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

Zenon Kontolemis and Kevin Ross
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Zenon Kontolemis: International Monetary Fund
Kevin Ross: International Monetary Fund

Macroeconomics from EconWPA

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.

Keywords: Exchange rate fluctuations; transmission economies; ERM II; EMU; structural VAR (search for similar items in EconPapers)
JEL-codes: E (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ifn and nep-mac
Date: Written 2005-04-08
Note: Type of Document - pdf; pages: 35
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