Causal relations between nominal exchange rates and monetary fundamentals in Central and Eastern European countries

Marek Dąbrowski, Monika Papież () and Sławomir Śmiech ()

The Economics of Transition, 2015, vol. 23, issue 1, 45-73

Abstract: type="main" xml:id="ecot12055-abs-0001">

The purpose of this paper is to investigate the causal relations between nominal exchange rates and monetary fundamentals. The analysis is conducted using panel quarterly data from the period 2001–12 for Central and Eastern European countries (including Turkey) with relatively flexible exchange rate regimes. The paper reconnects the empirical literature on exchange rates in Central and Eastern European countries with the most recent findings on exchange rate determination in advanced economies. Kóyna's approach, which accounts for linkages between countries, is used in the study. The main findings indicate the existence of causal relations running from both nominal exchange rates to monetary fundamentals and in the opposite direction as well as the existence of a relatively strong link between exchange rates and differentials in the relative price of non-tradables.

Date: 2015
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