Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries

Dąbrowski, Marek A.; Wróblewska, Justyna

doi:10.1016/j.inteco.2020.03.002

Cited by 8 publications

(8 citation statements)

References 34 publications

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“…The dominance of real shocks suggests that the real exchange rate is a stabilizing mechanism in the Albanian economy and lends support to the “equilibrium” or “real economy” view of exchange rates consistent with evidence from Erjavec et al ( 2012 ), Dabrowski and Wroblewska ( 2016 ) findings for Poland, Audzei and Brázdik ( 2018 ), and Dabrowski and Wroblewska ( 2020 ). Our findings contradict evidence from Shevchuk ( 2014 ), where more than 80% of variability in the nominal exchange rate is explained by nominal shocks.…”

Section: Resultssupporting

confidence: 81%

“…In line with our findings, after examining ten CEE countries during 1998–1917, Audzei and Brázdik ( 2018 ) conclude that the real exchange rate is a shock absorber and that in none of the countries is the real exchange rate a major source business cycle volatility. Similarly, Dabrowski and Wroblewska ( 2020 ), who study the effects of exchange rates in eight CEE economies with fixed and floating regimes, show that in spite of the exchange rate regime, output is driven mainly by real shocks, but it is less responsive to these shocks under more flexible exchange rates.…”

Section: Resultsmentioning

confidence: 92%

“…Their evidence for most countries shows that the real exchange rate does not create much business cycle instability, supporting the “real economy” view that real exchange rates are shock-absorbing. Dabrowski and Wroblewska ( 2020 ) study the effects of exchange rates in eight CEE economies with fixed and floating regimes employing Bayesian SVAR models with data for the 1998–2015 period. They show that regardless of the exchange rate regime, output is mainly driven by real shocks, but its sensitivity to real shocks is considerably lower under more flexible exchange rates.…”

Section: Literature Reviewmentioning

confidence: 99%

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Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

Miteza

Tanku²,

Vika³

2023

Econ Change Restruct

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The choice of a foreign exchange regime hinges primarily on whether the real exchange rate acts as a shock absorber or reverberator for macroeconomic fluctuations. This policy choice is considered central especially prior to joining currency areas such as the Eurozone. We investigate whether Albania’s current floating exchange rate regime contributes to macroeconomic stability, or generates volatility. Using three different structural vector autoregression techniques, and an expanded five-variable model, we show that the real exchange rate has played a shock absorbing role, buffering the Albanian economy primarily from real demand shocks. The analysis reveals that monetary shocks and supply-side shocks have modest contributions in real exchange rate volatility. This evidence in favor of the “shock absorbing” view of exchange rates lends support to Albania’s policy choice of a flexible exchange rate system. If in future Albania considers joining a currency area, its monetary authority will need to pay attention to real currency misalignments as well as the availability and flexibility of alternative adjustment mechanisms.

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Section: Resultssupporting

confidence: 81%

Section: Resultsmentioning

confidence: 92%

Section: Literature Reviewmentioning

confidence: 99%

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Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

Miteza

Tanku²,

Vika³

2023

Econ Change Restruct

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“…Earlier studies for the CEE countries are mostly in favour of contractionary exchange rate depreciations (Bahmani-Oskooee & Miteza, 2006;Bahmani-Oskooee & Kutan, 2008;Miteza, 2006), but recent studies incline towards a more favourable treatment of a weaker currency (Cuestas, Monfort, & Ordóñez, 2019;Cizmović, Shachmurove, & Vulanovic, 2021). In turn, it strengthens an argument in favour of a floating exchange rate regime (Dabrowski & Wroblewska, 2020;Ihnatov & Capraru, 2012). However, a stronger exchange rate anchor is suggested for inflation-targeting emerging economies as a better resistance tool for the inflationary shocks like in the 2007-2008 pre-crisis period (Pourroy, 2012).…”

Section: Introductionmentioning

confidence: 91%

Price and output effects of long-term exchange rate changes: Central and Eastern European countries in 2002-2019

