Exchange Rates in Central Europe: A Blessing or a Curse?

Louis Kuijs and Alain Borghijs

No 2004/002, IMF Working Papers from International Monetary Fund

Abstract: Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECs-the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia-empirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks.

Keywords: WP; exchange rate; nominal exchange rate; nominal Exchange rate.; Exchange rates; structural VAR; accession; CECs; LM shock; IS shock; demand and supply shock; exchange rate movement; shock-absorbing capability; exchange rate variability; neutral shock; labor market shock; structural shock; Real exchange rates; Exchange rate flexibility; Exchange rate arrangements; Exchange rate adjustments; Europe (search for similar items in EconPapers)
Pages: 29
Date: 2004-01-01
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Citations: View citations in EconPapers (50)

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