SOURCES OF EXCHANGE RATE DYNAMICS IN THE EUROPEAN TRANSITION ECONOMIES
Abstract
Exchange rates in the European transition economies are currently exposed to the exogenous shocks as a result ofhigher uncertainty on the foreign exchange markets related to the various kinds of world economic crisis implications. Higher
vulnerability of exchange rates of these countries to the exogenous shocks reflects decreased confidence of financial
markets to the recovery process as well as an ability of the governments to sustain persisting fiscal pressures leading to
higher fiscal deficits and public debt. Another issue that emphasizes the role of exogenous shocks in determining the
exchange rate development in the European transition economies is the ability of national central banks to perform “suitable”
monetary policy that would be able to support the recovery process in these economies while still being able to protect
exchange rate of the national currency against speculative attacks and to keep exchange rate stable in the medium term
horizon.
In the paper we analyze the sources of exchange rate movements in the European transition economies (Bulgaria,
the Czech republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania) in the period 2000-2009 using SVAR (structural
vector autoregression) approach applied on each country individual data as well as panel data. We decompose the variability
of NEER and REER in these countries to permanent and temporary shocks. Impulse-response functions are also computed
in order to estimate the behaviour of NEER and REER after structural one standard deviation innovations. The relevant
outcomes of the analysis we compare with the results of the tests for the whole euro area (represented here by old EU
member countries - EU-12 group). This approach helps us to understand the common as well as differing features of NEER
and REER determination in the European transition economies and the old EU member countries.
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