Exchange Rates in Central Europe: A Blessing or a Curse?
29 Pages Posted: 15 Feb 2006
Date Written: January 2004
Central European accession countries (CECs) are currently considering when to adopt the euro. From the perspective of macroeconomic stabilization, the cost or benefit of giving up a flexible exchange rate depends on the types of asymmetric shocks hitting the economy and the ability of the exchange rate to act as a shock absorber. Economic theory suggests that flexible exchange rates are useful in absorbing asymmetric real shocks but unhelpful in the case of monetary and financial shocks. For five CECsthe Czech Republic, Hungary, Poland, the Slovak Republic, and Sloveniaempirical results on the basis of a structural VAR suggest that in the CECs the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks.
Keywords: Exchange rates, structural VAR, accession, CECs
JEL Classification: C32, F31, F33
Suggested Citation: Suggested Citation