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The role of the exchange rate for adjustment in boom and bust episodes

  • Martin, Reiner
  • Schuknecht, Ludger
  • Vansteenkiste, Isabel

Numerous countries have experienced boom-bust episodes in asset prices in the past 20 years. This study looks at stylised facts and conducts statistical and econometric analysis for such episodes, distinguishing between industrialised countries that experienced external adjustment (via real effective exchange rate depreciation during busts) and those that relied on an internal adjustment process (and experienced no depreciation). The study finds that different adjustment experiences are correlated with the degree of macroeconomic imbalances and balance sheet problems. Internal adjustment seems more prevalent when financial vulnerabilities, excess demand and competitiveness loss remain relatively contained in the boom. In the bust, internal adjusters experience more protracted but less deep downturns than external adjusters as imbalances unwind more slowly. Some Central and East European EU Member States are currently experiencing strong credit and asset price growth in conjunction with rapid economic expansion. Against this background the experience of other countries may raise awareness of related policy challenges. JEL Classification: E32, E63, E65

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Paper provided by European Central Bank in its series Working Paper Series with number 0813.

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Date of creation: Sep 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070813
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  1. Jun Xu & J. Scott Long, 2005. "Confidence intervals for predicted outcomes in regression models for categorical outcomes," Stata Journal, StataCorp LP, vol. 5(4), pages 537-559, December.
  2. Peter Backé & Christian Thimann & Olga Arratibel & Oscar Calvo-Gonzalez & Arnaud Mehl & Carolin Nerlich, 2004. "The acceding countries’ strategies towards ERM II and the adoption of the euro - an analytical review," Occasional Paper Series 10, European Central Bank.
  3. Felix Eschenbach & Ludger Schuknecht, 2004. "Budgetary risks from real estate and stock markets," Economic Policy, CEPR;CES;MSH, vol. 19(39), pages 313-346, 07.
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