Exchange Rates in Central Europe: A Blessing or a Curse?
IMF Working Papers, January 1, 2004
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- Exchange Rates in Central Europe: A Blessing or a Curse?
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Bibliographic details
- Authors: Louis Kuijs, Alain Borghijs
- Published: January 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451841794.001
Overview and research question
- Paper title: Exchange Rates in Central Europe: A Blessing or a Curse?
- Authors: Louis Kuijs, Alain Borghijs
- Date: January 1, 2004
- Research question: For Central European accession countries (CECs), does giving up a flexible exchange rate (by adopting the euro) result in net macroeconomic gains or losses, given the types of asymmetric shocks hitting these economies and the exchange rate’s ability to act as a shock absorber?
Theoretical framework
- Economic theory proposition:
- Flexible exchange rates are useful in absorbing asymmetric real shocks.
- Flexible exchange rates are unhelpful in the case of monetary and financial shocks.
- Types of shocks considered (as used in the paper’s terminology):
- Real shocks (demand and supply shocks, IS shock, labor market shock)
- Monetary shocks (LM shock, nominal exchange rate movements)
- Financial shocks
- Neutral shock
- Measurement approach noted in the abstract:
- Empirical analysis based on a structural VAR (structural shock identification via a structural VAR).
Empirical findings
- Country scope: five CECs — the Czech Republic, Hungary, Poland, the Slovak Republic, and Slovenia.
- Main empirical result (as summarized):
- "the exchange rate appears to have served as much or more as an unhelpful propagator of monetary and financial shocks than as a useful absorber of real shocks."
- Interpretation implied by results:
- For these five CECs, the shock-absorbing capability of nominal exchange rate flexibility is limited; exchange rate flexibility may amplify monetary and financial disturbances rather than stabilizing the economy against asymmetric real shocks.
Policy implications and considerations
- For CECs contemplating euro adoption:
- The balance of macroeconomic stabilization benefits versus costs of giving up a flexible exchange rate depends critically on the relative frequency and magnitude of asymmetric real shocks versus monetary and financial shocks.
- If monetary and financial shocks dominate and exchange rate flexibility propagates those shocks, adopting the euro (removing nominal exchange rate flexibility) may not increase macroeconomic vulnerability and could reduce shock propagation through exchange rate channels.
- If asymmetric real shocks dominate and exchange rates would serve as useful shock absorbers, retaining flexibility could be beneficial.
- Practical takeaway for policymakers:
- Assess the economy-specific empirical role of the nominal exchange rate in propagating versus absorbing shocks (e.g., via structural VAR analysis) before deciding on the timing of euro adoption.
Publication and metadata
- Series: Working Paper No. 2004/002
- Issue: 002
- Volume: 2004
- Pages: 29
- DOI: https://doi.org/10.5089/9781451841794.001
- Stock No: WPIEA0022004
- ISBN: 9781451841794
- ISSN: 1018-5941
- Subjects: Exchange rate adjustments, Exchange rate arrangements, Exchange rate flexibility, Exchange rates, Foreign exchange, Real exchange rates
- Keywords: accession, CECs, demand and supply shock, Europe, exchange rate, Exchange rate adjustments, Exchange rate arrangements, Exchange rate flexibility, exchange rate movement, exchange rate variability, Exchange rates, IS shock, labor market shock, LM shock, neutral shock, nominal exchange rate, nominal Exchange rate., Real exchange rates, shock-absorbing capability, structural shock, structural VAR, WP
Source: Exchange Rates in Central Europe: A Blessing or a Curse?, Louis Kuijs and Alain Borghijs, IMF Working Papers 2004, 002 (2004), accessed 9/17/2026.