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A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe

  • Vladimir Klyuev

The paper develops a model of exchange rate regime choice centered on the trade-off between internal price stability and external competitiveness and allowing for institutional costs of altering exchange rate arrangements. The main implication of the model is a nonlinear relationship between the rate of inflation and the choice of regime for the next period. The model also suggests that a major inflationary shock-like the one to which all Central and Eastern European economies were subject when they allowed prices to be determined by the market-should give rise to a tightening of the exchange rate regime, followed by a gradual introduction of more flexibility as inflation subsides. A series of regressions on a sample of 13 Central and Eastern European economies yield results consistent with the hypothesis.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/140.

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Length: 42
Date of creation: 01 Sep 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/140
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  1. Alberto Alesina & Allan Drazen, 1989. "Why are Stabilizations Delayed?," NBER Working Papers 3053, National Bureau of Economic Research, Inc.
  2. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
  3. Hélène Poirson, 2001. "How Do Countries Choose their Exchange Rate Regime?," IMF Working Papers 01/46, International Monetary Fund.
  4. Turnovsky, Stephen J, 1976. "The Relative Stability of Alternative Exchange Rate Systems in the Presence of Random Disturbances," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(1), pages 29-50, February.
  5. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," Research Department Publications 3118, Inter-American Development Bank, Research Department.
  6. Guillermo A. Calvo & Carlos A. Vegh, 1999. "Inflation Stabilization and BOP Crises in Developing Countries," NBER Working Papers 6925, National Bureau of Economic Research, Inc.
  7. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
  8. Elmar B. Koch, 1997. "Exchange Rates and Monetary Policy in Central Europe - a Survey of Some Issues," Working Papers 24, Oesterreichische Nationalbank (Austrian Central Bank).
  9. S. Fisher & R. Sahay & C. A. Vegh, 1997. "Stabilization and Growth in Transition Economies: The Early Experience," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 5.
  10. Agenor, Pierre-Richard & Masson, Paul R, 1999. "Credibility, Reputation, and the Mexican Peso Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 70-84, February.
  11. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
  12. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  13. Bernhard, William & Leblang, David, 1999. "Democratic Institutions and Exchange-rate Commitments," International Organization, Cambridge University Press, vol. 53(01), pages 71-97, December.
  14. Tornell, Aaron & Velasco, Andres, 1995. "Money-Based Versus Exchange Rate-Based Stabilization with Endogenous Fiscal Policy," Working Papers 95-21, C.V. Starr Center for Applied Economics, New York University.
  15. Sachs, Jeffrey D, 1996. "Economic Transition and the Exchange-Rate Regime," American Economic Review, American Economic Association, vol. 86(2), pages 147-52, May.
  16. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  17. Paul R. Masson, 1999. "Monetary and Exchange Rate Policy of Transition Economies of Central and Eastern Europe after the Launch of EMU," IMF Policy Discussion Papers 99/5, International Monetary Fund.
  18. Sebastian Edwards, 1996. "The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes," NBER Working Papers 5756, National Bureau of Economic Research, Inc.
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