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Exchange Rate Dynamics and its Effect on Macroeconomic Volatility in Selected CEE Countries

Volha Audzei and František Brázdik

Working Papers from Czech National Bank

Abstract: To understand the potential for forming an optimum currency area it is important to investigate the origins of macroeconomic volatility. We focus on the contribution of exchange rate shocks to macroeconomic volatility in selected Central and Eastern European countries. The contribution of the exchange rate shock relative to other shocks allows us to evaluate whether the Exchange rate is a source of volatility or a buffer against shocks as the theory suggests. The identification of the contributions is based on variance decomposition in two-country structural VAR models, which are identified by the sign restriction method. We identify countries where shocks are predominantly symmetric relative to the effective counterpart and countries where the contribution of real exchange rate shocks is strong. In general, for all the countries considered the results are consistent with the real exchange rate having a shock-absorbing nature. Finally, a significant role of symmetric monetary policy shocks in movements in real exchange rates is found for some of the countries.

Keywords: Asymmetric shocks; Central and Eastern Europe; monetary union; real exchange rates; sign restrictions method; structural vector autoregression (search for similar items in EconPapers)
JEL-codes: C32 E32 F31 F41 (search for similar items in EconPapers)
Date: 2015-09
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon, nep-opm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2015/07

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