 83(3), pages 653-58, June.
  28. Ibrahim Chowdhury, 2004. "Sources of exchange rate fluctuations: empirical evidence from six emerging market countries," Applied Financial Economics, Taylor & Francis Journals, vol. 14(10), pages 697-705.
  29. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
  30. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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