How Credible Are the Exchange Rate Regimes of the New EU Countries?: Empirical Evidence from Market Sentiment

Christian Bauer and Bernhard Herz

Eastern European Economics, 2005, vol. 43, issue 3, 55-77

Abstract: European Union (EU) accession countries have strong incentives to stabilize their exchange rates with respect to the euro as the nominal anchor. We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize the de facto exchange rate regimes and derive a market-based measure of the credibility of these exchange rate regimes. Our empirical results indicate that in the run-up to EU accession, most Central and Eastern European countries enjoyed high credibility in their exchange rate management. However, some of these future Economic and Monetary Union participants will have to strengthen their efforts and further focus their exchange rate policy on stabilizing the euro exchange rate.

Date: 2005
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