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A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe

Author/Editor: Klyuev, Vladimir
Authorized for Distribution: September 1, 2001
Electronic Access: Free Full Text (PDF file size is 2,139KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: The paper develops a model of exchange rate regime choice centered on the trade-off between internal price stability and external competitiveness and allowing for institutional costs of altering exchange rate arrangements. The main implication of the model is a nonlinear relationship between the rate of inflation and the choice of regime for the next period. The model also suggests that a major inflationary shock-like the one to which all Central and Eastern European economies were subject when they allowed prices to be determined by the market-should give rise to a tightening of the exchange rate regime, followed by a gradual introduction of more flexibility as inflation subsides. A series of regressions on a sample of 13 Central and Eastern European economies yield results consistent with the hypothesis.
 
Series: Working Paper No. 01/140
Subject(s): Exchange rate regimes | Transition economies | Central and Eastern Europe | Albania | Bosnia and Herzegovina | Bulgaria | Croatia | Czech Republic | Estonia | Hungary | Latvia | Lithuania | Macedonia, FYR | Poland | Romania | Slovak Republic | Inflation | Economic models | Macedonia, former Yugoslav Republic of
Author's keyword(s): Transition | exchange rate policy | inflation
 
English  
    Published:   September 1, 2001        
    ISBN/ISSN:   1934-7073   Format:   Paper
    Stock No:   WPIEA1402001   Pages:   42
    Price:   US$15.00
       
     
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