Exchange Rate Risk and Convergence to the Euro

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may Abstract:This paper proposes a new monetary policy framework for effectively navigating the path to adopting the euro. The proposed policy is based on relative inflation forecast targeting and incorporates an ancillary target of declining exchange rate risk, which is suggested as a key criterion for evaluating the currency stability. A model linking exchange rate volatility to differentials over the euro zone in both inflation (target variable) and interest rate (instrument variable) is proposed. The model is empirically tested for the Czech Republic, Poland and Hungary, the selected new Member States of the EU that use direct inflation targeting to guide their monetary policies. The empirical methodology is based on the TARCH(p,q,r)-M model. JEL classification: E42, E52, F36, P24.

Exchange rate volatility and regime change: A Visegrad comparison

“…Further, central banks should set low inflation targets, gain their credibility, and stabilize nominal interest rates at low levels. A stable interest rate propagates less volatility in exchange rate, and achieving stable low inflation promotes a less volatile exchange rate as well, which is in accord with Orlowski (2004).…”

“…Without a doubt, a converging economy ought to give priority to the objective of lowering inflation, before placing emphasis on exchange rate stability. This is so because price stability or low inflation is a prerequisite for exchange rate stability, not the other way around, as is underscored by the causal effects described in the empirical literature (Orlowski, 2004).…”

“…The heightened volatility in September 1998 can undoubtedly be attributed to the official strategy of "de-coupling" the Polish financial markets and institutions from the Russian crisis. The monetary authorities presented compelling evidence of immunity to possible contagion effects of the crisis by emphasizing the better institutional advancement of its financial system and the higher quality of assets held by the country's financial institutions (Orlowski, 2004). …”

“…Further, on the institutional level, exchange rate stability is defined as one of the Maastricht criteria for monetary integration 5 : as stressed and analyzed by Orlowski (2003), candidate countries for the Economic and Monetary Union (EMU) accession need to demonstrate their capability to manage inflation and exchange rate risk premium as a necessary prerequisite for their successful monetary convergence. In short, diminishing exchange rate risk is suggested as a key criterion for evaluating currency stability and thus effectiveness of monetary convergence to the euro (Orlowski, 2004).…”

Empirical Analysis on the USD/all Exchange Rate Volatility in Albanian Market: Preliminary Results

“…The second field of research is characterized by the use of ARCH models, firstly introduced by Engle (1982) and Bollerslev (1986) and extended by Giot and Laurent (2001) and Orlowski (2004). Papers like Belke and Setzer (2003) can be classified in this field of literature and they study exchange rate volatility impact in labor market of Visegrad.…”