2/2002 Lúcio Vinhas de Souza. Integrated monetary and exchange rate frameworks: Are there empirical differences?

Working Papers of Eesti Pank. No 2, 2002

The aim of the paper is to empirically estimate whether the different monetary and exchange rate frameworks observed in the accession countries of Central and Eastern Europe and the Baltic States do yield different outcomes in terms of level and variance of a set of nominal and real variables. The author follows and extends the methodology developed by Kuttner and Posen (2001), who perform a combined analysis of the individual effects of exchange rate regimes, central bank independence and announced targets in nominal variables for a large set of developed and developing countries. They also estimate that a set-up combining a free float, an independent currency board and inflation targeting yields an outcome that mimics the price stabilisation advantages of a hard peg without its drawbacks in terms of extreme volatility. This sample of countries, not covered by the Kuttner and Posen study, supports their conclusions for both nominal and real variables, testing for both the individual and combined effects of the frameworks and indicating that a flexible exchange rate regime, coupled with CBI and DIT, would be Pareto-improving when compared to harder regimes.

Author's e-mail address: desouza [at] few.eur.nl

The views expressed are those of the authors and do not necessarily represent the official view of Eesti Pank.

CONTENTS

Introduction. Combined Monetary Frameworks
1. Monetary and Exchange Rate Frameworks of the Accession Countries
2. Data and Estimations
2.1. Nominal Variables
2.1.1. Exchange Rates
2.1.2. Inflation
2.1.3. Interest Rates
2.2. Real Variables
2.2.1. Unemployment
2.2.2. GDP
Conclusions
References
Annex 1
Annex 2

Integrated Monetary and Exchange Rate Frameworks: Are There Empirical Differences? Working Papers of Eesti Pank, No 2, 2002 (PDF*)

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