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Exchange Rates in Central Europe; A Blessing or a Curse?

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  • Louis Kuijs
  • Alain Borghijs

Abstract

Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECs-the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia-empirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks.

Suggested Citation

  • Louis Kuijs & Alain Borghijs, 2004. "Exchange Rates in Central Europe; A Blessing or a Curse?," IMF Working Papers 04/2, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:04/2
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    References listed on IDEAS

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    5. Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
    6. 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.
    7. Canzoneri, Matthew B & Vallés Liberal, Javier & Viñals, José, 1996. "Do Exchange Rates Move to Address International Macroeconomic Imbalances?," CEPR Discussion Papers 1498, C.E.P.R. Discussion Papers.
    8. Charles Engel, 2002. "The Responsiveness of Consumer Prices to Exchange Rates And the Implications for Exchange-Rate Policy: A Survey Of a Few Recent New Open-Economy..," NBER Working Papers 8725, National Bureau of Economic Research, Inc.
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    Keywords

    Czech Republic; Exchange rates; Foreign exchange; Hungary; Poland; Slovak Republic; Slovenia; structural VAR; accession; CECs; exchange rate; nominal exchange rate; real exchange rate; flexible exchange rates; Multiple or Simultaneous Equation Models: Time-Series Models; International Monetary Arrangements and Institutions; Slovakia; transition;

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