A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe

Vladimir Klyuev

No 2001/140, IMF Working Papers from International Monetary Fund

Abstract: The paper develops a model of exchange rate regime choice centered on the trade-off between internal price stability and external competitiveness and allowing for institutional costs of altering exchange rate arrangements. The main implication of the model is a nonlinear relationship between the rate of inflation and the choice of regime for the next period. The model also suggests that a major inflationary shock-like the one to which all Central and Eastern European economies were subject when they allowed prices to be determined by the market-should give rise to a tightening of the exchange rate regime, followed by a gradual introduction of more flexibility as inflation subsides. A series of regressions on a sample of 13 Central and Eastern European economies yield results consistent with the hypothesis.

Keywords: WP; exchange rate regime; managed float; inflation rate; inflationary spiral; Transition; exchange rate policy; inflation; regime determination; rate of inflation; regime choice; government policy; Exchange rate arrangements; Exchange rate flexibility; Conventional peg; Exchange rates; Central and Eastern Europe; Eastern Europe (search for similar items in EconPapers)
Pages: 42
Date: 2001-09-01
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Citations: View citations in EconPapers (4)

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