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Sources of real and nominal exchange rate fluctuations in transition economies

  • Ali M. Kutan
  • Selahattin Dibooglu

This paper provides an empirical inquiry into the sources of movements of the real and nominal exchange rates in Hungary and Poland for during the 1990:01-1998:02 period. We decompose the exchange rate movements into those attributable to real and nominal shocks, we find that (1) nominal shocks have played a significant role in Poland, but not in Hungary, in explaining real exchange rate movements during the transition period. Instead, real shocks have dominated real exchange movements in Hungary and (2) nominal shocks explain almost all of nominal exchange rate movements in Poland and a sizable portion of nominal exchange rate movements in Hungary. These results are compared with the findings of Lastrapes (1992) and Enders and Lee (1997) for industrial countries. Finally, policy implications of the empirical results as well their lessons for modeling exchange rates in transition economies are discussed.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 1998-022.

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Date of creation: 1998
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Publication status: Published in Journal of Compartive Economics as "Sources of Real Exchange Rate Fluctuations in Transition Economies: Evidence from Hungary and Poland."
Handle: RePEc:fip:fedlwp:1998-022
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  1. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  2. Begg, David, 1998. "Pegging Out: Lessons from the Czech Exchange Rate Crisis," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 669-690, December.
  3. Brada, Josef C., 1998. "Introduction: Exchange Rates, Capital Flows, and Commercial Policies in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 613-620, December.
  4. Portes, Richard, 1994. "Transformation Traps," Economic Journal, Royal Economic Society, vol. 104(426), pages 1178-89, September.
  5. 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.
  6. Szapary, Gyorgy & Jakab, Zoltan M., 1998. "Exchange Rate Policy in Transition Economies: The Case of Hungary," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 691-717, December.
  7. Stockman, Alan C, 1980. "A Theory of Exchange Rate Determination," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 673-98, August.
  8. Desai, Padma, 1998. "Macroeconomic Fragility and Exchange Rate Vulnerability: A Cautionary Record of Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 621-641, December.
  9. Lucjan T. Orlowski, 1996. "The Path of Exchange Rates in the Polish Economic Transformation," CASE Network Studies and Analyses 0090, CASE-Center for Social and Economic Research.
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