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Interest Rates Determination and Crisis Puzzle (Empirical Evidence from the European Transition Economies)

  • Mirdala, Rajmund

Economic theory provides clear suggestions in fixed versus flexible exchange rates dilemma in fighting high inflation pressures. However, relative diversity in exchange rate regimes in the European transition economies revealed uncertain and spurious conclusions about the exchange rate regime choice during last two decades. Moreover, eurozone membership perspective (de jure pegging to euro) realizes uncertain consequences of exchange rate regime switching especially in the group of large floaters. Successful anti-inflationary policy associated with stabilization of inflation expectations in the European transition economies at the end of 1990s significantly increased the role of short-term interest rates in the monetary policy strategies. At the same time, so called qualitative approach to the monetary policy decision-making performed in the low inflation environment, gradually enhanced the role of real interest rates expectations in the process of nominal interest rates determination. However, economic crisis increased uncertainty on the markets and thus worsen expectations of agents. In the paper we analyze sources of nominal interest rates volatility in ten European transition by estimating the structural vector autoregression (SVAR) model. Variance decomposition and impulse-response functions are computed to estimate the relative contribution of inflation expectations and expected real exchange rates to the conditional variability of short-term money market interest rates as well as responses of nominal interest rates to one standard deviation inflation expectations and expected real interest rates shocks. Effects of economic crisis are considered by estimation of two models for every single economy from the group of the European transition economies using data for time periods 2000-2007 and 2000-2011.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 43756.

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Date of creation: Dec 2012
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Publication status: Published in Journal of Applied Economic Sciences 4.7(2012): pp. 418-436
Handle: RePEc:pra:mprapa:43756
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  1. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers 2626, National Bureau of Economic Research, Inc.
  2. Kosta Josifidis & Jean-Pierre Allegret & Emilija Beker Pucar, 2009. "Monetary and Exchange Rate Regimes Changes: The Cases of Poland, Czech Republic, Slovakia and Republic of Serbia," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 56(2), pages 199-226, June.
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  4. Eduardo Strachman & José Ricardo Fucidji, 2012. "The Current Financial And Economic Crisis: Empirical And Methodological Issues," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 95-123, June.
  5. Mirdala, Rajmund, 2012. "Sources of exchange rate volatility in the european transition economies (effects of economic crisis revealed)," MPRA Paper 42060, University Library of Munich, Germany.
  6. Garcia, R. & Perron, P., 1994. "An Analysis of the Real Interest rate Under Regime Shifts," Cahiers de recherche 9428, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  7. Oleg KITOV & Ivan KITOV, 2012. "Inflation And Unemployment In Switzerland: From 1970 To 2050," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 7(2(20)/ Su), pages 141-156.
  8. Markku Lanne, 2001. "Near unit root and the relationship between inflation and interest rates: A reexamination of the Fisher effect," Empirical Economics, Springer, vol. 26(2), pages 357-366.
  9. Monica DAMIAN, 2011. "The Comparative Analysis Of The Monetary Policy Strategies Before The Adoption Of The Euro Currency And The Impact Upon The Maastricht Criteria," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 6(3(17)/ Fa), pages 222-229.
  10. Crowder, William J & Hoffman, Dennis L, 1996. "The Long-Run Relationship between Nominal Interest Rates and Inflation: The Fisher Equation Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(1), pages 102-18, February.
  11. Lai, Kon S., 2004. "On structural shifts and stationarity of the ex ante real interest rate," International Review of Economics & Finance, Elsevier, vol. 13(2), pages 217-228.
  12. Engsted, Tom, 1995. "Does the Long-Term Interest Rate Predict Future Inflation? A Multi-country Analysis," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 42-54, February.
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