The effect of nominal exchange rate volatility on real macroeconomic performance in the CEE countries

This paper analyzes the relation between nominal exchange rate volatility and several macroeconomic variables, namely real output growth, excess credit, foreign direct investment (FDI) and the current account balance, in the Central and Eastern European EU member states. Using panel estimations for the period between 1995 and 2008, we find that lower exchange rate volatility is associated with higher growth, higher stocks of FDI, higher current account deficits, and higher excess credit. At the same time, the recent evidence seems to suggest that following the global financial crisis, “hard peg” countries may have experienced a more severe adjustment process than “floaters”. The results are economically and statistically significant and robust.     

Exchange rate dynamics and their effect on macroeconomic volatility in selected CEE countries

To understand the potential for forming an optimum currency area it is important to investigate the origins of macroeconomic volatility. We focus on the contribution of real exchange rate shocks to macroeconomic volatility in selected Central and Eastern European countries. The contribution of real exchange rate shocks relative to other shocks allows us to evaluate whether the real exchange rate is a source of volatility or a buffer against shocks, as the theory suggests. The identification of the contributions is based on variance decomposition in two-country structural VAR models, which are identified by the sign restriction method. For most of the countries in the sample, shocks are predominantly symmetric relative to their effective counterpart, although the role of non-symmetric shocks is non-negligible. In general, for all the countries considered except Bulgaria and Slovenia, the real exchange rate does not generate large volatility over the business cycle and, with the exception of Bulgaria and Romania, is mostly driven by the non-symmetric shocks. These results are consistent with the real exchange rate having a shock-absorbing nature.     

PPP may hold better than you think: Smooth breaks and non-linear mean reversion in real effective exchange rates

This paper revisits some key topics in the literature on purchasing power parity (PPP). The study applies a set of newly developed unit root tests, which account for both nonlinearity and multiple smooth temporary breaks in series, to the real effective exchange rates (REERs) of 23 developed countries. The results suggest that PPP generally holds for various currency-based real rates. There is evidence in favor of linear stationarity in REERs for highly integrated economies. The REERs of most other countries tend to have nonlinear adjustment toward large long-swing type mean changes around constant equilibrium values.