A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe
IMF Working Papers, September 1, 2001
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- A Model of Exchange Rate Regime Choice in the Transitional Economies of Central and Eastern Europe
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Bibliographic details
- Authors: Vladimir Klyuev
- Published: September 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451856125.001
Summary of the model and central trade-off
- 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.
- Main implication: a nonlinear relationship between the rate of inflation and the choice of regime for the next period.
Dynamic implication for inflationary shocks and regime evolution
- 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:
- An initial tightening of the exchange rate regime.
- Followed by a gradual introduction of more flexibility as inflation subsides.
Empirical approach and key results
- Empirical test: a series of regressions on a sample of 13 Central and Eastern European economies.
- Result: regression results are consistent with the hypothesis implied by the model (nonlinear inflation–regime relationship and tightening-followed-by-flexibilization dynamic after large inflationary shocks).
Relevant topics and keywords emphasized
- Subject terms: Conventional peg, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, Inflation, Prices.
- Keywords: Central and Eastern Europe, Conventional peg, Eastern Europe, Exchange rate arrangements, Exchange rate flexibility, exchange rate policy, exchange rate regime, Exchange rates, government policy, inflation, inflation rate, inflationary spiral, managed float, rate of inflation, regime choice, regime determination, Transition, WP.