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Macroeconomic Aspects of Real Exchange Rate Volatility in the Central European Countries

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  • Mirdala, Rajmund

Abstract

Exchange rate unexpected fluctuations determine economic development of countries the way quite similar to any other type of exogenous shocks. Unpredicted volatility in exchange rate short-run path affects macroeconomic performance the way that may be a subject of academic as well as economic policy discussions. Overall exposure of countries to negative implications of exchange rate volatility represents one of the areas of empirical investigations related to fixed versus flexible exchange rate dilemma. Rigorous analysis of various aspects of exchange rate fluctuations in terms of macroeconomic performance causal effects is considered to be a crucial outcome of not only exchange rate determining potential but also key information for exchange rate policy or policy decisions related to exchange rate regime shifts. In the paper we analyze macroeconomic aspects of the real exchange rate volatility in the Central European countries. VAR (vector autoregression) methodology is implemented to estimate effects of the real exchange rate fluctuations on the selected main macroeconomic indicators variability. Structural exogenous shocks are identified by applying the Cholesky decomposition of variance-covariance matrix of the reduced-form VAR residuals. Variance decomposition and impulse-response functions of selected endogenous variables to positive one standard deviation real exchange rate shock are computed for two models covering time series for two periods - 2000-2007 (model A) and 2000-2011 (model B) to determine the role of economic crises on presented results (changes in the exchange rate determining potential during the crisis period are expected to be revealed). Ordering of the endogenous variables in both models is also considered to check the robustness of the empirical results of the estimated econometric model in the selected group of countries.

Suggested Citation

  • Mirdala, Rajmund, 2012. "Macroeconomic Aspects of Real Exchange Rate Volatility in the Central European Countries," MPRA Paper 40910, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:40910
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    Cited by:

    1. Mirdala, Rajmund, 2013. "Current Account Adjustments and Real Exchange Rates in the European Transition Economies," MPRA Paper 48901, University Library of Munich, Germany.
    2. K. Rajmund MIRDALA, 2012. "Sources Of Exchange Rate Volatility In The European Transition Economies. Effects Of Economic Crisis Revealed," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 7(3(21)/ Fa), pages 270-282.
    3. Rajmund Mirdala, 2013. "Real Output and Prices Adjustments Under Different Exchange Rate Regimes," William Davidson Institute Working Papers Series wp1064, William Davidson Institute at the University of Michigan.
    4. Mirdala, Rajmund, 2013. "Exchange Rate Pass-Through to Domestic Prices under Different Exchange Rate Regimes," MPRA Paper 53209, University Library of Munich, Germany.
    5. Julia Durcova, 2021. "The Impact of Interest Rate Transmission Channel on the Prices Development in the Eurozone Countries," Montenegrin Journal of Economics, Economic Laboratory for Transition Research (ELIT), vol. 17(2), pages 23-35.

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    More about this item

    Keywords

    exchange rate volatility; economic growth; economic crisis; vector autoregression; variance decomposition; impulse-response function;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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