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

  • Zenon Kontolemis

    (International Monetary Fund)

  • Kevin Ross

    (International Monetary Fund)

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.

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Paper provided by EconWPA in its series Macroeconomics with number 0504015.

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Length: 35 pages
Date of creation: 08 Apr 2005
Date of revision:
Handle: RePEc:wpa:wuwpma:0504015
Note: Type of Document - pdf; pages: 35
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  1. Fidrmuc, Jarko & Korhonen, Iikka, 2001. "Similarity of supply and demand shocks between the Euro area and the CEECs," BOFIT Discussion Papers 14/2001, Bank of Finland, Institute for Economies in Transition.
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  3. Obstfeld, Maurice, 2002. "Exchange Rates and Adjustment: Perspectives from the New Open Economy Macroeconomics," Center for International and Development Economics Research, Working Paper Series qt5t38s42v, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  4. Richard Clarida & Jordi Gali, 1994. "Sources of Real Exchange Rate Fluctuations: How Important are Nominal Shocks?," NBER Working Papers 4658, National Bureau of Economic Research, Inc.
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  6. Lastrapes, William D, 1992. "Sources of Fluctuations in Real and Nominal Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 74(3), pages 530-39, August.
  7. Fabrizio Coricelli & Boštjan Jazbec, 2004. "Exchange Rate Arrangements in the Accession to the EMU," Comparative Economic Studies, Palgrave Macmillan, vol. 46(1), pages 4-22, March.
  8. Ali M. Kutan & Selahattin Dibooglu, 1998. "Sources of real and nominal exchange rate fluctuations in transition economies," Working Papers 1998-022, Federal Reserve Bank of St. Louis.
  9. Jorge Braga de Macedo & Helmut Reisen, 2003. "Float in Order to Fix?: Lessons from Emerging Markets for EU Accession Countries," OECD Development Centre Working Papers 218, OECD Publishing.
  10. Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
  11. Fabio M. Natalucci & Federico Ravenna, 2002. "The road to adopting the euro: monetary policy and exchange rate regimes in EU candidate countries," International Finance Discussion Papers 741, Board of Governors of the Federal Reserve System (U.S.).
  12. Zenon Kontolemis, 2003. "Exchange rates are a matter of common concern: policies in the run-up to the euro?," European Economy - Economic Papers 191, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  13. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  14. 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.
  15. 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.
  16. Buiter, Willem H. & Grafe, Clemens, 2002. "Anchor, Float or Abandon Ship: Exchange Rate Regimes for Accession Countries," CEPR Discussion Papers 3184, C.E.P.R. Discussion Papers.
  17. Lúcio Vinhas de Souza & Elisabeth Ledrut, 2002. "Alternative Paths Towards EMU: Lessons from an Expanded Mundell-Fleming Model for the Accession Countries," Kiel Working Papers 1132, Kiel Institute for the World Economy.
  18. Louis Kuijs & Alain Borghijs, 2004. "Exchange Rates in Central Europe: A Blessing o+L2762r a Curse?," IMF Working Papers 04/2, International Monetary Fund.
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