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Exchange Rate Fluctuations in the New Member States of the European Union

Author

Listed:
  • Zenon Kontolemis

    (International Monetary Fund)

  • Kevin Ross

    (International Monetary Fund)

Abstract

This paper assesses the role of exchange rates in moderating the impact of economic disturbances in the new member states of the European Union, and finds some evidence in favour of this proposition. Exchange rates are mostly driven by real (demand) shocks, whilst output by real supply shocks. Nominal shocks, which have no long-run impact on output, are nevertheless important in explaining exchange rate fluctuations implying that less exchange rate flexibility may indeed be warranted in the run- up to the adoption of the euro. We find that while interest rate shocks generally do not explain exchange rate fluctuations, credit shocks matter in certain cases and seem to have considerable impact on exchange rate developments (e.g., for Poland). The analysis also shows that based on the average responses of exchange rates to different shocks, the adoption of narrow bands inside ERM II may be risky.

Suggested Citation

  • Zenon Kontolemis & Kevin Ross, 2005. "Exchange Rate Fluctuations in the New Member States of the European Union," Macroeconomics 0504015, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpma:0504015
    Note: Type of Document - pdf; pages: 35
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/mac/papers/0504/0504015.pdf
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    References listed on IDEAS

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    Cited by:

    1. Sfia, Mohamed Daly, 2006. "Tunisia: Sources Of Real Exchange Rate Fluctuations," MPRA Paper 3129, University Library of Munich, Germany.
    2. Ivan Todorov, 2012. "European Economic Integration Theories and Criteria," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 2, pages 131-152.
    3. Skorepa, Michal & Komarek, Lubos, 2015. "Sources of asymmetric shocks: The exchange rate or other culprits?," Economic Systems, Elsevier, vol. 39(4), pages 654-674.
    4. Agnieszka Stazka, 2006. "Sources of Real Exchange Rate Fluctuations in Central and Eastern Europe – Temporary or Permanent?," CESifo Working Paper Series 1876, CESifo Group Munich.

    More about this item

    Keywords

    Exchange rate fluctuations; transmission economies; ERM II; EMU; structural VAR;

    JEL classification:

    • E - Macroeconomics and Monetary Economics

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