Exchange Rate Policy Tensions: A Comparative Study between North Africa and Central & Eastern Europe

Abstract

The performance of small open economies depends -to an extent -on the tension between government"s economic policy preferences and actual behavior. This tension can be nicely studied by analyzing the behavior of exchange rates, where one observes tensions between proclaimed de jure and de facto exchange rate policies. Typically a country makes a de jure commitment to a peg if it attempts to persuade markets of its strict monetary-policy priorities; similarly a country makes a de jure commitment to a float if it wants to keep monetary policy in its own hands. In this paper we measure the flexibility of exchange rate which partially helps in deciphering the de facto behavior. For this purpose, we use comparative data of two sets of countries: North African as well as Central and Eastern European.Keywords: Exchange rate policy, de facto exchange rate regimes, and exchange market pressure

Dynamics of the real exchange rate in European emerging economies: Evidence from quantile regression

“…Although there are opposite views in the literature from the point of de jure and de facto applied exchange rate regime in selected countries (Ali Massoud and Julius Horvath 2015;International Monetary Fund 2016;Ethan Ilzetzki, Carmen M. Reinhart, and Rogoff 2017), we can derive a general conclusion that countries considered have applied regime of more or less controlled fluctuations during most of the observed period. Given the fact that a flexible regime is characterized by the possibility of intervention in the foreign exchange market to prevent excessive oscillations of the exchange rate, it is evident that the shocks only have a temporary impact on the RER deviation with respect to the equilibrium level in the countries where PPP is sustainable.…”