Shevchuk¹

2022

EBER

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The objective of the article is to measure the magnitude of the long-term exchange rate price and output effects in the Central and Eastern European countries (plus Turkey and Russia) which practice flexible exchange rate policies, while controlling for the institutional quality and policy stance as measured by the Index of Economic Freedom (IEF) from the Heritage Foundation database. Research Design & Methods:To analyse long-term price and output effects, the anticipated value of a nominal effective exchange rate was used as obtained by the ARIMA (n,m) model. We analysed the relationships between selected macroeconomic variables with the panel DOLS model using quarterly data from 2002 to 2019. Individual country estimates were provided as well. The study considered alternative specifications for regression models, with control for the money supply and institutional developments. Findings: Our study revealed that anticipated depreciation of the exchange rate was associated with the incomplete exchange rate pass-through (ERPT) into consumer prices and a decrease in output, with the former becoming stronger over the low-inflationary 2010-2019 period. Among other results, there was a trade-off between price and output effects of the money supply. As expected, investments in physical capital were the factor behind higher output. Finally, liberalisation efforts as proxied with the IEF were inflationary and contractionary. Implications & Recommendations: It was demonstrated that policies aimed at gradual strengthening of local currencies could be helpful for both acceleration of output growth and containment of inflation in the long run. At the same time, it is not recommended to proceed with further liberalisation of regulatory environment, as it seems not to bring about any favourable output effects while contributing to higher consumer prices. Contribution & Value Added:The novelty of this study is the estimation of the long-term price and output effects of the anticipated exchange rate while controlling for institutional quality and the progress of market reforms as measured by the IEF. The findings may serve as suggestions for reliable exchange rate policy, with a focus on predictability and the long-term macroeconomic effects.

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“…The seminal work of Friedman (1953) 2 emphasized the importance of exchange rate regimes in determining nations’ economic competence. Besides, various prominent studies (Dabrowski & Wroblewska, 2020; Fleming, 1962; Swallow-Carriere et al, 2018) argue that the intrinsic features of flexible exchange rate regimes and frequent exchange rate flexibility can work as a blessing in disguise as it facilitates the adjustment of economies to the real shocks. Self-directed monetary policy common in the market-determined exchange rate system(s) in the presence of sturdy and brisk international capital mobility provides an opportunity to stabilize the local economy without any external meddling (Dornbusch & Giovani, 1990; Dornbusch & Park, 1999).…”

Section: Introductionmentioning

confidence: 99%

Disentangling the Nexus Between Exchange Rate Volatility, Exports, and FDI: Empirical Evidence from the Indian Economy

Jamal

Bhat

2022

Global Journal of Emerging Market Economies

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The primary objective of the study was to scrutinize the effect of exchange rate volatility on foreign direct investment (FDI) inflows and Indian exports during the flexible exchange rate period. The bounds testing procedure confirmed the presence of a single (stable) long-run relationship between exports, conditional exchange rate volatility, and unconditional exchange rate volatility. The autoregressive distributed lag model verified that volatility in Indian rupee vis-à-vis USD had a significant (negative) impact on Indian exports and FDI inflows. Besides, trade openness and gross domestic product, in the long run, were positive and significant in explaining the exports and FDI inflows. Based on the empirical results, India should devise suitable macroeconomic policies to reduce exchange rate volatility to make the export-led growth strategy a success. Moreover, emerging and progressive economies like India should strengthen and streamline their domestic foreign exchange markets without compromising the level of trade openness. More precisely, the forward exchange markets’ coverage should be broadened, as they provide protection (hedging) against the exchange rate volatility in the long run.

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Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries

Cited by 8 publications

References 34 publications

Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

Is the floating exchange rate a shock absorber in Albania? Evidence from SVAR models

Price and output effects of long-term exchange rate changes: Central and Eastern European countries in 2002-2019

Disentangling the Nexus Between Exchange Rate Volatility, Exports, and FDI: Empirical Evidence from the Indian Economy

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