Monetary Policy Regimes and Real Exchange Rates in Central Europe's Transition Economies
Posted: 10 Oct 2000
This paper examines how various approaches to monetary policy in Poland, Hungary and the Czech Republic during the period 1995-1999 influence the trend and the stability of real exchange rates. It argues that, in contrast to the Polish and the Czech systems, the Hungarian commitment to exchange rate stability has been successful in lowering the scope of real currency appreciation and in diminishing volatility of real exchange rates, although at the cost of higher inflation. The paper proves empirically that the Hungarian monetary policy allows for an active use of the exchange rate channel of monetary transmission, while the alternative Polish and Czech monetary regimes based on more flexible exchange rates disable this channel. The empirical tests cast doubts about effectiveness of crawling devaluations. They further prove that changes in real exchange rates are influenced mainly by fluctuations in nominal rates and by their own stochastic time trend.
JEL Classification: E58, P33
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